Financial planning is considered by many to be a critical operation that facilitates secure investment and financial goals for both the short and long term. Some even elevate financial planning skills to an art form with elegance and style.
But whatever label is applied to securing a financial goal, the planning process is constant and spans many decades. The goals of an investor will change with increasing age and family composition. For example, the age at which an investor starts provides significant clues to their financial potential as well as their ability to handle investment risk.
This article will consider financial goal setting and actions using stage of life as a major parameter.
Investing for Young Children
Few people understand that even an infant can start an investing program (of course with the help of a financially-savvy parent). The goal of such a program is to accumulate enough assets to fund the child’s education after high school through something like a 529 college savings plan. Additionally, parents could start early financial planning to help pay for costs of a private K-12 program.
Parents attempt to accumulate wealth for their children for almost two decades and in the end, hope to have a solid lump sum of funds available for educational costs such as college tuition. Since the time frame of the goals involves potentially 18-20 years, parents should take an aggressive stance and utilize an investment portfolio asset allocation heavy in equities, which should readily absorb market fluctuations. The extended time frame will also facilitate many investment changes the account owner (or parent) may have to make to accommodate different life situations of the child or parent.
Starting an investment program for a child is simple and financial planners are available at banks and private investment houses. Each parent should meet and discuss their goals with a trained financial planner and build an investment portfolio that matches their long term desires and investment risk profile.
Financial Decisions for the Young Adult
The next age group to consider is 20 to 30 years old. Many young adults in this category are starting their first job and considering marriage and a family. Thus, the goal of investing at this age should be to accumulate wealth for future prosperity. There are many options available and investors should be more aggressive in taking risks while they’re younger.
Investing options for the young adult include the individual retirement account (i.e. Roth IRA or traditional IRA) as well as employer-based plans such as the 401k. These plans are designed to fund retirement years, although it may seem like a long time away. It’s important for young investors to look to the future and decide how much they can afford to contribute to their retirement accounts on a monthly basis (based on current earning power).
During this decade, the investor has the freedom to pursue more aggressive opportunities such as domestic equity funds, investments in international firms, or even buying real estate. These aggressive decisions are designed to build personal wealth. However, safer investment options exist as well and include high interest savings accounts (e.g. ING Direct or Ally Bank), money market funds, and certificates of deposit (CDs).
Decisions in Your 40s and 50s
In general, people in their forties and fifties have much more earning power than earlier in life. It’s also a time when many families and children are maturing. The investor during these decades should seek wealth maximization and further plan for retirement, when a significant reduction in annual income is likely.
A solid investment strategy includes maximizing contributions to one or more retirement and investment accounts. A company-sponsored retirement program, along with a personal IRA, are great investment vehicles to utilize. Furthermore, an investor may also consider “playing” in the stock market, which allow for greater control and diversification of investment choices.
Despite the increased income and investment options, investors should be a bit more conservative as they grow older and wealth preservation becomes more of a priority. It is at this stage when investing in bonds and government-backed securities becomes popular. These vehicles offer solid returns while providing some safety and liquidity should the need for income arises.
Once investors get serious about retiring and leaving the workforce, their goals and investing strategies will change. Wealth preservation becomes the key driver, and investors must understand the levels of income they will need each month to maintain a specific lifestyle.
The investor has spent decades saving their hard-earned money and hopefully watching it grow. Now it’s time to utilize these funds for living, healthcare, and recreational expenses as well as determining which assets may eventually be left to beneficiaries (i.e. estate planning).
What stage of life are you currently in and how has it affected your investing strategies? What are some of the main goals you’re focusing on? Please share in the comments below.
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