Recognize it or not, you will move through several distinct phases of your financial life: wealth building, wealth preservation and wealth distribution.
By understanding the importance of using the most relevant and appropriate financial solutions, ones that are “phase appropriate,” you can significantly increase the odds of a positive financial outcome.
The central idea in phase planning is that you use the most stage-appropriate solutions. That is, when it’s time to plant, you plant, and when it’s time to sow, you sow, according to Ecclesiastes and, of course, The Byrds.
Wealth Building Phase
This is when you need to turn, turn, turn those paychecks into savings, savings, savings. You need to save til it hurts!
The Wealth Building phase, also called the Accumulation Phase, when you make plans for that future, those golden years that are so far away, but they’re not. They’re closer than you could ever imagine. This is when you pay yourself first, and pay yourself as often as humanly possible. The accumulation phase is when you need to consult your inner future geezer and ask him or her if the future in which they’re now living was worth all those choices you made to delay gratification. Your inner geezer will undoubtedly and appreciatively reply, “Yes.”
You need to stop buying stupid crap.
Poor people have lots of stupid crap.
Buying stupid crap makes you poor.
Of course, they may say something like, “No, Sonny, go ahead and buy that $52000 German sports car, this government provided ‘care’ facility I’m assigned to isn’t really all that bad.” If that’s the answer you hear, there may be no hope for you. Stop reading.
The accumulation phase lasts roughly between your first paycheck and your last paycheck. Mid-twenties to normal retirement age, 66 or 67 for most workers today. Let’s call it forty years and add a few other variables.
You were very good at delayed gratification. You were very good at paying yourself first, the minimum 10% annually. You made good wages, let’s flatline you at $75000 a year, so you socked away $7500 a year in savings, in your 401K, in your IRA and ROTH accounts.
You took appropriate risks and earned about 8% a year, nothing spectacular, but certainly solid. While each person’s situation may involves a multitude of various planning variables, for this illustration, let’s see how Sonny did.
By saving $7500 annually, earning 8% annually, and letting it grow for 40 years, assuming he doesn’t run off like a jackass to buy a $52000 German engineered liability, Sonny will have a little over $2,100,000 to fund his wealth preservation project.
Guess that KIA wasn’t so bad after all.
These are your working years, and the accumulation phase will be your longest, so you need to make the most of it. You need to establish basic rules. Here they are:
- You need to stop buying stupid crap. Poor people have lots of stupid crap. Buying stupid crap makes you poor.
- You must start saving immediately, with your first paycheck.
- You need to pay yourself first, a minimum of 10% of your annual pre tax paycheck, in a 401K plan. Employer Matching is the cherry on top.
- You need to invest consistently, that is, every paycheck, without fail.
- You need to invest passively in a diversified basket of index funds and/or exchange traded funds (ETFs), and leave the investments alone to do their thing. Their thing is called growth. Leave them alone, you are not smarter or luckier than the market. Time IN the market works. TimING the market does not.
- You need to save and invest as much as you can in an after tax ROTH account, which magically turns taxable assets into tax free assets. A ROTH beats the hell out of an IRA.
Are there more rules than these six? You bet your assets there are more, many more, but if you did nothing more than follow these six, you will be rich at retirement.
Wealth Preservation Phase
This phase is all about two things: Keeping what you have (preserving) and generating enough income on which to comfortably live. It’s all come down to this. It’s the culmination of forty years of sweat and toil, sacrifice and smart planning.
The paycheck is gone. Social security is never enough. You never had a pension, nobody does anymore, unless, of course, you were a janitor in the California state municipal union that was paid $148,000 a year to mop floors.
Healthcare takes center stage, as doctors, hospitals, procedures and drugs all continue to get more expensive with each passing year. Looking for growth, looking for risk, looking for expensive, German made crap on wheels are all a thing of the past. Now it’s all about income and holding onto your hard earned assets.
If you’ve not done so prior to retirement, now is the time for a repositioning of assets, refining your objectives-based asset allocation model to lower your exposure to risk while continuing to seek meaningful returns, and keep the income flowing.
Lowering risk, maintaining or increasing life insurance coverage, securing long term care coverage, and estate planning become your go to projects.
Wealth Distribution Phase
The distribution phase actually overlaps with the preservation phase, so distribution actually means two things: 1-continuing to distribute your assets to yourself in the form of lifetime, dependable income, and 2-distributing your assets to your surviving spouse and other loved ones at your demise.
The trick here is to achieve the appropriate level of income. Not too little so that your quality of life sucks, but not so much that it depletes your assets to the point where your surviving spouse will be caught penniless.
A thoughtful integration of asset management, risk management, income planning and estate planning are required to strike the appropriate balance.
Three life phases in less than 1000 words! Each phase can fill volumes, so if this is new information to you, you have just received a bite-sized dose of awareness. Now that the ball is in your court its up to you to do something with it.