A Guide to Financial Management at Each Financial Life Stage

Financial management and planning are important at every stage of life, whether you’re a young adult just starting out in a new career or someone approaching retirement age. The financial decisions you make when you’re young will impact your financial goals. At any income level and any life stage, there are strategies for managing money that can help you make the most of your assets.

Here at Addition Financial, we love talking to members of all ages about personal finance and educating them on how to set and achieve their financial goals. To help you, we’ve created this guide to financial life stages to provide you with the tools you need to lead a financially healthy life.

What Are the Key Financial Goals for Someone Just Starting Their Career?

When you’re in young adulthood and just starting a career, long-term financial planning may not be at the top of your mind. For example, you may have student loan debt to repay so it’s common for younger people to live paycheck to paycheck and not set financial goals or take the practical steps required for future financial success. There are two steps that we think are essential for young adults:

Creating an Emergency Fund

There’s a reason that we’re prioritizing creating an emergency fund. When we bring this topic up, we’re often asked to explain the concept of an emergency fund and how big it should be.

An emergency fund is usually kept in a savings account because the money must be accessible when you need it. The money in the fund is there in case you experience a loss of income or lose your job and can be used to pay for your expenses in the interim.

We suggest an emergency fund with a minimum of six months of living expenses. You might get lucky and find a new job quickly, but if you don’t, it’s essential to have enough money to pay your rent or mortgage and other bills. Once you reach your goal, you can put the money in a high-yield savings account to continue earning dividends on your balance. When your income and/or expenses change, you should revisit and add to your emergency fund as needed.

Opening a Retirement Account

Our second big recommendation for young adults is to open a retirement account as soon as possible. Saving early means you can take advantage of compounding interest to maximize your savings and be sure you’ll have the money you need to retire when the time comes.

For many people, there’s the option of enrolling in an employer-sponsored retirement plan such as a 401(k) or a 403(b) account. We recommend enrolling as soon as you’re eligible and maxing out your contributions if you can afford to do so. Contributions to these plans are often on a pre-tax basis, meaning your contributions lower your taxable income. Many employers offer matching contributions up to a set limit, so at minimum you should contribute enough to take advantage of matching.

If you’re self-employed, you can open a solo 401(k) or an IRA. If you choose the latter, you can select a traditional IRA where you make pre-tax contributions or a Roth IRA where you make post-tax contributions. With a Roth IRA, you’ll get tax-free growth and withdrawals.

Financial Planning for Mid-Career and Mid-Life

In mid-life, many of our members are financially established. They’re earning more than they did when they were young and they may have a significant amount saved for retirement. At the same time, they may have higher expenses and struggle to maintain financial wellness. Here are our suggestions for managing your money in mid-life.

Make Asset Allocation a Priority

By your 40s and 50s, you may have a decent amount of money in your retirement account. You may own a home and have kids to support. Our first suggestion is to make asset allocation a priority to avoid significant losses.

As a rule, you don’t want to have more than 10% of your retirement savings in any one asset. As investments grow, you may need to sell to rebalance your portfolio. You should also work on diversifying your investments. For example, a mix of stocks, bonds, ETFs, real estate, and other assets to maximize your earnings and minimize your risks.

Take Advantage of Catch-Up Retirement Contributions

Even if you started saving money for retirement early, middle age is the time to maximize your retirement savings. Anybody over the age of 50 can make catch-up contributions to their retirement accounts. Here are the limits for 2024:

  • $7,500 for 401(k), 403(b) and most 457 plans
  • $1,000 for IRAs, including Traditional, Roth, SIMPLE and SEP plans

Even though retirement plan contributions made in middle age have less time to grow, that doesn’t mean you should ignore the opportunity to maximize your savings.

What Financial Moves Should Be Made When Approaching Retirement?

People can retire at any age, but in the United States, the average age of retirement is 64. As you get closer to retirement age, it’s essential to think ahead and make sure you can pay your living expenses. Even if you’ve accumulated a significant amount of wealth, you still need to think about the risk of outliving your savings.

Estimate Your Living Expenses

The first thing to consider as you prepare for retirement is the expense of maintaining a healthy and comfortable lifestyle. The rule of thumb to estimate your living expenses is to take your salary at retirement and multiply it by 80%.

For example, if you’re earning $150,000 per year at retirement, you would need $120,000 per year in retirement income. Your income in retirement could come from a variety of sources, including Social Security, distributions from your 401(k) or IRA, annuities, and even part-time employment.

Minimize Your Risks

We already talked about asset allocation and that’s something that becomes increasingly important as people approach retirement age. As you get older, you should rebalance your portfolio to minimize the risk of sustaining a substantial loss.

A common recommendation is to subtract your age from 100 to calculate what percentage of your portfolio should be invested in stocks, which can be volatile. As life expectancies have increased, some financial experts recommend starting with 120, but you should take your risk tolerance into account. If you’re 60, you might not be comfortable having 60% of your investment in stocks where 40% might constitute an acceptable level of risk.

Create an Estate Plan

Our final recommendation for those approaching retirement is to create an estate plan if you haven’t already done so. Your estate plan should, at minimum, include a will, a durable power of attorney, and a living will with any specific wishes you have for end-of-life decisions and long-term care. You may also need the following:

  • Revocable trusts for your heirs, including children and grandchildren
  • Charitable donations
  • Life insurance policies
  • Donor-advised funds

Your best bet is to sit down with a financial planner to identify your goals and create an estate plan. Then, you’ll need an attorney to draft documents and make sure that everything is executed properly.

Financial Advice for Any Age

There are a few tips, including some we’ve already mentioned here, that are important at every financial life stage:

  • Save as much as you can: Saving money should always be a priority. Some financial experts recommend the 50/30/20 rule, where 20% of your money goes into savings. We would suggest making 20% the minimum. Some portion of your savings should be liquid, including your emergency fund.
  • Be wary of credit card debt: While it’s okay to carry some revolving debt, credit card debt can add up quickly and take years to pay off. If you have a lot of debt, considering debt consolidation can help you reduce your interest payments and get out of debt quickly.
  • Always have a budget: Budgeting is sometimes dismissed as something that’s needed only when money is tight. However, the best way to control your spending and prioritize savings, is to create a household budget.
  • Learn how to manage your investments: We’ve talked about asset allocation and risk management, but we want to emphasize how important these things are. You don’t need to check your portfolio every day – in fact, we’d recommend you don’t – but you do need to be aware of what’s happening with your money.

These tips are all things a financial planner can help you with. You might need some guidelines to get started, but once you understand the basics of financial management you can grow from there.

Financial Management Assistance from Addition Financial

Regardless of your stage of life, financial management and planning are always important. Learning how to manage your money is the key to setting realistic goals and achieving them. Starting as early as you can is a must but it’s never too late to prioritize your financial health and wellbeing.

Are you ready to prioritize savings and open a retirement account? Addition Financial has Traditional, Roth, and Term Share Certificate IRAs. Learn more and open an account today!

The content provided here is not legal, tax, accounting, financial or investment advice. Please consult with legal, tax, accounting, financial or investment professionals based on your specific needs or questions you may have. We do not make any guarantees as to accuracy or completeness of this information, do not support any third-party companies, products, or services described here, and take no liability or legal obligations for your use of this information.