Life Cycle Financial Planning

How do you judge how well your investment plan is doing? Do you compare its annual performance to similar benchmarks? Do you have a specific target you want to reach before retirement?

Or, are you more concerned with how your overall financial strategy will provide for your daily, monthly and annual expenses throughout retirement?

Some people focus on their return on investment rather than the return on their lifestyle. However, life-cycle economics is a branch of economic study that can inform financial planning, focusing on investor objectives by taking into consideration potential variances in their personal life cycle.

We tend to automate our savings through work plans, saving a certain percentage of income each year until retirement and perhaps increasing that percentage as we receive subsequent pay increases.

However, the reality is, during some cycles of life, we may be able to save even more, such as when each subsequent child moves out and becomes financially independent

    Consider other variables such as:

  • How much a couple can save with only one child versus when they have additional children
  • How much money is necessary for a family vacation including children versus for an empty-nest couple
  • Spending reductions related to children no longer living at home (e.g., clothes, activities, entertainment, family cellphone plans, health insurance, auto insurance, maintaining an extra car)

On the other side of that equation, spending tends to ebb and flow during retirement as well. In the first phase, many retirees spend more money as they embark on travel and hobby pursuits.

During the middle phase, those expenses tend to wind down as retirees spend more time at home. At the latter stages of retirement, individuals may need more money to pay for health and long-term care but may cut back on other types of expenses such as maintaining cars and auto insurance

From the outset, a key variable in financial planning is assessing an investor’s level of risk aversion. However, instead of gauging response to a percentage decline in the market, the life- cycle perspective involves converting that percentage into portfolio dollar terms.

In other words, how would an investor with $100,000 in assets under management react to a loss of:

  • $25,000 (the equivalent of the 25% loss following the dotcom bubble)
  • $50,000 (the 50% decline during the Great Recession)
  • $75,000 (the 75% decline during the Great Depression)

A focus on the life cycle involves projecting spending levels and anticipating variability and the potential for disruption risks, such as divorce, disability or the death of a spouse.

Joe Tomlinson. Advisor Perspectives. July 2, 2018. “Insights from Life-Cycle Financial Planning.”
https://www.advisorperspectives.com/articles/2018/07/02/insights-from-life-cycle-financial-planningAccessed Oct. 11, 2018.
 

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