What makes perfect financial sense at age 25 is wrong by age 45 – but many continue to utilize that same advice they received as young adults, wondering why their financial situation feels even worse down the line. The fact is, plans and priorities change over time, and what serves one decade often needs a stark overhaul by the next.
Unfortunately, most people learn this the hard way – through costly mistakes or missed opportunities that never get to return. But knowing how financial situations shift and evolve over time helps to prevent those tragedies and implement the proper financial planning in its appropriate time.
The Pre-Laying of a Financial Foundation: 20’s/Early 30’s
For many, this is a time of establishing habits and systems, even if the money isn’t there. College graduates head into the world for their first jobs, competing priorities – student loans, emergency savings, potential house equity, retirement plans – all begging for attention.
Yet one of the most detrimental things people can do is wait. Compound growth works when it has time to grow; someone who invests beginning at 25 ends up with way more than someone who starts at 35 – even if the 35-year-old contributes more per month. It’s not fair math.
Another mistake is denying free money. Employer retirement matches mean free cash. Even if student loans are rampant or debt burdens are high, contributions to get that full match are critical. After the employer match has been hit, THEN focus on paying off high-interest debt and building up that emergency fund.
Most should get comfortable with riskier investments at this time, as well. Time is on their side – there’s decades ahead of them to let market fluctuations even out. Sticking with bonds or savings accounts early on means a lack of growth potential when it matters most.
Amassing Wealth: Mid-30’s to Mid-40’s
For many, by this age period, income increases, and financial planning lives become more complicated. More responsibility brings more money, but additional decision-making is necessary for where to plop down that new free cash.
Now, mortgages exist and children are an addition, as well as aging parents requiring new attention spans due to potential illnesses. For some, this is a breeding ground for lifestyle inflation – if we make double the money, we can spend double the money. But this mindset holds people back from establishing greater wealth (i.e., spending the same amount conservatively). When income doubles during this decade but net worth doesn’t follow suit, something bad’s been done.
If someone began investing early on, their wealth is compounding nicely; if they start in their late 30s; they’re catching up early on. Either way, many need a mid-to-long-term plan to evaluate how to sort through the responsibilities. Working with professionals offering comprehensive financial planning is often helpful, as newfound responsibility requires juggled priorities.
Insurance becomes vital during these years – life insurance, disability insurance and liability insurance matter more now than in any other stage when people depend on these salaries. The price of dying or becoming injured without coverage can financially ruin families.
Estate planning becomes applicable during this stage, too – who gets the kids if something happens? Who gets a share? It’s not a topic most want to discuss, but it’s dangerous when left up to chance.
High-Earning Years: Late 40’s/Late 50’s
A high income typically occurs during this stage when kids grow up enough to require less active cash (college) and homes are partially paid off, financially freeing up major cash flow opportunities for investments.
But mistakes during this period are costly; plans fail from panic thinking that there’s not enough time left until retirement starts needing a nest egg and making risky investment decisions to catch up too late. Finally able to spend money on self-care concerns, people overspend lifestyle upgrades, failing to build wealth during earning years.
Funding college becomes another stressor at this stage; parents want their children to avoid debt but not at the expense of their own retirements. There’s no financial aid for retirement – and what assists college-age students fails when applied to adults. Finding the happy medium requires budgetary collaboration.
Healthcare costs also rise during this era – aided by aging bodies requiring increased medical attention and the insurance premiums which come with them.
At this point, people should begin seriously considering retirement projections – how much is genuinely required? What’s the gap between what’s established and what’s possible? Waiting until age 60 only gives limited options for achieving success.
Accumulating/Preparing for Retirement: Late 50’s/Early 60’s
The transition comes during these years from accumulating wealth to determining how amassed holdings will pay for retirement. When should someone take Social Security? What’s the best option? What are investment projections before Medicare kicks in?
These decisions become life-changing – taking Social Security too early means a lesser amount forever. Gradually converting IRAs into Roth accounts can mean needing to pay taxes – not the best scenario for someone who has spent decades carefully constructing investment portfolios and games.
Many will find themselves needing to deal with retirement age now; some can’t wait to quit working while others want to do it part-time or start something different. Financial planning should support whatever decision makes sense – not what age everyone else retires.
Long-term care aspects require prioritization during this stage; costs can quickly deplete savings – and insurance is difficult to procure (if qualifying) meaning advanced planning addresses what may happen should other care be needed.
Retirement/living expenses: Retirement Years
Retirement creates an entirely new approach regarding finances – no longer is money coming in from a salary; thus significant new returns planned for potentially 30+ years now requires drumming savings through inflationary expenses amid market fluctuations.
Withdrawal strategies now matter – are retirees taking too much out early on? Too little for what their current lifestyles need? Shifting strategies nuance the retired stage – as do required minimum distributions from retirement accounts as mandated by the IRS; forced withdrawals can push retirees into higher tax brackets unless proper strategies keep them level without need.
Retirees can also find themselves surprised by healthcare costs of which Medicare does not cover everything; out-of-pocket expenses add up quickly coupled with supplemental insurance needs that aren’t always available or affordable.
Retirement requires estate planning updates regularly as well – laws change. Families change. Situations change. What made sense at age 65 probably needs amending when they reach age 75/85.
The Central Confusing Factor
The hardest part about all these shifts is knowing what works for one era isn’t beneficial in another good one. The 25-year-old’s approach isn’t applicable at 55 – what worked then could hurt a current adult retrospectively and financially. The 45-year-old’s discovered spending patterns could dramatically shift when they turn 65.
Those who best support themselves reassessing their situation frequently sidestep challenges that arise when income gets set and allocated as “good enough.” Financial planning cannot be set and forgotten; it has to be an ongoing effort that deserves the same transformation life demands of it.
