The Lifecycle Financial Planning Approach

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The lifecycle financial planning approach places all your financial activity into distinct time periods, or stages, with retirement acting as the final phase in the financial lifecycle.

This approach is powerful as it provides you a clear framework for evaluating different decisions. Here are the 5 standard financial life stages encompassed in the lifecycle approach. Keep in mind the stated age ranges are merely guideposts, some of you will pass through stages more quickly or more slowly depending on your circumstances.

1. Early Career
Ranging in age from 25 to 35 years old, early career phase adults are starting to build a foundation for a strong financial future. You may be planning to start a family, if you have not done so already. If you do not yet own a home, you might be saving for one. At this stage, keeping income in step with expenses is a struggle, but it’s important to lay the groundwork for retirement saving now.

2. Career Development
From ages 35 to 50, earnings rise, but so do financial demands. Keeping expenses in line with income is a challenge in this stage. Many families are concerned with covering college costs and paying for ongoing expenses while also increasing the pace of saving for retirement.

3. Peak Accumulation
In this stage, from the early 50s into the early 60s, you typically reach your maximum income level. It may be a time of relative freedom as your children have graduated from college. Without college tuition and with lower expenses, you can accelerate savings rates to position yourself for a more secure retirement.

4. Pre-Retirement
About 3 to 6 years before winding down professionally, you should start restructuring assets to reduce risk and increase income. By this point, mortgages are usually paid and children are independent. This is the time to evaluate retirement income options and the tax consequences of investments.

5. Retirement
The final financial lifecycle phase occurs for people in their mid-60s and beyond. Once you stop working, your focus shifts from wealth accumulation to income preservation. In this stage, the goal is to preserve your purchasing power and enjoy your desired lifestyle. Estate planning and legacy considerations also gain importance as you age.

As we transition through each life stage, we should adjust our focus each step of the way to ensure our financial plan remains appropriate for our risk tolerance, age and goals.

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7 Reasons Why We Need Life Insurance

We buy life insurance as a solution to life’s problems and opportunities. In Singapore, as people become more financially literate, the percentage of us enjoying insurance protection has increased since the mid-1900s. Here are 7 reasons why we need life insurance:

1. Protection against premature loss of income

“The greater your income, the more you stand to lose. The less your income. the less your family can afford to lose.”

broken piggy bank -wipe savingsTo put it simply, we need life insurance because we may “die too soon”. Nobody knows how long one’s lease on life will run before it expires. Life insurance provides the means to ensure that an early, untimely death will not wipe out the potential income that could be used to support the family.

Insurance is particularly useful for a married man with a wife and a few young children. All his hopes and dreams of making a decent provision for his family would be dashed by one unfortunate event – death.

For just three cents, the dollar can be protected. No other financial instrument can do this so well.

2. Provision against disability

One common misconception about life insurance is that you have to die to benefit. Sometimes death could be more merciful and quick. But what if you don’t die but linger on disabled?

Would your cost of living increase? YES. Would your income continue? NO! What a terrible combination – to be alive yet not having an income, coupled with increased cost of living!

Certainly, your family can take care of you. But don’t you wish to make things easier for them by providing the means to take care of you? Sometimes, people say that if anything happens to them, their brother/sister will take care of them.

Assuming the roles are swapped, it’s not you but your brother who is disabled. Now, how are you going to look after him? Wouldn’t it be much easier if he passes you $10,000 every year to defray some of the expenses?

3. A worthwhile “investment”

How would you define a good investment? Too often, only one criterion is mentioned – rate of return, usually measured in terms of interest. Apparently, the most meaningful definition of a good investment should be – It pays best when needed most.

When something untoward happens, life insurance provides a guaranteed “investment” return. Although we will never wish to benefit from this investment, it pays us at the moment when needed most.

4. An expression of love and care for family

“It’s a mistaken kindness or misappropriated affection, to provide so well today that inadequate provision is made for tomorrow.”

family

This is life insurance at its best. The average person may feel that buying various gorgeous/cool gifts is a good expression of love and concern for the family. So, he buys a car so the family has a convenient form of transportation, on instalment. He buys a huge 3D smart TV for the entertainment of his wife and children, on instalment. All is well and good, provided he lives long enough to see the end of the payments. But should the unexpected happen, every item on hire purchase will be taken away, leaving broken dreams and unfulfilled wishes.

Children are told to study hard, not just for today, but to be ready for tomorrow. By buying life insurance, the parents have demonstrated a live example for the children – by taking care of tomorrow today, the future will take care of itself.

5. Peace of mind

“Death comes everyday to someone and someday to everyone.”

It is the only certainty in life, other than tax maybe. When a responsible person knows that he has made sufficient preparation for a predictable event in the future, he feels a sense of peace with himself and peace within himself.

Still, there are people who prefer to worry and take a risk. To be under-insured is the biggest gamble you can take. And it is a particularly tragic one, for if you lose, it is not you but your loved ones who lose. Why worry when you can insure? In fact, why worry when for a small regular sum you can let the insurance company do the worrying for you?

6. A security against creditors

“Sir, this bag of money can only be given to your wife and children. Nobody else can touch this.”

loansharkA person will never know when a creditor may turn up. And when the creditor comes, usually this will be at the worst possible time when the family can ill-afford it. How sad to see houses and all types of assets being taken away because creditors have a legal right to them.

No widow should suffer the additional hurt of having her assets re-possessed because provision was not made for some money to be creditor-proof! The proceeds of a life insurance policy can only be received by his beneficiaries and is protected from any creditor.

7. Tax Relief

This used to be a popular reason for buying life insurance. Your premium paid on your policies is considered as a tax deduction – it will not be part of your income that is taxed! It is a reward for looking after your own future needs.

People in the lower income bracket will also find this reason to be a good incentive to cover themselves.