04/20/2023 - Financial Wellness & Life Planning
Experts have identified three distinct phases that we experience: wealth accumulation, wealth preservation, and wealth distribution. During these three phases, your financial needs will change. Understanding how each phase works can help you better prepare so you can meet your goals.
1. Accumulation
This is also known as the build and grow phase. During this phase, you’re working hard, earning money, and establishing credit. But don’t spend all your money just because you have it. During this stage, you should focus primarily on saving and investing, which includes retirement.
The key to accumulating wealth is to start early. The earlier you start, the more your money can grow and the better off you’ll be – thanks to the magic of compounding interest. Consider these options for a strong build and grow phase:
- 401(k) Plan: These tax-advantaged accounts are generally available through your employer. To meet your retirement goals, make sure you’re contributing enough each month. If they’re offered, take advantage of any employer matching options, which can help grow your savings.
- Individual Retirement Account (IRA): If you don’t have a retirement plan through your company, think about traditional and Roth IRAs. It’s wise to consult a financial planner who can help you explore your retirement account options and advise you about saving for your future.
You’ll also want to focus on liquidity and having access to a certain amount of your savings.
- Money Market Accounts: These typically earn higher interest rates than savings accounts. Plus, unlike a savings account, money market accounts usually allow you to write checks and use debit cards for withdrawals, just like checking accounts.
- Emergency Fund: You’ll want to have cash on hand for things like unexpected car repairs or medical bills. How much should you put away? Experts recommend having at least three to six months’ worth of living expenses set aside in an interest-bearing savings account. You can start small and put aside a little cash each month to further prepare for an unexpected expense.
If you stay on track and build your retirement fund and other savings, you’ll be in good shape to preserve your wealth as you enter the second phase.
2. Preservation
This is also known as the transition phase. This phase can be tricky, as people don’t always realize they’ve entered it. At what age does it start? Experts generally agree you’ve entered the preservation phase when you’re about 10 years from taking withdrawals from your portfolio. For some, this might be at age 52; for others, it could be 62.
During this period, it’s a good time to reevaluate your investment portfolio. Determine where it’s working well and where it can be improved. You might want to diversify and choose an asset allocation strategy – a mix of stocks and bonds – that works best with your retirement goals. Remember, the closer you get to retiring, the less time you’ll have to recover from downturns in the market.
You can also consider annuities, tax-planning strategies, business-succession plans, and your real estate portfolio as part of your strategy to preserve your wealth. Will you still have a mortgage? Will you invest in a vacation home? Or will you be downsizing? Discuss your goals with a financial advisor who can help you make the best decisions for your individual situation.
3. Distribution
This phase is also known as the distribute and deploy phase. Once all your hard work has paid off, you are set for this phase, which begins one year before you begin taking withdrawals. As you did with the preservation phase, you’ll want to look at your investments again with this time frame in mind. The goal of the distribution phase is to reduce risk.
As you plan, think about reallocating part of your portfolio into safer investments. You don’t want to get caught in a sudden market shift that could substantially affect your earnings.
The way you choose to distribute your money will affect how long it lasts. It’s especially important to speak with an experienced wealth manager at this stage. This professional can help you prepare for this stage by discussing investment strategies as well as tax considerations. Similarly, you will want to consult with an estate planning professional who can help you allocate your legacy and distributions to your beneficiaries.
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