Financial Planning Life Stages

Fin Planning-Life Stages:

It is helpful to analyze your personal situation within the context of financial planning life stages.  Listed below are attributes and characteristics of investor stages over the course of time.


Financial planners in the industry often use a rule of thumb for spending and investing.  For example, people early in their careers might be directed to save at least 12–15% of their salary while accumulating 3–6 months of living expenses in an emergency fund.   (Or: Save 10-20% of your money.)  However, as a millennial, you may be paying down a mountain of student debt, and it is impractical or impossible to follow the simplistic rule of thumb.  The first step should be to pay down the highest credit card debt first, and eventually pay off all credit card debt.

Then pay off all credit card debt each month.  Then maintain enough in the bank to cover a big unexpected expense like a car repair.  Other key steps include:

-Establish a monthly automatic withdrawal schedule from checking account to savings.

-Ensure that you get the employee match in your retirement accounts.

-Establish explicit Savings Goals:  Like a house down payment.

-Contribute to charitable causes.

-Increase your savings rate and charitable rate by a specified % each year.

-Max out your retirement accounts as soon as you can afford it.

-Only buy a home when you are financially ready.

-Make sure you are properly insured.


Pre-Retirement Stage:

  1. Recognize that retirement can come earlier than you expect. The median expected retirement age is 65, but the median actual retirement age is 60 according to a 2015 survey by the Society of Actuaries.
  1. Online tools are available from Vanguard and Fidelity.
  1. Recognize that there will be numerous one-time outlays like a different car or home remodeling.
  1. Seek steps so that you can claim Social Security as late as possible, and hopefully at age 70. Each year of delay represents an 8% annual increase.
  1. Eliminate all credit card and other consumer debt. Designate funds to anticipate future purchases like a car, home remodeling or travel so that debt is not incurred when
  1. Plan to purchase a car without debt as you go into retirement.
  1. Ensure that the home mortgage is paid off before retiring.
  1. Consider downsizing your home to save operating costs and property taxes. Recognize that a reverse mortgage could be a last-resort opportunity. Some individuals can be house rich and cash poor.
  1. Determine a source of health insurance if you are not 65 and eligible for Medicare. Alternatives include a health-care exchange, a spouse’s plan, or Cobra through your former job.
  1. Consider the potential for part-time work.
  1. Build a retirement cash flow statement and Monte Carlo scenarios.

Finally, live below your means.


Retirement Stage:

Establish an income and spending plan.  Your income will come from Social Security, pensions and portfolio withdrawals.  Your spending will come from your monthly budget.

Maintain a cash/short-term bucket to ensure 2 years of income.   Utilize dividends and rebalancing to re-fill this bucket.

Maintain an intermediate bucket for intermediate goals/needs like replacing a car or taking a vacation.

Maintain your Long-Term bucket.  Your portfolio withdrawal rate is critically important to maintain your long-term bucket.

Your portfolio Withdrawal Rates are part of your overall sources of retirement income.  It is important to compare your secure non-portfolio income sources (like social security and pensions) with your spending rate.  The difference or gap between these non-portfolio income sources and your spending rate needs to be filled by tapping your investment portfolio.  There has been extensive commentary related to safe investment portfolio withdrawal rates.

The most frequently cited analysis says that you can use a 4% annual withdrawal rate and adjust this rate in subsequent years for inflation.  This is described as providing a 30-year cash flow with 95% success rate.  Another way of looking at this rate is to look at the reciprocal.  In other words, a 4% withdrawal rate implies that you need to accumulate a portfolio that is 25 times larger than annual spending.  (1/25 =4%, or 25X your expected needs.)  Since most people retire before age 65 (whether planned or unplanned), then you need to build a portfolio that is more than 25X your annual spending.  Conversely, you might conceivably get by with a portfolio less than 25X if you retire well after age 65.  This rule of thumb is only a starting point, and each situation is unique.

Cornerstone believes that a target withdrawal rate for a 60/40 portfolio adjusted for inflation is a good starting place, but we would adjust the withdrawal rate down to 3.25% for age 65.  The 3.25% withdrawal rate implies a rule of thumb portfolio that is 31 times the annual spending rate.  This withdrawal rate is adjusted downward to reflect the fact that the historic fixed income investment performance is not likely be sustained into the future.

For further consideration see the end values of the Asset Accumulation Mileposts in the Asset Accumulation/Retirement section.