Life Cycle Planning Keeps Up with Your Changing Financial Needs

The financial needs of a 70-year-old retiree are, not surprisingly, much different than the financial needs of a newly married couple.

Our financial needs change at different stages in our lives. This simple fact provides the basis for life cycle planning. As we age, life changes are taken into account to adjust the investor's financial plan and ensure that steps are taken to meet changing financial goals.

When helping investors achieve their financial goals at each stage of their life cycle, financial advisors also take into consideration factors such as the investor's tolerance for risk, net worth, and specific goals. If the investor has one child and expects to send the child to a state college or community college, investment decisions will be different than if the individual has four children and expects them all to attend Harvard or Princeton.

Financial goals must be balanced against the investor's risk tolerance. Investors who are averse to risk are unlikely to meet lofty financial goals. The high returns needed to accumulate significant wealth require that the investor take on more risk than would be necessary if the investor had modest goals.

Typically, much of an individual's life is focused on wealth accumulation. The need to save for a home, support a family, pay for college, and save for retirement can place significant financial demands on the investor. As retirement approaches, assuming the individual has saved enough for retirement, the focus is on wealth preservation. Finally, in the individual's later years, the focus typically shifts to the transfer of wealth to the next generation, or perhaps to one or more charities.

Wealth Accumulation

Within the wealth accumulation period, the individual's financial goals and needs are likely to change every time the individual's life undergoes a significant change—marriage, the purchase of a home, having children, saving for college, divorce, a new job, an inheritance, health issues, and aging parents are just some of the life events that can have a significant impact on the individual's finances and financial goals.

Financial advisors divide the wealth accumulation period into three stages: early career, mid-career, and pre-retirement.

Early career

Those in the early career stage typically are getting married, having children, buying their first home, and, perhaps, paying off student loans. This can be an especially difficult time, because earnings are often low, while financial demands are high. Newlyweds may find it helpful to have not only a financial plan, but a strict budget that helps them track where their money is going—and where it should be going.

In this stage, your goal should be to build the foundation for your financial future. The principle of paying yourself first should be followed. By saving a percentage of your earnings, such as through your employer's 401(k) plan, your family will have choices as you and other family members experience life cycle changes.

While retirement may seem to be a long way off, investors should plan to begin saving for retirement as early as possible. Any funds invested early in life will have longer to grow in value than funds saved later in life. Over time, as earnings are re-invested, compounding can significantly increase their value.

Another reason to begin saving for retirement during the early career stage is that investors can take on more risk than they would as they approach retirement, because their investing timeline is much longer. If, for example, a 60-year-old invests in stocks, he or she may need the funds within a few years. If a bear market causes stock prices to fall and the investor needs the funds, he or she may have to take a loss. If a 20-year-old invests in stocks for retirement, he or she is likely to see stock prices rise and fall many times before the funds are needed. Long-term though, stock prices generally seem to rise. While past performance is no guarantee of future returns, historically, stocks have outperformed bonds over the long term.


Mid-career investors are typically focused on achieving financial independence, paying for their children's college education, reducing taxes, and saving for retirement. At this stage, individuals typically are earning more money, but they may still have significant financial demands.

The investing timeline is still long at this point, so the investor can still afford to carry a reasonable level of risk to meet financial goals. The need to address short-term goals, such as college funding, should be balanced against the need to save for retirement. Those who wait until their pre-retirement years to save for retirement are unlikely to maintain their current lifestyle during retirement.


The pre-retirement years are often a period of financial freedom—mortgages are paid off, children are living independently, and those at this stage are frequently at the top of their earning potential.

At this stage, attention should begin to shift from wealth accumulation to wealth preservation. The investor's asset allocation strategy is likely to shift. The investor may, for example, invest a larger percentage of assets into fixed-income investments and decrease the percentage of assets invested in stocks.

While there is usually more money available at this point to save for retirement, there is less time for earnings to accumulate. Many people do not even begin to save for retirement until this point in their lives. According to a 2002 survey by the Employee Benefits Research Institute (EBRI), almost half of all workers have saved less than $50,000 for retirement and 15% of those surveyed have saved nothing. Less than one fourth of those aged 40 to 59 have saved $100,000 or more.

During Retirement

Most of today's retirees will live longer than their parents did. Since life expectancy has consistently been increasing, the younger you are today, the longer you can expect to live during retirement. The downside of longer life is that you will need to save more for retirement.

The EBRI estimates that retirees will need to generate 70 to 80 percent of their pre-retirement income to maintain their lifestyle during retirement. The income typically will come from the retiree's pension plan, personal savings and Social Security. Average Social Security benefits today are under $1,000 a month, so Social Security should not be expected to be your only source of income—especially since many believe Social Security will be underfunded by the time many of today's workers retire.

Keep in mind, too, that retirement will become less affordable as you age. Not only will inflation erode the value of your savings, but your later retirement years are likely to be more expensive, because your medical expenses will increase as you age. If you spend too much in your early retirement years, you may not have enough money left to pay for your later retirement years.

Those who fail to plan adequately, and to adjust their plans for life cycle changes, are likely to reach retirement age without sufficient funds saved for retirement. Given the limitations of Social Security, those who fail to save enough to pay for retirement will have only one option, and that's to continue working. That's why it is important to develop a financial plan early in life, so you have choices during your life cycle changes.

Written by: Darrell J. Canby, CPA, CFP®

Darrell J. Canby, CPA, CFP® is a founding shareholder of Canby Maloney & Company and President of Canby Financial Advisors, LLP, both of Framingham, Mass.