Planning for Life's Phases
TRICKS OF THE TRADE
How to Financially Prepare for Retirement: A Realistic Guide
Prepared by Michael Menninger, CFP®
In my 27 years as a financial planner, I’ve had the privilege of meeting thousands of people. During that time, it has become evident that people’s behavior, values, and lifestyle tend to go through demographic phases. Additionally, I have also validated this observation as I’ve followed many folks as they transition from one phase to another.
In addition to people’s lifestyle changes, their financial priorities also change. The objective of this article is to identify those phases and to review the financial decisions being faced during each phase, which are listed below:
- Phase 1 – High School & College Students
- Phase 2 – 20’s & Early Career
- Phase 3 – 30’s & 40’s – Family Building
- Phase 4 – 50’s & 60’s – Empty Nesting & Pre-Retirement
- Phase 5 – Late 60’s and Beyond – Retirement Years
Phase 1 – High School & College Students
These are very formative years when a teenager is extremely influential and developing habits, making it a period when life-long habits (both good and bad) are learned and can help shape one’s future financial success. Many folks agree with me in believing the educational system does too little to teach out teenagers important life lessons, particularly in the world of finance. This represents a great time to teach the next generation the basics such as avoiding debt traps, credit card usage, how loans work (including student loans), budgeting, and even investing and the magic of compounding interest.
Phase 2 – 20’s & Early Career
Now that education has been completed, the first full-time job appears, hopefully in the field of the college education. This is when the first paycheck hits the account and is likely the largest one they’ve ever seen. But it’s now that you’ve become a young adult and must take on responsibilities never seen before – rent, car payment, utility bills, student loan payments, and independence.
In my opinion, one of the first things to learn is to analyze your paystub. The amount of information that can be gleaned from a paycheck is mind-boggling, as is how much smaller your take home pay is than your gross pay. Where did all that money go? Yes, mostly to taxes, but hopefully that includes 401(k) contributions.
The early career phase establishes the foundation of future financial success, and also best capitalizes on the law of compounding returns, particularly for retirement savings. This also represents the time that a young individual will want to invest their retirement savings aggressively. For example, if a 25-year old saved $5,000 per year for 35 years (until age 60), they made $175,000 in total contributions. If invested conservatively (for example, earning 4% annually), they will have about $380,000 at age 60. However, if they invested more aggressively (for example, earning about 12% annually, roughly equivalent to the stock market return), they would have accumulated over $2.4 million. This illustrates the magic of compounding.
This is also the phase to begin developing an emergency fund, as well as saving for intermediate-term goals such as buying a home, having children, etc. For shorter time horizons, it is prudent to take a more conservative investment approach even if it is in a high yield savings/money market account. The last thing you want is for your investment to lose value just when you need it.
Phase 3 – 30’s & 40’s – Family Building
Speaking from my own experience, as well as observing clients, these are the years that families typically struggle the most financially, and also have the least amount of free time. While raising a family can be the most fulfilling experience of a lifetime, it comes with its challenges. This is when parents are juggling their schedules to run their kids to soccer, baseball, cheerleading, music, boy/girl scouts, etc. It often coincides (in the early years) with additional expenses associates with child care, or a time when the family chooses to have one parent leave the workforce, resulting in the loss of income. Further, the cost of raising children and supporting these activities is quite high, in addition to the time sink.
From a financial perspective, many folks are just trying to survive and avoid going into a debt spiral. This also represents a time that parents should be extremely attentive to their insurance needs. The concept of insurance is basic – you pay a little bit for premiums and pass the risk on to the insurance company. Particularly for the bread winners (and even the caregiving spouse), it is extremely important to have adequate life and disability insurance. Further, it is not uncommon that cash flow will necessitate reducing retirement savings, but do NOT forego company match to your 401(k) or other retirement plan. Long-term investments can still be invested aggressively at this phase of life. This also serves as a time that parents wish to save money for college (i.e., 529 plans), which puts further stress on cash flow and finances. Lastly, it is imperative that both parents have wills in the rare case that both of them died. It is vital that the assets are distributed properly and that YOU name the guardians for your children rather than the courts appointing them after you’re gone.
Phase 4 – 50’s & 60’s – Empty Nesting & Pre-Retirement
I always like to say that the biggest raise you’ll ever get is when your kids leave home. Of course, most folks in this phase will admit that the kids are never really “off the payroll”. This phase is when adults are usually in their highest earning years and the idea of retirement is becoming a reality.
The laws now allow for catch-up contributions to your retirement plans once you’ve attained age 50. Now that you’re in your highest earning years, childcare expenses are reduced, and the retirement idea has become real, this serves as a great opportunity to significantly increase contributions to your retirement plan, and also rapidly paying down debt, including your mortgage.
As you enter your 60’s, new topics emerge; they are Social Security and medical insurance planning, particularly with Medicare eligibility at age 65. Do not underestimate those two topics because there is a lot of planning to maximize efficiency, as well as improving tax efficiency.
From an investment perspective, it makes sense to pare back on the riskiness of your investments. However, it is important to note that retiring is not the same thing as jumping off a cliff. You need your assets to last another 20 or 30 years, so a portion of your portfolio ought to remain in stocks which will provide the necessary growth to combat inflation. We strongly encourage you to better understand your risk tolerance, along with your risk capacity, and consider meeting with a financial professional for advice.
In the few years leading up to retirement, it is time to “practice”. It is important to understand your cost of living now, and what will change once you retire. Thus, it is prudent to understand your actual expenses because some may go away, and others may increase, such as travel and medical costs.
Phase 5 – Late 60’s and Beyond – Retirement Years
CONGRATULATIONS! You finally did it. This is when that pesky thing called “work” no longer gets in the way of that cool thing called “fun”. We do caution you that retirement shouldn’t result in sitting on the couch watching TV and eating potato chips all day. As you can imagine, this lifestyle isn’t healthy and can lead to shortening your retirement (if you know what I mean). This also tends to be a time when seniors kick their kids to the curb by saying “Bring on the grandchildren”.
Additional financial planning for seniors should always include tax planning, but estate and legacy planning takes on greater significance because “the end” is closer in sight. For those with charitable inclinations, they can make “Qualified Charitable Distributions (QCDs)” from their IRAs by having money distributed tax free so long as it goes directly to the charity.
Once seniors reach the age of 75 (or 73 if born prior to 1960), they must take “Required Minimum Distributions (RMDs)” from their pre-tax IRAs or retirement plans. (Note that RMDs are NOT needed for Roth IRAs.) There are several strategies that could be initiated, as the QCD strategy could be used to satisfy your RMDs. Alternatively, we like to use RMDs as the “sacrificial lamb” for making necessary tax payments at the end of the year, but it is important to understand the rules and do it correctly.
The biggest concern for retirees is to never run out of money. To accomplish this, it is very important to understand your cost of living and ensure you have enough assets to cover it. Distribution planning, and doing these calculations, are very important to the financial success of retirees, and maximizing tax efficiency plays an important component.
Conclusion
Life unfolds in a series of distinct phases, each marked by its own blend of personal responsibilities, financial priorities, and evolving perspectives. From the early years of learning foundational habits in high school and college to the challenges and opportunities of building a career and family in adulthood, individuals continuously adapt to new financial realities. As children leave home and retirement nears, planning becomes more strategic — maximizing income, optimizing savings, and preparing for Social Security and Medicare decisions. Finally, in the retirement years, the focus shifts to sustaining a fulfilling lifestyle, managing distributions wisely, and ensuring that one’s legacy is handled with intention.
What remains constant across every phase is the value of proactive planning. By understanding the financial priorities associated with each life phase and making decisions that support long‑term stability, individuals can create confidence, seize opportunities, and create a clear path forward. No matter where you are today, thoughtful preparation — paired with ongoing guidance — can help ensure that each chapter of life is lived with confidence, purpose, and peace of mind.
If you wish to discuss or review any of these financial topics, feel free to contact us at 610-422-3773 or visit our website at www.maaplanning.com.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
