Life Cycle Approach to Retirement Planning

In the 1990s, financial planners developed a model based on a person's life cycle to help people understand retirement planning and other financial planning issues. The models may vary slightly, but they generally divide a person's life into the following five time periods or stages:

• Age of Majority: From the age of 18 to 30, a person is generally still single and first begins earning money as an adult. There is no better period than this to start saving for retirement. It is also the most ignored time period of retirement planning.
• Age of Responsibility: The period from age 30 to 45 includes those with developing careers and growing families. At this point, the feeling that it's all downhill from here is true at least when it comes to saving for retirement.
• Age of Maturity: Between the age of 45 and 55, people are theoretically approaching the height of their careers and family development.
• Age of Reflection: At age 55 until about 65, people are usually in the pre-retirement phase and have the "empty nest" syndrome to look forward to.
• Age of Tranquillity: The last, but certainly not the least, stage in a person's life hopefully finds the retiree enjoying the fruits of his or her labors and dealing with post-retirement issues.

This model's greatest strength and its greatest weakness are the same: its simplicity. There is no model that could ever hope to neatly pigeonhole every major life event into tidy age groups. People may start or change careers or families late in life. Any number of similar life events may occur at any point in a person's life. At the same time, retirement planning issues can become quite complex and a life cycle model can help you make sound planning decisions without being overwhelmed.

Tip Your retirement plans need to stay flexible enough to anticipate and adapt to change throughout your entire life. Investments that made sense at one time might not make as much sense as you age. Investment advisers generally suggest that young people invest in stocks and other types of investments where there is a chance for substantial appreciation. They also advise that, as people age, they switch to more conservative investments that guarantee income and are unlikely to lose value.

No matter where in the life cycle you are, you will always face unique challenges that require different retirement strategies. On the other hand, there always will be retirement planning issues that come up again and again. As you navigate through the life cycle stages, remember that most planning issues will involve answers to the following questions:

• How much time do I have left until I can retire?
• How much can I invest toward retirement?
• Will the magic of compounding work for me?
• How much risk am I willing to take when making my investment choices?

By answering these questions, individuals can determine at any given point in their life cycles whether their retirement goals can be achieved, and then they can act accordingly.