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As physicians, we have spent countless hours gaining knowledge in how the human body progresses throughout its life cycle, from birth to death.

There are expected milestones to be achieved during our early development as well as certain expected declines with advancing age.

There are various stages in an individual’s personal finance that can also follow a predictable pattern which, if managed correctly, can compliment the corresponding stages of a human’s lifespan.

I personally like to think of breaking the “Financial Lifespan” into 3 major phases, which can be further subdivided by various milestones.

Phase I: Tabula Rasa (“Clean Slate”)

• Corresponding Human Stage: Infant-Young adult
• Financial Observance stage:
  • In this stage, one is completely financially dependent on others, typically the parental figures.
    • Basic needs of food and shelter are taken care of and provided for by someone else.
    • Financial habits, both good and bad, can start to develop as children observe the financial behaviors of their role models
      • Children of parents with good financial behaviors typically tend to follow the same path as they see the direct benefit of what those financial behaviors achieved
        • Successful parents typically tend to raise children who are successful
        • There is, however, a potential risk for having a child developing an entitlement type attitude if not careful which can be detrimental to his or her subsequent finances.
      • Children of parents with poor financial habits can have two pathways to choose from:
        • Follow in parent’s footsteps and make similar unsound financial decisions
        • Have firsthand experience of what results from poor financial decisions and strive to do the opposite

Phase II: Accumulation Phase

• An individual progresses into this stage when he or she first enters the workforce and begins to earn a living (trading time for money)
• Can be further broken down into expected financial milestones
  • Financial Dependence
  • Corresponding Human Stage: Early 20s
    • Income earned still not able to provide for basic needs of food, shelter, and/or debt repayment.
      • Starting salaries in early career will typically be at the lowest level
      • Debt incurred for education etc. will typically be at the highest level
    • Can often turn to bank loans or credit cards to make up the difference, compounding the effects of debt burden
  • Financial Solvency
  • Corresponding Human Stage: Mid-Late 20s
    • An individual typically enters this stage as the salary increases with work experience and incoming cash flow meets or barely exceeds negative cash flow.
      • Still not making progress on debt repayment beyond the minimum amounts required but no longer adding more debt to the pile
  • Financial Traction:
  • Corresponding Human Stage: Early 30s
    • With increasing work experience, possible job promotions and/or job transfers, a higher salary now allows the individual to make positive strides to debt reduction.
      • Able to make more than the minimum debt repayments.
      • As debt balance decreases, more cash is freed up to take advantage of the Debt Snowball Phenomena.
    • Efforts should also concentrate in building up an adequate Emergency Fund
  • Financial Stability:
  • Corresponding Human Stage: Mid-Late 30s
    • The individual is likely entering his or her peak earning years.
    • With most of the bad debt off the books and good debt remaining (such as a mortgage), an individual should ensure that the Emergency Fund is now adequately built up (recommended 6 months of living expenses)
    • With continued expected salary increases and diminishing debt repayment, this is the time for an individual to really start turbo charging retirement funding (ideally started much earlier) as well as establishing funds for any major foreseeable expenses (automobile purchase, wedding, birth of child, etc).
    • This is a good stage to start exploring investment opportunities that can provide passive income
  • Financial Independence Threshold:
  • Corresponding Human Stage: Late 30s/Early 40s
    • At this stage, an individual’s passive income can allow him or her to support a bare minimum lifestyle indefinitely without a need to work
    • This is sometimes referred to as “Lean FIRE”
    • Does not allow much buffer for unexpected expenses or even the occasional splurge.
    • Provides enough for a roof over head and basic food on table.   Minimum entertainment budget.
      • Has been adopted by the “Frugalists (those who relish in the frugal lifestyle)
  • Financial Independence:
  • Corresponding Human Stage: Early-Mid 40s
    • The “holy grail” of the FIRE crowdTypically considered as assets large enough that 4% (or equivalent to 25 years worth of annual expenses) can provide not only the basic needs but also can easily handle occasional splurges such as vacations or fine dining.
    • Being employed is no longer a necessity as passive income or asset drawdown can completely provide for above average lifestyle
  • Financial Cornucopia:Corresponding Human Stage: Mid 40s to 50s
  • Sometimes referred to as “Fat FIRE,” “Financial Abundance,” or “F.U. Money”
    • Asset accumulations have reached substantial amounts (> 33x annual living expenses) that it can easily support a 6 figure annual drawdown.
    • With this level of financial freedom, can pick and choose what endeavors you want to engage in, whether paid or not, as financial necessity is no longer a pressing need.

Phase III: Decumulation Phase

• Corresponding Human Stage: 60s and beyond
• An individual enters this phase once he or she leaves the workforce and begins to rely on accumulated assets to support lifestyle
• Depending on age or the possibility of not being able to re-enter the workforce, special care must be made to ensure that no undue risk is undertaken and that a reliable fixed income stream is available to provide a safe floor so that basic needs are always taken care of.
  • There is a typical glide path to decrease stock weight in portfolio (typically suggested starting 5 years before planned retirement date), often benchmarked at 120-age in percent stock allocation.
    • This decreases volatility from the portfolio which is unwanted in the decumulation phase.
    • It is important to maintain some exposure to equities as the growth from stocks is still needed to ensure a portfolio doesn’t run out of funding over 30 years.
      • The oft quoted Trinity Study where the 4% safe withdrawal rate was emphasized was based on 50-50 stock/bond allocation.   A more updated analysis with current market performance suggests that the highest percent success (87%) was with at least a 60% stock allocation.
• Need to assess ultimate goal for this money
  • Do you plan on spending everything in retirement (try for complete consumption of assets)
  • Do you want to leave a financial legacy for your heirs?
    • Requires spending much less than you might have on yourself
    • Need to take into consideration tax implications on how best to transfer money to your heirs:
      • Assets that have considerable gain during your lifetime will receive a step up in cost basis on your death (i.e. your heirs inherit it at the then assessed valuation and not have to pay capital gains).
      • ROTH IRAs are preferential for heirs to inherit as they do not have to pay any taxes
    • Is it even worth the sacrifice for legacy transfer if statistics say it will likely be squandered (70% of wealth lost by 2nd generation, 90% by 3rd generation)?

Superhuman Take-home Points:

1. At each developmental stage in the human life cycle there is a corresponding financial level to reach.  Recognizing these steps and achieving these milestones is a sure path to financial bliss.