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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
- 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
- In this stage, one is completely financially dependent on others, typically the parental figures.
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
- Income earned still not able to provide for basic needs of food, shelter, and/or debt repayment.
- 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
- An individual typically enters this stage as the salary increases with work experience and incoming cash flow meets or barely exceeds negative cash flow.
- 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
- 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.
- 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 crowd
Typically 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
- The “holy grail” of the FIRE crowd
- 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.
- 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.
- 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:
- 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.
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Reminds me of that old song by the Godfathers “Birth School Work Death” ?
Great stuff!
Thanks Dave. Funny but I think we commented on each other’s posts at the very same time. Love your post on imposter syndrome as well
Holy cow that was in depth and very thought out and well written. Nice little summary of one’s financial life.
Glad you liked the post. Every now and then I get lucky (even a blind squirrel finds a nut every now and then. Lol ?)
I see your silhouette chart, I am on the verge of being the fat guy in the track suit holding that sheet of paper (instructions for programming the VCR)
LOL. This holiday season has been particularly rough on me, my silhouette has grown considerably. 🙂 As long as we are to the left of the gravestone, we are doing ok 🙂
Great list of financial milestones along the life cycle. I think I’m on the Financial threshold stage.
Do you think the timing is slightly different for physicians??
I agree that the timing is bit off for physicians as we don’t technically enter the workforce until mid 20’s. Probably would be smart to add 4 years or so when compared to the general public timeline. Great point! Thanks
Nice discussion but it misses some things like taxes and risk. When you work your employer takes on your risk. He pays your insurance, half your SS tax, vacation, disability, unemployment ins. etc. It’s part of what keeps your butt in the chair. People HATE owning their own risk even if they are not consciously aware of it. When you deflate, all of that risk and it’s cost is once again assumed by you. That risk that your employer pays for now, is a hidden dollar amount that you need to pay for over decades out of your saved money.… Read more »
Great points. I am one of those people who likely could retire now and be fine but because I am overly cautious and don’t want to take on the risks (healthcare insurance mainly) I am staying on and padding my nest egg more and work longer. I would say that SS tax, malpractice insurance and disability insurance would no longer be needed once you leave the work force for good. Even life insurance could be taken off the plate. The insurances that are wise to keep would be health insurance (if FIRE’d likely only need to insure against catastrophic events),… Read more »
you can mitigate the risk however you like, but it’s a cost that is not considered in a 4 x25 formula because till you quit, your employer covers it. If your compensation is 100K per year and your bennies are 20K per year the x25 part needs to be 120K not 100K. That means at 4% withdrawal you actually need to accumulate $3M not just $2.5M. For 3 x33 it would be $3.9M instead of $3.3M
The numbers are of course adjustable, less insurance move to Podunk etc but the point is the point.
I think that the older I get, the more I appreciate the values that my parents instilled in me. Specifically, the more I learn about personal finance, the more I am glad my parents taught me the value of a dollar at a young age.
Also, the older I get, the more I say stupid things like “the older I get…” Ugh. Sounding so cliche over here.
LOL. That is great that you had great financial role models at an early age. It still is shocking that the vast majority of high schoolers graduate without any exposure to finance. There are a few schools that are starting to buck that trend. My daughter’s school actually has a class on personal finance in high school when she gets there. Otherwise we are graduating a large population of sitting ducks that get picked off by predatory lenders on college campuses, luring them with freebies like Frisbees and beer cozies.
But what is a 3892% interest rate when I have a free frisbee?! #WORTHIT
Thoughtful characterizations of the stages. Curious if you think there are appetites or corresponding pitfalls at each stage (impressing peers or family, finding companionship, sex) that threaten to undermine the progress one can make.
Perhaps a complementary post to follow up this one?
Thanks CD. I agree just like the regular life cycle there are pitfalls life throws at you that can derail your path to wealth and cause you to be financially delayed. Keeping up with the Joneses is by far the most common one especially when you are younger and trying to impress your peers (as you get older hopefully you really don’t care about comparison as much and live a life that you enjoy). Dating, marriage, divorce are all potential financial stumbling points as well. Unfortunately, to quote Forest Gump, you just do not know what you are going to… Read more »
Very nice. We are at Financial Cornucopia. It’s pretty awesome, but we’re still hustling a bit. It doesn’t feel right to drawdown yet. We’ll put that off until we’re 55 or so.
It isn’t important to me to leave a big inheritance. We’ll make sure our son gets a good education and may help a bit at the beginning of his career. Then he can make his own fortune.
I share your thoughts on this as well Joe. I think one of the hardest things will switch from the accumulation phase to the drawdown phase. Because I know I have an income from work it is a safety net for me. Take that away and I’m sure it will be a bit stressful.
I used to think setting up my child financially later on was a nice goal but then I read that family fortunes are typically squandered away in a couple of generations because they never earned it and therefore are not as protective of it
Love it as always! Will forward to my adult children as a template.
Thank you so much for the kind words. It’s nice to have at least some sort of target to shoot for at each stage of life