Before I begin to describe each stage, let me first clarify one key point. I will use ages as part of the definition for each step in the wealth cycle. By no means are these meant to be the sole determinant of your station in the cycle. A careful look at all the aspects of any stage may suggest a different position than the one implied by your age.
Accumulation. As the name implies, this is the stage in which you accumulate your wealth. Generally between the ages of 25 and 55, we can identify this phase as the time in which you will do the bulk of your income producing work, save as much as you can, and implement an investment strategy designed to provide for yourself in later years.
The first years of this phase generally find an individual saving for the down payment on a first home. A wise investor will also begin, as early as possible, to set aside some savings into a retirement plan. The compounding effect of $2000 saved annually at 10% interest from age 25 to age 65 will produce a nest egg of nearly one million dollars. Children's education expenses and, in some cases, reserves for the support of elderly parents are other goals for which one may begin to accumulate assets.
Also during the early years of this stage, life and disability insurance are important protections to own in order to ensure the completion of your plans. And it's never too soon to have a will drawn. This critical document should be the first building block of your future estate plan.
Most people tend to be more risk tolerant during this time, and are willing to assume a greater risk in their investments for a potentially greater growth. The later years of this phase are usually marked by an increase in savings and accumulation. With your largest acquisition expense (your home) behind you, and your income reflecting your highest production years, the last part of this phase may find you catching up for past savings years.
Preservation. Most of us enter this phase of the wealth cycle as a result of illness or disability, or upon retirement. Thus the usual ages associated with this stage are 55 through 75 years old. The most common starting ages are, of course, 62 to 65, because nearly 95 per cent of the American population must depend on social security to see them through this part of their financial lives.
During this stage, you will determine how your estate will operate for you while you are alive. Most of the preparations will have been accomplished in the prior phase as you worked with your advisors to update your will, establish a living trust, and otherwise plan for your retirement. Now you will want your accumulated wealth to support you for the rest of your life.
You will be much less tolerant of risk during the preservation phase. With your accumulation years behind you, you won't be able to make up for an unwise or risky investment. As for insurance, disability probably will be no longer applicable, and the purpose of life insurance will change at this stage. No longer concerned with providing for unfulfilled goals, life insurance will now serve to protect your assets from estate taxes. Of course, you should be sure that someone else (eg, a trust) is the owner of the insurance, so that it doesn't compound the problem it is meant to solve.
Finally, although you may possess an estate sizable enough to owe transfer taxes, the risk of a long term illness may forestall you from giving away or otherwise disposing of any large amounts during this stage in the wealth cycle. However, through a carefully designed annual gifting program you can assist your children and grandchildren through the accumulation phases of their lives.
Distribution. When you reach an understanding that you will indeed outlive your assets, whether because of the amount of those assets, or because of the advance of your age or failing health, you are ready to enter the distribution phase of your wealth cycle. At this point, commonly age 75 or above, you will want to develop and implement a plan that will distribute your assets to the people and organizations you designate to receive them.
One principal concern will be to reduce or eliminate estate taxes. You can continue to take advantage of the annual $11,000 gift allowance, and perhaps, for larger gifts, use some of your $1,000,000 lifetime exclusion. During this phase, you may also reorganize some of your assets with a mind to those who will inherit them. You can start a charitable bequest now by establishing a charitable remainder trust.
For over 30 years, I've had the privilege of working with clients through all three stages of the wealth cycle. Together, we've been able to structure financial freedom, even though some have begun quite late in life. But why wait? Identify your stage today, and begin your own journey to financial freedom.
