Signposts of financial success – 50 to 65
Over recent months this column has summarised my thoughts on the key behaviours that help people ‘be good with their money’ as they journey through life. So far, I have considered what financial success might look like for those in their twenties and how this evolves as we move through our thirties and our forties. This month I will cover the period loosely called middle age - the 15 years between 50 and 65. In financial terms I label this period ‘the age of realisation’ – but more of this later.
Firstly a recap; in our twenties it is all about learning to live within your means and starting to find that balance between enjoying today and planning for tomorrow. This includes; balancing your finances, establishing a savings pattern, understanding the implications of debt, writing a will, understanding insurance and giving something back - perhaps through voluntary work. For most people in their twenties formal planning will be limited to establishing KiwiSaver and setting relatively short-term goals.
As we move into our thirties – life becomes more serious and many of us become responsible for others. In addition to the good habits we established in our twenties continued financial success is driven by; growing your human capital, understanding the difference between lifestyle assets and investment assets, having a debt repayment strategy, protecting your liabilities through adequate insurance, tracking your financial progress and investing in your relationship. Formal planning should now extend to identifying a Wealth Target, i.e., the future wealth you need to create to make work optional in the future.
So if we are lucky, we have made it to our fifties – my so called ‘age of realisation’. For me my first realisation was, at age 50, there were just 390 fortnights between me and my 65th birthday, or in business terms, about two and a half business cycles. For those who are earning wages, that might be 390 paydays to repay debt and accumulate savings.
For those in business e.g. farming or manufacturing, the future value of their enterprise could be a large part of their retirement wealth. The point of the business cycle at which a sale occurs can have a significant impact on that figure. Working with your accountant to track your business value in relation to the business cycle can be very important. Just like the decision to harvest a forestry investment, you could choose to sell out earlier than planned because of favourable market conditions.
It is time for a midlife investment review. Are your investments generating the returns that you need, are they consistent with your risk profile and what are your costs? Even if your risk profile has not changed I generally suggest that the level of share exposure should be reviewed and possibly reduced in your late fifties. If you don’t have time to do it yourself – outsource this task to a qualified specialist adviser.
Limit lifestyle creep. If you are lucky the kids are now costing less to 'run' and the mortgage is well under control – so why not treat yourself? Yes, you can, but do understand that you could be rewarding your current self at the expense of your future self. Most people in their fifties need to significantly step up their saving programme rather than step up their lifestyle. You have to find the balance that is right for you.
Some of us don’t make it. We have all lost friends in this age group. Personal insurance plays an important role in protecting the financial security of dependants. However, insurance premiums can often increase significantly in our fifties. It is important to review insurance covers to make sure that they are affordable for as long as you are likely to need them. You need to consult a risk specialist. And on this not so happy note, it is also time to consult your Solicitor to discuss such matters as your Will and Enduring Powers of Attorney.
On rereading this column, it all sounds a bit serious – one of the risks of aging, I guess. However, if you get the mix right you will be making good financial progress and still having fun along the way.
***
Peter Ashworth is a Principal of New Zealand Funds Management Limited, and is an Authorised Financial Adviser based in Dunedin. The opinions expressed in this column are his own and not necessarily those of NZ Funds. His disclosure statements are available on request and free of charge.
First published in the Otago Daily Times on 12 November 2018, as 'Signposts of success: ages 50-65.'
