Five Seasons

Adam M. Grossman

NICK MAGGIULLI, in his book Just Keep Buying, makes an observation about the world of personal finance: If you Google common questions—such as “how much should I save?”—you’ll receive more than 100,000 results. It’s an overwhelming amount of information. But there’s a bigger issue: Many of the answers contradict each other.

It’s the same with many other personal finance questions. How much should you hold in bonds? Do you need international stocks? What’s an ideal withdrawal rate in retirement? Look for answers to each of these questions, and you’ll find a mix of often-contradictory opinions and rules of thumb. This is one of the reasons that personal finance can be challenging. But there is, I think, a way to cut through the complexity. I recommend approaching your financial life the same way we approach the seasons of the year.

Just as there are basic steps we know to take during each season—to wear a coat in the winter, for example—there are steps that make sense during each phase of our financial lives. This can help us to set aside generic rules of thumb and instead focus on the specific strategies that are most important for each phase. Below is a look at five key phases of life and the playbook I suggest for each.

1. Getting to zero. In the early years after getting out of school, many people joke that their goal is to achieve a net worth of zero. What they mean is that they want to move their net worth up to zero by paying off their student loans.

But this raises a question: Many with six-figure debt loads feel an urgency to eliminate their loans. That’s understandable. But should they devote every spare dollar to paying down their loans as quickly as possible? Or should they use some of those spare dollars to begin saving?

My view is that it’s more important to begin saving, for three reasons. First, if history is any guide, you’ll earn more on your investments than you’d save by paying down debt—because the returns on stocks have, on average, been higher than virtually all student loan interest rates. Second, having savings provides you with flexibility, such as to make a major purchase or to weather an interruption in your income. Finally, if your employer provides a dollar-for-dollar match on retirement plan contributions, you’ll effectively earn a 100% return overnight on those dollars. That’s why I wouldn’t pay down debt any more quickly than is required.

Saving and investing are important, but—to use a phrase popularized by investment manager and author Howard Marks—what’s “the most important thing” at this stage? In my view, disability insurance is critical. If you’re in a high-income profession such as medicine, be sure to secure own-occupation coverage. And if you have a preexisting condition, try to obtain a guaranteed standard issue policy, which may be available only while you’re still in school or in training.

What about life insurance? If you aren’t married and don’t have children, I see life insurance as generally unimportant at this stage.

2. Accumulation. Once your career has gotten underway, and there’s a surplus in your monthly budget, you’ll want to shift your priorities. At this stage, if you have a family, life insurance should take center stage. How much coverage should you have? I generally recommend an amount that would both pay off your mortgage and pay your family’s bills indefinitely. As a starting point, you might consider coverage equal to 25 or 30 times your current after-tax income.

Another priority is what I call dollar allocation. To the extent you have surplus dollars in your budget, decide how you should divvy up these dollars among retirement accounts, college savings, your rainy-day fund, extra-mortgage payments and other uses. Look at this question through both tax and investment lenses.

The most important thing at this stage: to maintain the right mindset toward market downturns. While everyone enjoys seeing their savings balances rise along with the market, the reality—counterintuitively—is that you should be hoping for a market downturn. Since you’re adding to your savings, a downturn will allow you to buy into the market at lower prices. When a big decline comes along, I’d find every spare dollar you can to invest.

3. Breakeven. You may reach a point in life when you’re just breaking even—not adding to your savings but not withdrawing, either. It’s common for young people to be in this position for a while. Older folks, too, may go through a breakeven phase—when their children are in college, for example.

What’s the most important thing at this stage? Run long-term projections to make sure you’re still on track for your goals, especially retirement. In other words, it isn’t necessarily a problem to be running a breakeven budget, but you’ll want to be sure your savings, with no further additions, are on track to grow sufficiently to meet future needs.

4. Financial independence. Perhaps you’ve done the math and are confident you now have enough saved to meet your needs indefinitely. At this stage, what’s the most important thing? In my opinion, it’s risk management.

If you’re relying on your savings to meet your expenses every month into the future, you want to be sure that your asset allocation is sufficiently conservative so you could weather a multi-year downturn. If you need $100,000 per year from your portfolio, consider holding at least $500,000 to $1 million in bonds and cash investments. To be sure, there are other priorities at this stage, including tax-management, but I see risk-management as paramount.

5. Fixed income. If you’re in retirement and living solely on fixed income sources such as Social Security, a pension or maybe an annuity, your financial situation might not have a lot of latitude. Aside from inflation increases, your income will be more or less fixed forever. While that might not feel ideal, this is also the simplest of the five phases because you aren’t relying on the stock market—which is inherently unpredictable—to meet your goals.

The most important thing in this phase: to think ahead. While your income might meet your needs today, it’s worth taking some time to consider rainy-day scenarios. What would happen, for example, if health care expenses increased later in life? You’ll want to think through different scenarios. There may be estate planning steps you could take today to protect your family’s assets.

I live in Boston, where the joke is that we sometimes experience four seasons in one day. Fortunately, our financial lives don’t move quite that quickly. But when you see a financial change-of-season coming, it’s good to have a new playbook ready.

Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.

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