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The Four Phases of Your Financial Life

Designing, building and protecting a plan throughout these phases requires an integrated approach across many life and financial areas. Key moments across each phase can impact your long-term success to whether you accomplish the goals you’ve set forth. the four phases of your financial life

I believe that by having a better understanding of each phase, you’ll be able to know what to expect and plan for throughout each one, in particular when it comes to creating a retirement spend down strategy.

Let’s take a look at those four phases:

  • Accumulation
  • Transition
  • Distribution
  • Legacy

In the sections below, we’ll dig into each of them so you know what to expect and consider while going through them. Remember, not everything will make sense for your current situation or at least for your situation right now.

As you start your career, get married, have children, switch jobs, prepare for retirement, retire, etc., you will experience different things depending on your own personal circumstances so, as mentioned, not all of these will apply to you.

If you have any questions about the four phases or if you’re not sure where you’re at or what you should be thinking about right now, we are more than happy to help.

With that said, let’s take a look at the four phases of your financial life.

The Accumulation Phase

Saving and investing opportunities should start early to fund future objectives such as education. Once a career begins, a coordinated approach to saving, investing, risk-management, and tax optimization can set the foundation for a smooth transition into retirement.

Let’s take a look at some things to consider when going through your accumulation phase:

  • Aligning your career with your values and financial expectations
  • Saving as much as possible in a tax-aware strategy across tax-deferred, tax-free and taxable accounts
  • Matching ordinary income-producing assets with ordinary income tax account structure. This will lower the future dollar amount of Required Minimum Distributions and position your equities for capital gains rate and tax-free step up
  • Managing the financial risk of a spousal death
  • Accumulating growth in unrealized gains
  • Building a globally diversified equity portfolio
  • Making a healthy lifestyle part of your long-term strategy
  • Optimizing asset placement and account structure for future after-tax distributions
  • Potentially position your equities to take advantage of tax-loss harvesting
  • Managing tax-bracket creep as your income increases
  • Drafting estate planning documents in case of a premature death

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The Transition Phase

Transitioning from the accumulation phase to generating a sustainable income is critical to long-term client success. The objectives of this phase are to design a strategy that minimizes tax liability over the long term — not just the current years.

Let’s take a look at some things to consider when going through your transition phase:

  • Optimizing your tax strategy for life after work
  • Estimating your taxable income in retirement
  • Creating a wellness plan that you can share with your family
  • Projecting your adjusted gross income to potentially take advantage of tax strategies
  • Reviewing if life insurance is still needed
  • Estimating your in-retirement tax rate
  • Starting your phased career plan transition
  • Exploring Roth conversion strategies
  • Developing a tax rate bracket strategy
  • Projecting tax bracket at 70 with no tax-optimized planning
  • Adopting a low net investment income tax (NIIT) strategy

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The Distribution Phase

Optimizing income from all sources — including investments — in a tax-efficient way can increase the longevity of the plan. Smart rebalancing and distributions can increase philanthropic impact while preparing for legacy objectives.

Let’s take a look at some things to consider while going through your distribution phase:

  • Defining the cost of your retirement lifestyle before-tax
  • Identifying non-portfolio 1099 income sources
  • Creating and sharing your legacy with your family
  • Donating RMD’s to charity
  • Transferring wealth to heirs and charity
  • Analyzing your financial capacity
  • Assessing your progress toward your definition of non-financial success
  • Funding your lifestyle spending with the lowest tax-cost investments
  • Determining your Social Security strategy
  • Identifying any potential health factors
  • Projecting taxable income and converting investments into cash where appropriate
  • Selling equities with a high basis in up markets
  • Selling fixed income in down markets
  • Updating your estate planning documents

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The Legacy Phase

As assets are transferred between spouses and ultimately heirs, it’s important to coordinate your income requirements, tax considerations, and other intentions. This phase’s goal is to positively impact the client’s wealth on the lives of others — either heirs or charity.

Let’s take a look at some things to consider while going through your legacy phase:

  • Equalizing ownership of equities while both spouses are alive
  • Making sure your assets go where you want them
  • Aligning your plan with your personal values
  • Accumulating unrealized gains for tax-free step-up in basis at the first death
  • Creating a strategy for the 10-year Inherited IRA stretch: tax rates of heirs vs. you, trust beneficiary issues, naming a charity as a beneficiary
  • Funding surviving spouses lifestyle with inherited assets
  • Avoiding tax of liquidating assets and distributing to heirs
  • Verify your intentions and gifting preferences are being executed
  • Transferring your assets in the most tax-efficient manner
  • Updating your estate planning documents
  • Ensuring all of your assets are titled properly

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About the Author

Aurtho Clint Haynes, CFPThis article was written by Clint Haynes, CFP®. Clint is a Certified Financial Planner® and Founder of NextGen Wealth. You can learn more about Clint by reading his full bio here.

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