Oran Hall | Keeping up with changing financial needs

In financial and life planning, there are three primary phases: accumulation, consolidation, and spending, so financial goals and needs change with the phases. Strategies must also be dynamic, given the changes in the environment.

Here are some of the changes: low interest rates have become entrenched; there has been a marked shift from defined benefit pension plans to defined contribution plans, and individual pension plans have been added to the range of pension arrangements; there is a growing diversity of financial instruments; the cost of tertiary-level education especially is spiralling; contributors to the National Insurance Scheme are required to contribute longer; people are living longer; and how people earn a living is changing as employment is not as guaranteed as it used to be.

The accumulation phase itself encompasses two major periods – the early career period and the mid-career phase spanning the time from the first day of work up to the beginning of the late career, or pre-retirement phase, which generally covers the 10 years just before retirement. The late career phase is the period of consolidation and the retirement period is the net spending phase during which final plans must be put in place for the transfer of assets to loved ones and cherished causes.

The phase we do not seem to put at the front of our minds is the foundation period – when our children are ‘children’ by law, being under the age of majority. To a great extent, they depend on their parents or others to provide for them. This is the time when they should learn basic money skills, begin to develop their money values, and begin to make their first major financial decisions. This is the period during which they learn financial behaviours from their parents, other significant persons in their lives, and institutions like schools and churches.

In the early career phase – up to age 35, or even 40 – persons not fortunate to get a jump-start from parents must find the resources to establish their homes, acquire assets such as a motor vehicle and meet the expenses associated with starting a family.

Generally, persons in this group have a greater capacity to take risk than their elders because they have more time to recover from any setback so they can focus more on growth and build more wide-ranging portfolios and thus compensate for the low yields on interest-earning investments.

Against this is the reality of the high price of some assets. In nominal dollar terms, it takes good money to purchase a dwelling place, meaning that it may require a big deposit and high monthly mortgage payments. Add to this the high debt load some carry from student loans and the tendency to yield to the temptation to incur expensive credit card debt.

A big advantage this group has is the range of financial instruments available, but the ability to benefit from them is a function of the extent to which members of this group educate themselves about the instruments and markets and the strategies to employ.

Persons in the mid-career phase are generally in a good position to boost their investment activity and capitalise on the wider range of options available, because they tend to have higher incomes, though it must be recognised that developments in the job market have also derailed the lives and plans of some members of the group. This is the last phase to really build a strong foundation, as it is still safe to focus on growth.

Then comes the change – in the late career period as retirement beckons. This period of consolidation can be testing in a low interest rate environment, but instruments like preference shares and some unit trusts and mutual funds that are able to invest in diverse interest-earning instruments can be useful in this period. With parents largely freed from expenses associated with children and debts incurred to fund assets like a home, there should be more funds to strengthen the portfolio.

Members of defined benefit plans may not fare badly in retirement, but those with defined contribution plans, whether supported by employers or just funded by the scheme member, could face inadequate pensions due to low returns from fixed-income investments as well as from stocks if the market is in declining mode.

The self-employed and persons who are not covered by employee-sponsored pension plans should seize the opportunity to embrace approved retirement schemes which, by the way, are not savings accounts from which funds are withdrawn, and which require consistent contributions.

It is still necessary to build a diversified portfolio for retirement in addition to formal pension arrangements and, during retirement, the focus should be on income, liquidity, safety of principal, with some limited and more conservative provisions for capital appreciation.

Generally, although beneficiaries will receive NIS ‘pension’ benefits at a later age, the other benefits should be accessed as they represent a source of income.

It is important to get familiar with financial matters and to be aware of developments in the economy. Business has the potential to provide income at different phases of the life cycle, but those opting to build their financial future on securities and other marketable assets may want to consider engaging professionals to manage all or a part of their portfolio.

- Oran A. Hall, author of Unde rstanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.finviser.jm@gmail.com