Life Cycle Planning Flashcards
Three Stages of The Financial Life Cycle
Stage 1: The Early Years
Stage 2: The Golden Years
Stage 3: The Retirement Years
The Early Years
Stage 1: The Early Years - Involves a long period that centers on the accumulation of wealth. Goal setting, insurance, home buying, and family formation are highlighted in terms of planning. The phases included in this stage are Young Adult, Family Formation, and Family Development.
The Golden Years
Stage 2: The Golden Years - Involves a shorter period approaching retirement. Financial goals shift to the preservation and continued growth of the wealth already accumulated. The phase included in this stage is Family Maturity.
The Retirement Years
Stage 3: The Retirement Years - Involves more spending and less saving. Safety, income, and estate planning take on increased importance. The phase included in this stage is Retirement.
Constant ratio Plan
As the name implies, a constant ratio plan adjusts the portfolio back to its target weight
Variable Ratio Plan
A variable ratio plan rebalances, but it stacks the proportions in favor of assets that have performed poorly in recent periods.
. What are two life events that can impact your finances?
A. Marriage
B. Opening a checking account
C. Children
D. Budgeting
Correct Answers: A. Marriage and C. Children
Explanation: Marriage and children are the two life events that can have a profound impact on your life and finances.
Newly married couples should always open a joint checking account as a first step to planning their finances.
A. True
B. False
Correct Answer: B. False
Explanation: If the couple has incompatible money management styles, they may need to consider two accounts. If they have compatible styles, a joint account may work for them. Just remember, there is no one right way to handle accounts. The couple needs to find a system that works for them.
What are some of the financial planning steps on starting a family?
A. Buy all new baby furniture.
B. Appoint a legal guardian and update your will.
C. Review your financial plan.
D. Investigate flexible spending accounts.
Correct Answers: B., C. and D.
Explanation: The key steps to financial planning on starting a family are: Update health insurance to include your child. Notify insurance company of the child’s birth (i.e. a beneficiary on life insurance policy). Review life and disability insurance to ensure adequate coverage. Investigate the use of a flexible spending account through your employer if a day care provider will care for the child. Save adequately to cover the new baby costs. Childcare expenses should be discussed before planning for a child and included in your budget. Update your will and appoint a guardian for your child. Review your financial plan. Save for the child’s education early should you decide to help with higher education expenses.
Young Adult
As a young adult, Consumption and Savings Planning and Disability Insurance Planning should be an integral part of your strategy to achieve lifelong goals.
Family Maturity
The family maturity phase - is part of stage 2 of financial life cycle planning and involves a transition from the earning years, to your retirement years.
Retirement
Tax reduction, protection from inflation, safety, income and estate planning become key to retired individuals.
Family Development
Retirement planning, insurance planning and estate planning are the paramount needs of this phase
Family Formation
Family Formation: In this phase, your planning must go beyond merely helping to fund the down payment on your home. Your children’s education, emergency funds and retirement planning must also be undertaken.
What is the significance of understanding the financial life cycle?
A. Helps you to keep up with other people.
B. Helps you to better understand the timing and areas of financial concern you’ll experience.
C. Allows you to focus on typical concerns earlier and to plan ahead with fewer problems.
D. The financial life cycle does not apply to most people.
Correct Answers: B. and C.
Explanation: The financial life cycle generally applies to most people. The knowledge of financial life cycle gives a better understanding of the timing and areas of financial concern, enables one to focus on those concerns earlier, and plan ahead to avoid future problems.
