The Money Cycle is a concept that encapsulates the financial journey we all undergo throughout our lives, characterized by three distinct phases: accumulation, preservation, and distribution.
The accumulation phase starts early when we actively amass or accumulate assets. During this period, individuals are generally more inclined to accept higher risks with their investments due to the extended time horizon. Considering that most individuals are engaged in the workforce for a significant amount of time, there's ample opportunity to recuperate losses or endure market downturns.
The next phase is the preservation phase. This is where the focus shifts towards safeguarding some accumulated assets as retirement approaches. With retirement goals drawing nearer, there's less tolerance for financial missteps or exposure to significant market volatility. This phase serves as a preparation for the subsequent distribution phase.
The distribution phase encompasses providing for oneself during retirement and giving assets to one's family upon passing. During this phase, individuals begin to draw from the assets they've amassed and preserved, generating income from their savings and investments.
The biggest mistake we have seen individuals make is transitioning directly from the accumulation phase to distribution. Often, they persist in investing as if retirement were distant, even when it's imminent or already commenced. This approach poses a risk, particularly during market downturns, as individuals are compelled to sell investments to meet income needs when markets are down, potentially depleting savings at an accelerated pace. I think of this like burning a candle from both ends.
The solution lies in preserving a portion of assets as retirement nears. Adopting a bucket planning approach to income distribution is key. By time segmenting distributions into categories for now, soon, and later needs, individuals can better mitigate the risk of running out of savings later in life.