Topic 2: The Personal Life Cycle

Question 1

Life cycle intro:

Answer 1

A person’s life cycle starts when they are born and ends when they die. When planning current and future finances, it is useful to consider the financial circumstances that tend to apply to each life stage, and the financial consequences of possible life events. Financial service providers such as banks, building societies, credit unions, friendly societies and insurance companies offer products that are designed to enable people to pay for the life events that tend to happen at different life stages

Question 2

A typical life cycle:

Answer 2

Question 3

At each stage of life, people tend to have different:

Answer 3

• Life events
• Levels of income
• Levels and patterns of spending
• Amounts of savings and attitudes towards savings
• Amounts of debt held and attitudes to debt
• Family sizes and structures
• Levels of education
• Attitudes to risk (and to the future)

Question 4

Why do people spend money?

Answer 4

• To pay for essential items they need
• To pay for optional items they want now
• To save for items they aspire to buy in the future

Question 5

What are needs in financial planning?

Answer 5

Needs relate to items people must have to survive, such as food, drink and a place to live

Question 6

What are wants in financial planning?

Answer 6

Wants are optional items that are desirable but not necessary

Question 7

What are aspirations in financial planning?

Answer 7

Aspirations are items or experiences that people wish to have in the future

Question 8

What are dependents?

Answer 8

People (children) who have to rely on someone else for food, warmth, security, health care etc.

Question 9

How can location affect life events?

Answer 9

Where in the world someone lives can influence their life events, such as starting and ending full-time education, and getting a permanent job. The decision about leaving full-time education is often dependent on whether or not families can afford to send their child to school, rather than needing them to work to help the family. Opportunities to work can vary from country to country, and from region to region within a country

Question 10

Typical life events and financial requirements:

Answer 10

Question 11

Income and its influence on life events:

Answer 11

The amount of money people have coming in from earnings, benefits, a pension or other sources (income) and the financial circumstances of the family into which the person is born, influence the options they have at different life stages. Some life events may be delayed compared with other people or previous generations

Question 12

How can health impact life events?

Answer 12

People who suffer from long-term poor health or disabilities may have a shorter life expectancy than others. They may need ongoing medical treatment and specialist equipment, and may be unable to work. In the UK, there is free or low-cost health care available from the National Health Service, and people with medical conditions may get an income and other financial assistance from the government through various benefits. This support means that people with health issues can have the best possible life expectancy and can participate in many of the same life events as others

Question 13

How does status affect life events?

Answer 13

As a person moves through their life cycle, their social status (e.g. marital) changes, not just because of their age, but also because of the life events that they experience. Another change that can affect an individual’s status in the life cycle is the early death of a relative

Question 14

How do unforeseen circumstances affect life events?

Answer 14

A person’s status within the life cycle can be affected by all kinds of unforeseen circumstances. These can be positive (e.g. unexpected inheritance, promotion at work, lottery win etc.) These could mean that aspirations (such as starting a business, travelling, or starting a new career) can be fulfilled. However sometimes the unforeseen circumstance is a negative one (e.g. divorce, pregnancy, being sacked, sudden death of a parent etc.), and they have negative and restrictive impacts. Even winning the lottery can have negative ramifications if partners, family members or friends become resentful or jealous; which can isolate the winner

Question 15

Attitudes towards physical risks:

Answer 15

• Physical risks include hazardous sports and activities such as parascending or bungee jumping. They also include more subtle risks, such as drinking alcohol, sunbathing or smoking, which have the potential to cause long-term damage to health
• Some people are willing to take greater risks with their personal safety than others. This attitude may be linked to life stage, with younger people often more willing to take physical risks than older people. This is partly because of their physical fitness but also because, often, they have no dependants. Once people are responsible for others they tend to reduce the risks they take and seek to protect their dependants from the financial consequences of the breadwinner or main caregiver being injured or killed
• For example, a person who races motorbikes might want to carry on with their sport once they become a parent but they might decide to take out insurance against injury or death to protect their children’s financial interests

Question 16

Attitudes towards emotional risks:

Answer 16

Emotional risks include trusting other people, such as friends, partners and spouses, and so risking being hurt by that person. People may try to minimise the financial consequences of these risks by, for instance, making pre-nuptial arrangements that keep their finances separate when they marry

Question 17

Attitudes towards risks to reputation:

Answer 17

An example of risk to reputation would be borrowing money and not repaying it on time: the borrower’s behaviour affects the way they are regarded by other people

This can have an impact on the amount of money that the person can borrow in the future and at what cost

Question 18

Attitudes towards financial risk:

Answer 18

An example of a financial risk would be putting money in an investment that might fall in value, or gambling. An example is investing in company shares. This is a risk because when someone buys shares in a company they become a part-owner of that company. The value of shares is mainly determined by how much profit the company makes: their value can rise but they can also fall if the company is not profitable

Question 19

How attitudes towards financial risk relate to the life cycle:

Answer 19

People’s attitude to risk can be influenced by the stage they have reached in the life cycle. Certain events are more likely to happen at certain stages. For example, older people are more likely to suffer from poor health. This means that paying for health insurance may be more important to people in late middle or old age than it people in the young adult stage

The consequences of risks can also be more damaging at different stages of the life cycle. Someone who loses all of their investment in a company when they are a young adult, for example, has many potential years of earnings to rebuild their savings. If the same loss happened to someone in late middle age, they would have just a few working years left to save for old age

Often, people want to take less financial risk as they move through the life stages. Greater financial demands may be placed on them as they get older, such as being responsible for dependent children and older relatives, and saving for their retirement. Their attitude to risk influences their financial decisions - for example, they may be less willing to borrow money because of the risk they may not be able to repay it

Some people, on the other hand, become more risk tolerant as they move through the life stages. They may take the view that many of the situations that might have presented a risk to them - for instance, illness, accident or redundancy - have not arisen so far; or, if they have arisen, they have survived them. They may also have financial arrangements in place that cater for most of their needs and so may be more willing to take a risk with any money they have remaining

Question 20

External influences on the life cycle:

Answer 20

The length of the various stages in the life cycle, and what happens during them, is affected by external influences including socio-economic trends

External influences originate from outside a person and come from the external environment in which everyone lives. To a large extent they are beyond our control and they affect many people. An example of a key external influence for personal financial planning is the interest rate set by the Bank of England. This rate affects the interest rate that financial services providers pay on savings and the amount they charge for loans. For example, an increase in the Bank rate set by the Bank of England will mean that savers receive more income and borrowers are charged more in repayments. Conversely, if Bank rate is low, savers will receive very low returns and borrowing becomes cheaper. This has an impact on people’s ability to save for life events and whether or not they can afford to borrow money

Social trends include demographic changes, that is, changes to population size and structure through births, deaths and migration (the movement of people to live in a different country). Social trends also include changing attitudes and habits, such as attitudes to work, marriage and debt

Economic trends include periods when a country is producing and selling increasing amounts of goods and services. This is often termed an economic boom. It leads to a greater number of jobs being available and so to lower unemployment and a higher income per person in the country. When a country’s production falls for two or more consecutive quarters (that is, for six months or more), the economy is described as being in recession. Fewer jobs are available, unemployment rises and people have a lower income per person. Employees lose their jobs and young adults find it difficult to find a first job. The benefits system is placed under financial pressure, so some benefits are reduced or withdrawn. A particularly poor economic situation in one country will encourage people to move to another in search of better job opportunities and a higher standard of living

Question 21

How external influences affect the retirement life stage:

Answer 21

Trends in life expectancy and the age structure of the country influence when people retire and how long their retirement stage lasts

The typical life cycle is getting longer because each generation tends to live to an older age than the one before. This is due to factors such as better living conditions, better nutrition and medical advances. These improvements are not spread evenly throughout the population, however, because life expectancy is linked to lifestyle choices (eating, exercise, alcohol consumption and smoking) and the genes a person receives from their parents

On average, women live longer than men - but both men and women born today can expect longer life spans than those of their great-grandparents

A longer life expectancy means that people retiring now are likely to be retired for more years than in previous generations. This means they need a source of income for longer. Most people qualify for a state pension paid by the government once they reach state pension age. The government funds state pensions from the taxes and National Insurance contributions made by people who are currently working

By 2050, it was estimated that there would not be sufficient contributions from working people to pay state pensions to all the people who qualify, using the current age limits. So in October 2020, the government increased the state pension age from 65 to 66 for both men and women. The age will increase to 67 by 2028 and 68 by 2046

People who rely on the state pension for all or part of their retirement income will need to delay their retirement life stage until they reach the new pension age that applies to them. Some people may have additional pension income from other sources. Most employees, for example, are entitled to an occupational pension provided by their employer, subject to certain rules

The income paid by the state pension and most occupational pensions is relatively modest compared to earnings as an employee, so many people need to work beyond the state pension age

Most employers cannot force staff to retire at a specific age, although some can justify imposing a retirement age on grounds such as safety. British Airways, for example, sets the retirement age for its pilots at 60. Some employers prefer older staff because of their experience

Another retirement stage trend is pensioners moving to another country to live because of a warmer climate and/or reduced living expenses

Question 22

Migration and employment opportunities:

Answer 22

Migration refers to the movement of people between countries. Those leaving a country are called ‘emigrants’ by the country that they have left and ‘immigrants’ by the country in which they settle. People now move between countries much more than they used to in order to find work. Some countries, such as the USA and Australia, control this movement of people through immigration laws. Within the European Union (EU), people can move to live and work in any of the member states.
As the EU has tens of member countries, there are many people who can move to any particular country within the EU

Question 23

Lifelong learning and changes in employment patterns:

Answer 23

Access to higher levels of education and training gives people opportunities to get better jobs and have greater career mobility. Career mobility refers to the ability to move between jobs and also to move from one type of job to another - for example, to begin working life as a sales adviser for an estate agent and switch to become a nurse. Better education and training means that people are more flexible, and can take on different roles as the jobs that are available change

More young adults have access to higher education now than in previous generations

The greater demand for higher education and the economic recession have meant that tuition fees for courses have increased. Young adults need to decide whether to continue in full-time education or start full-time work. Their decision will be influenced by their personal goals and their academic record, as well as financial considerations such as tuition fees and potential earnings

Learning is not confined to the years a person spends at school or university. People have access to a wide variety of learning opportunities, including on-the-job training, apprenticeships and self-study. The culture of lifelong learning is increasingly important as the patterns of employment change

Around 70 years ago, it was usual for people to stay with one employer all their working life. These days, people have less job security but they also have far greater opportunities for job flexibility, as society does not expect them to work for one employer or in one sector for life. People can seek retraining and learning opportunities to take advantage of new jobs, such as those enabled by new technology. They may take several part-time jobs and/or become self-employed

Question 24

Changes to the family unit:

Answer 24

In the past, it was not unusual for several generations of one family to live in one family home. Nowadays, members of one family generally live in several different homes, sometimes in the same part of the country, sometimes in different parts of the country; some family members may live abroad. This change has come about because people are more likely to move away from home to work, more children are able to afford to live independently from their parents, more marriages end in divorce and more people migrate abroad, either to find work or to retire. These changes mean that there are more ‘single-parent’ and ‘single-person’ households, where one person is responsible for meeting household costs such as rent, groceries and power