With all of the changes that happen during our lifetime, it’s easy to forget about how we should manage our cash flows (income versus expenses) to accommodate for our shifting financial goals. Theoretically, our income increases as we get older while our ability to accept risk declines. Our willingness to accept risk is largely driven by cash flow considerations that include, but are not limited to, our personal experiences, living conditions, and ambitions. For simplicity, the different stages in life have been categorized into three phases: foundation, accumulation, and maintenance.

The three phases of managing cash flows

Foundation Phase

The foundation phase typically represents our youth, where the goal is to create the base from which our wealth will grow. This base can be a marketable skill or obtaining education or certifications. Given their age, individuals during this phase have a long time horizon that is normally associated to a higher risk tolerance as there is more time to recover from potential losses.

Throughout this phase, most individuals do not have sufficient disposable income to make significant investments.  Choices are limited but it’s still important for individuals to allocate a portion of their income to savings, which may include opening a low-cost investment account. It’s also helpful to use this time to learn about different investment options to prepare for managing changing cash flows in the next phase.

Example: Ann is attending college to get a degree in Accounting and works part-time at a coffee shop. She puts 10% of her income in a savings account and educates herself about investing by borrowing books at her local library and reading free online information. 

Accumulation Phase

During the accumulation phase, individuals typically see a return on the skills and/or education obtained throughout the foundation phase as their incomes grow. In the years of wealth accumulation, disposable income exceeds expenses and the percentage of cash flows allocated to savings should increase over time. Though retirement is many years away, this is the time to establish savings plans, set up retirement/investment accounts, and begin investing.

Example: Ann has graduated and now has a full-time job as an Accountant. She registers in her firm’s pension plan and opens an RRSP and TFSA with her local discount brokerage. She does not have any significant debts at this time and she invests in companies in the tech sector as she has developed a fairly large knowledge base of this industry.

Eventually, individuals reach their earnings peak but the need for short-term cash rises as significant life events result in mounting expenses. Personal spending habits may need to be adjusted to maintain regular contributions to retirement plans established earlier on.

Example: Ann has given birth to her first son and she and her husband have purchased their first home. Previously, she and her husband would go on a luxury cruise each year but have now decided to adjust their vacation plans for the next couple of years so they can pay off their debts quicker and also continue to contribute to their existing plans. They also intend on using the cruise money for a recently opened RESP.

Throughout the accumulation phase, individuals typically have the highest savings rate with their investment portfolios containing riskier assets such as stocks. Investors may see the most volatility in their portfolios but their long time horizon will generally allow them to recover from short-term losses.

As expenses decline near the end of the accumulation phase, individuals who invested early are in a better position to retire as the income and/or gains from their portfolios should supplement their existing savings. Individuals who choose to invest their wealth at a later point may have a wide disparity between income and expenses. They may want to make more aggressive investments to increase their savings but might not have the ability to support the higher risk.

Maintenance Phase

The maintenance phase is representative of individuals in retirement. During this phase, wealth preservation is more important than accumulation as the goal is to maintain a desired lifestyle and financial security. Risk tolerance will decline as time horizons are shortening since there is less time to recover from potential losses. Individuals will shift their portfolios from riskier asset classes such as stocks to income-producing investments such as bonds.

The challenge with this change is maintaining a stable portfolio that preserves purchasing power. Inflation reduces our ability to buy goods and a portfolio that is too conservative (i.e. very high allocation to bonds) may diminish our purchasing power. Incorporating riskier investments may offset some of the impacts of inflation and so it’s important to maintain an appropriate asset allocation.

Example:  Ann’s son is no longer financially dependent on her. She and her husband are now retired and they rely on the income generated from their pension plans and RRSP to support their lifestyle.

Throughout this phase, individuals can also start the process of wealth transfer and seek guidance from a professional to distribute their remaining income to their children, grandchildren, and/or charities without the burden of estate taxes or other legal hurdles.


The path from the foundation to the maintenance phase is not always linear. An individual in the accumulation phase may decide to change careers and move back to the foundation phase. Personal circumstances play a large role in the progression throughout the three phases but if we can start a retirement plan in the early stages, it’ll be a smoother transition to the final phase.

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Beattie, Andrew (2018, July 25). The Seasons Of An Investor’s Life. Retrieved from https://www.investopedia.com/articles/basics/06/investingseasons.asp
Bronson, James W., Matthew H. Scanlan, and Jan R. Squires. 2007. “Managing Individual Investor Portfolios.” In Behavioural Finance, Individual Investors, and Institutional Investors. Charlottesville, VA

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