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6 important To Dos in your Mid Career Financial Planning Part 2

Aug 30, 2016 by Dwaipayan Bose | 85 Downloaded
Picture courtesy - PICJUMBO

In the first part of this article, we discussed that when you reach your early 40s, you are actually approaching the mid-point of your career after working for around 20 years. We also discussed how this stage of your life is important both from a career and financial planning perspective.

We have already covered the 3 to-dos in the first part - Build financial contingency for unexpected risks, Reduce debt burden and have plan to be debt free in the near term future And Ensure that you have adequate health cover for your entire family

We will now discuss the other 3 to-dos. Enjoy reading..

Ensure that you have adequate life insurance protection for your family

In our blog, we have repeatedly stressed on the importance of life insurance in financial planning. Unfortunately, people make some very basic and potentially damaging mistakes, when buying life insurance. Many life insurance buyers choose their life insurance covers based on the plans their insurance agents want to sell and how much premium they can afford. This is a wrong approach. Your life insurance cover should be adequate to meet the income needs of your family in the event of an untimely death. It should also be able to meet the future aspirations of your family, including your children’s education and marriage.

If your life insurance cover is not adequate, your loved ones are likely to endure financial stress and compromise on their aspirations, in the event of an unfortunate death. Other common life insurance mistakes include treating it as a savings scheme for children’s future or retirement with the expectation of certain maturity amount as promised by their insurance agents. Treating life insurance primarily as a Section 80C tax saving investment is another mistake, which many of us make.

Life insurance should be treated purely as a financial instrument for risk protection. Treating life insurance policies as savings or investment schemes has two harmful financial consequences. It causes us to be under-insured and gives us sub-optimal returns on investment. We have discussed this in details in our blog post Why are non term life insurance plans detrimental to your financial needs. The early 40s is a good time to review your life insurance needs. As discussed earlier in the post, this is the stage of life, when you are more settled from a lifestyle perspective. A life insurance cover bought when you were younger and had lower income, may not be sufficient to sustain the current lifestyle needs of your family.

If you need additional cover to meet your family’s lifestyle needs, buy additional term life cover. Also, if you made some of the other life insurance mistakes discussed here, earlier in your career, now is the time to correct it. Review your life insurance policies carefully, and if they are not suitable for your insurance and investment goals, you should consider surrendering the policies, buy term life insurance and invest the savings in premium in suitable investment options to meet your financial goals.

This is also a time, when you should consider buying a critical illness and personal accident covers. Critical illnesses and severe accidents, can result in very high medical expenses, which you may not able to get reimbursed through your Mediclaim policy. Further, critical illnesses and temporary or permanent disability caused by accidents can impair your ability to work, resulting in a loss of income for your family over a protracted period of time. Critical illness and personal accident covers, protect you and your family against such serious financial risks.

Invest for your child’s education

College and professional education in India is getting more expensive every year. Historical data, over the past decade or so, has shown that Inflation rates are highest in the education and healthcare sectors. A few years back, I read a post written by well known personal finance blogger in the US, known for her astute and sometimes counter-intuitive observations.. The blogger wrote that, in the US, people are getting married than before and, therefore, are having children at an older age compared to their parents and grandparents. This trend, by the way, is being seen in India also.

This blogger suggested young people to get married earlier and have children at a younger age; otherwise they may end up compromising on their retirement planning. In my opinion, people should get married when they want to and have children when they decide. Happiness and personal fulfilment should be the main purpose of life; not a large retirement nest egg, if it comes at the cost of happiness.

However, purely from a financial viewpoint, what the American blogger wrote makes logical sense. If your children’s higher education and marriage is too close to your retirement, managing multiple financial planning priorities becomes a difficult balancing act, unless you have saved enough at a younger age to meet both your children’s and your retirement goals. In our blog post Planning your child’s future: Part 1, we had discussed that, given the high rate of inflation in education, Your child’s higher education and wedding expenses can easily add up to be 10 years of your savings.

Therefore, it is imperative that you start saving and investing for your child’s future early in your career. If for whatever reason, you have not been able to save for your children’s education and marriage, you must start planning for these important objectives when you are in your early 40s. How much you have to save and where to invest, will depend on your personal situation, including the age of your children, your family’s aspirations, your assets and liabilities, your income and savings etc. If required, you should consult, with a financial planner and build a suitable financial action plan.

Invest in Retirement Planning

Many of us, in India, do not pay sufficient attention to retirement planning until it is too late. It is typical human nature, to pay much more attention to short term needs, at the cost of long term needs. What is more disturbing to me is the fact that, we prioritize relatively trivial short term needs over long term needs. We often take retirement planning for granted, even in our 40s, because we hope that we will have our jobs forever. But the reality is that, corporate careers are getting increasingly shorter because changing market and technology dynamics, calls for new skills which older (relatively speaking) people can struggle with. Finding a new career opportunity suited to your career aspirations becomes exponentially more difficult as you age. People in their 40s should realize this and prepare themselves financially for such an eventuality. Even if you are able to work till the age of 60, retirement planning is not a walk in the park, for the simple reason that, we work for about 40 years, earn money, save a portion of it, and then live on those savings for the next 30 years after we retire (please read our post, Retirement planning: Why should you get serious about it now).

The earlier you start planning for your retirement, the easier your task is. The later you start the more challenging the task becomes. If for whatever reason, you have not been able to save and invest for your retirement, and even if you were, you were not able to accumulate a sufficiently large nest egg by the time you are in your 40s, this is time when you must have a retirement plan in place.

You need to have a clear vision of what your retired life will look like. As we go through various stages of life, the goal post of retirement planning may keep shifting. By the time you are in 40s, you have more clarity about your long term aspirations, than when you were in your 20s or 30s. The important questions to ask at this stage are, what your lifestyle related expenses are, how much income you need to sustain your inflation adjusted lifestyle expenses, where will you want to settle after your retirement, will you continue to live in your current home or shift to a different house, will you like to start a business after retirement, will you like to retire early, so on and so forth. You then need to develop a suitable retirement plan or refine your retirement plan, if you have one in the first place, and start executing on it.

Conclusion

The early 40s is a very important stage of our lives, both from a personal and professional perspective. This period in life, for many of us, can be described as the prime of our working careers. This stage of life, as discussed in the post, is also extremely important from a financial planning perspective. In our early 40s, we have more visibility into our longer term aspirations and challenges that we have had before in our lives. In this post, we discussed 6 important financial planning to-dos that we must review and ensure that we are on track to achieve success in our long term financial goals.

Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.

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Dwaipayan Bose

An alumnus of IIM Ahmedabad, Dwaipayan is a Finance and Consulting professional, with 13 years of management experience, mostly in MNCs like American Express and Ameriprise Financial, both in India and the US. In his last role, he was the Chief Financial Officer of American Express Global Business Services in India. His key interests are building best in class organizations, corporate governance and talent development

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