Savings and investment is a journey that begins when we start to work and continues throughout our lives. Wealth managers around the world describe the savings and investment journey in different life stages. While different wealth managers have different nomenclatures for these life stages, we have identified common theme for stages of investing. The different life stages of investing are associated with important milestones of our lives. In this blog post, we will discuss 5 life stages of investing.
Starting your career
This is the first time in your life, when you are earning money and are financially independent. You put your salary or income from business in a savings bank account and spend from it, to meet your living expenses (like food, rent, transportation etc.) and other lifestyle needs. The most important financial requirement for you at this stage is to meet your expenses from your income; if your expenses are more than your income then you will run into debt. If your expenses are higher than your income, then you must either cut down on expenses or find additional income.
Finding additional income is not always within your control, expenses on the other hand are within your control. Once your expenses are within control, not only you will be debt free but also be able to save. I have discussed the importance of savings and investment a number of times in my blog and so I will not repeat myself. It is important to make savings a habit; even relatively small savings every month can grow to a huge corpus in the future through the power of compounding.
When you have just started your career, your first goal would be to save an emergency fund. This fund should be able to sustain you, if for any reason you suffer a loss in regular income or have to meet a big unforeseen expense. Financial planners advise their clients to have an emergency fund that can meet six months of your expenses. Typically, people save the emergency fund in savings bank account, but money market mutual funds like liquid funds or ultra short term debt fund offer high liquidity and superior returns compared to savings bank interest. Once you have accumulated an emergency fund, then you can focus on longer term goals like saving to buy a vehicle, house, retirement etc.
Most important priorities of this stage: Start saving, set up an emergency fund, start investing for long term goals
Recommended read: https://www.advisorkhoj.com/iciciprumf/5-Reasons-why-financial-life-begins-at-30:-A-wake-up-call-for-all-young-investors
Getting married and starting a family
The next important milestone in a person’s life is marriage; marriage marks the beginning of the next stage of your saving and investment journey. At this stage of life, couples wish to have a home of their own, a family vehicle and start a family. While these are short or medium term goals, couples should not ignore long term goals like retirement planning. At this stage of life, hopefully your income and savings are higher than what was before. To plan for various short term and long term goals, you should start systematic investing.
Systematic investing is investing a fixed amount every month from your savings. You should have separate investment plans for each goal, so that you can monitor whether you are on track to meet your individual goals. Mutual funds systematic investment plans (SIP) are the best and also the most convenient investment options for various goals. Mutual funds SIPs help you stay disciplined and get you superior returns in the long term through the power of compounding to meet your different goals. You should choose asset categories depending on the nature of the goal, e.g. for short term goals select debt funds, for medium term goals select hybrid funds (balanced funds) and for long term goals select equity funds.
It is also at this stage of life, that you are likely to incur debt to buy a vehicle or a car. Debt puts strain on your monthly savings, but many a times debt is unavoidable if we wish to fulfil our desires. This is where financial planning becomes very important, because through careful goal and investment planning, you can make a bigger down-payment for the loan and reduce your debt obligation. Financial planning also helps you stay realistic and prevents you from overstretching yourself. For example, a couple may desire to buy a luxury sedan, while their financial plan may suggest that, they can afford only an entry level sedan or a hatchback car, without over-extending themselves in debt or compromising on other equally important goals.
Recommended read: https://www.advisorkhoj.com/iciciprumf/Cost-of-debt-is-huge-and-can-be-damaging-to-your-financial-future:-Part-1
Finally, once you have a family it is very important that, you protect your loved ones from financial distress in the event of an unfortunate death by buying adequate life insurance. Protecting the health of your young family through adequate health insurance (whether provided by your employer or purchasing a family floater plan yourself) should also be high on your financial planning priorities.
Most important priorities of this stage: Financial Planning, Life Insurance, Health Insurance, Systematic Investing, Minimizing Debt
Recommended read: https://www.advisorkhoj.com/iciciprumf/4-Early-Life-Mistakes-which-Investors-should-avoid-at-any-cost
Children’s growing years (school years)
Education expense, especially higher and professional education, is one of the most inflationary items in our urban consumption basket. Education expense inflation every year is usually higher than your annual increment. Financial planners suggest that, young families start planning for the children’s higher education right from the time the child is born or even earlier. As discussed earlier, Systematic Investment Plan is the best investment option for long term goals. If you start planning your children’s higher education, when they are young you can get the best returns by investing in diversified equity funds; on the other hand, if you start planning children’s higher education only in their teenage years, then balanced fund is the better option.
Apart from children’s education, their marriage is also an important priority for Indian parents. With weddings taking place on a more lavish scale than ever before, planning for children’s marriage should also start early enough. Again systematic investing through equity funds or balanced funds is the best option, depending on your goal horizon. A major part of wedding expenses in Indian families goes towards purchase of Gold jewellery for their children and / or their spouses. If you wish to gift Gold to your children then you can start investing in Gold ETFs which represent the financial value to pure 24 carat physical gold. You cannot invest in Gold ETFs through SIP; however, you can set aside some amount every year to purchase Gold ETFs and over a long investment horizon average out the purchase price of Gold.
By the time your children are in middle school or high school, you are likely to be in mid-stage of your own career progression. Your income is much higher than what it was and your one-time cash-flows, e.g. annual bonus, incentive pay-outs, profits from business etc., are also likely to be higher than before. You may also receive one time cash-flows through maturity proceeds of fixed term investments (like life insurance policies, public provident fund, fixed deposits etc.). If you are on track with respect to all or most of your goals through systematic investing plans, you can use these one-time cash flows to retire your debt or make strategic lump sum investments. If you are making comfortable progress on other goals, you can afford to take more risks with lump sum investments. You can deploy your lump sum funds in asset categories like midcap or small cap funds, sector funds etc. Depending on your investment knowledge and temperament, you can also invest directly in stocks; however, we must caution you that, directly investing in stocks can be risky and so unless you have the ability to identify good stocks to invest, it is much wiser to stick to mutual funds.
Finally, towards the end of this stage, when your children are in their mid to late teens, you should start rebalancing your portfolio and shift to lower risk investments, at least the investments earmarked for your children’s higher education, so that your children’s education are not compromised by a stock market crash.
Most important priorities of this stage: Start systematic investing for children’s goals (education and marriage), retire debt and make strategic lump sum investments.
Recommended read: https://www.advisorkhoj.com/articles/Financial-Planning/Financial-Planning-for-Children-Education
This stage begins when you are in your late forties or early fifties. If you had planned well and worked hard in the previous stages, this should be a stress-free and fulfilling life stage. You can see your children achieving their goals and getting settled in life; nothing gives parents more happiness. If you had been saving in a disciplined way for your impending retirement, then you and your spouse should be stress free. However, life is seldom perfect.
Based on my experience, parents often compromise on their own futures (retirement planning) to give a better future to their children. Purely from a financial perspective, it is never advisable to compromise on your retirement planning for the sake of your children’s higher education because if your children are meritorious then they can get education loan from banks to fulfil their academic ambitions. Once children start working, they can repay the debt and even get a tax break on the interest payments under Section 80E of Income Tax Act. Over the years, I have tried to explain this to parents facing the dilemma of funding their children’s education expense versus their own retirement planning, but I saw that, most parents sacrifice their own retirement in interest of their children. I can fully appreciate that parental love can trump financial wisdom because parents do not want their children to start with a debt obligation when they begin their careers; nevertheless, I would still stress that, you should not compromise on retirement planning, because if you do and lose financial independence in your retirement years, you will be a financial burden on your children.
That said if you are running short on your retirement goal, then you re-double your efforts at this stage of life. In this stage of life, you are at the peak of your earning capacity; if your children are working and financially independent, then your expenses should also be lower. So you should aim to save and invest the maximum amounts possible for your retirement. Your investment mix should comprise of equity, balanced and income funds based on your financial planning objectives. You should also review and rebalance your investment portfolio, so that you have the suitable asset allocation for this stage of your life. When you are 50 years old, the Asset Allocation Rule of 100 suggests that, you should have 50% of your assets in equity and 50% in debt. As you approach retirement, you should keep rebalancing your asset portfolio, so that by the time you retire, the majority of your assets are invested in low risk debt instruments (e.g. debt funds).
You should continue to make strategic investments from any one-time cash-flows / windfall gains. However, you should keep your impending retirement in mind when making such investments. You should avoid speculative or risky investments like midcap stocks, sector funds etc. Large cap or diversified equity funds are good lump sum investment options in this stage of your savings and investment journey.
At this stage of life, you should also plan for life after retirement, most importantly, in terms of having sufficient health insurance covers in your post retirement years. If you are receiving health insurance benefits from your employer, you should know that, the benefits will cease post retirement.
Most important priorities of this stage: Retirement Planning, Asset Allocation and Asset Rebalancing
Recommended read https://www.advisorkhoj.com/iciciprumf/Avoid-these-common-retirement-planning-mistakes
This, ideally, should be the most fulfilling years of your life. Your children are grown and you will have the pleasure of grandchildren. However, you need to pay a lot of attention to your investments. Since you do not have regular income from your profession after retirement, you should rebalance the asset allocation of your portfolio. Regular income from your investment is the most important need after retirement. You should de-risk your portfolio from the whims of stock market.
However, with increased longevities, retired lives can be as long as 30 years; so you need your retirement asset portfolio to be inflation proof. Historical data shows that, equity as an asset class can beat inflation in the long term. As such, you should continue to have exposure to equity even in your post retirement years.
Mutual funds offer a variety of options for getting regular income and capital appreciation, in accordance to different risk profiles. For regular income, you can invest in dividend options or avail of the Systematic Withdrawal Program facility offered by mutual funds. For capital appreciation, you should allocate a portion of your portfolio to equity or hybrid funds. Depending on your specific needs, you can invest in a mix of accrual based debt funds, income funds, monthly income plans, balanced funds or even large cap / diversified equity funds; needless to say, most of your investment should be in debt.
Health insurance is also important in this stage of life. You should have sufficient health cover for you and your spouse. Even if you are covered by your children’s employers’ group health insurance plan, you should buy sufficient Mediclaim cover for you and your spouse.
Finally, tax planning should be a very important consideration in this life stage. Tax directly reduces your income in this stage and therefore, you should strive to make your investment withdrawals / income as tax efficient as possible.
Most important priorities of this stage: Health Insurance, Investment Planning and Regular Income, Tax Planning
In this blog post, we discussed about 5 life stages of Investment Planning. There is final financial planning stage, which does not get sufficient attention resulting in a lot of issues after the death of the investor. This stage is estate planning for your successors. You should devote sufficient time and effort to ensure that inheritance is as smooth as possible for your heirs. You should have a list of all your assets, have nominees clearly identified and documented for each asset. In India we do not pay sufficient attention to estate planning resulting in considerable procedural and also legal difficulties for heirs in inheriting their estates left behind by spouses / parents / relatives. Lack of clear succession planning, can also result in family disputes and in the worst case, legal battles, something which no parents want. Writing a will ensures smooth succession planning and inheritance, in case of ambiguity or lack of sufficient documentation. If you wish to leave inheritance for your heirs (spouses, children, grandchildren, nephews etc.), you should plan your estate very carefully; take the help of a lawyer, if required.
Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.