Financial planning for long term goals is not high priority for most individuals when they are young. At a younger age, fulfilling lifestyle desires, getting married and starting a family, purchasing assets for the family like a car and a house, are given more importance than savings and accumulation. But once you approach mid-career, 15 to 20 years into your working life, some of the most important long term goals like children’s education, marriage and retirement begin to loom larger on the horizon.
This is also the stage of life, typically in your late thirties to early/ mid-forties, when you are also servicing debt obligations like home and car loans. In this age of rapidly changing industry landscapes, mid-career crisis is also a big concern for many individuals that we have spoken with.
In this blog post, we will discuss how you should approach financial planning when you get to the mid stages of your career.
Typical financial situation in mid-career years
This is likely to differ from individual to individual but we have tried to draw some broad themes:-
- When you are 15 to 20 years into your working life, your income is likely to be much higher than what it was 10 years back, but your lifestyle and expenses would have also increased substantially
- A big part of your post tax income would be going towards debt obligations, home and / car loan EMIs. Another substantial part will be spent on the education and extra-curricular activities of your growing children
- You are also likely to have retired parents who may be fully or partially dependent on you from a financial standpoint
- Depending on your specific situations, you will be thinking about your career progression and at the same time, may be worried about financial concerns with regards to your next career move
- Your children may be approaching their teens and you have to ensure that you have enough money set aside for their college and higher education in the next 5 to 10 years
- This is also the time, when your own impending retirement starts to feel more real than how it felt 10 years back
How to approach financial planning in your mid-career
People who started saving and investing from the early stages of their careers have less to worry about, but for most people this is the most important part in their financial planning journey. This is the time to get very serious about financial planning; otherwise you may fall short of multiple financial goals. Here are some points you can consider for managing your finances in this stage of life.
Savings habit and goal: You should start with a goal. Suppose you are 40 years old and need Rs 1 crore (at current prices) for your retirement. Factoring 5% annual inflation, your retirement goal will be Rs 2.7 Crores.
Assuming you get a return on investment (ROI) of 10%, you need to save around Rs 35,000 per month to meet your retirement goal. Try this Retirement Planning Calculator to estimate your retirement needs.
Add to this other life-stage goals like children’s education, marriage etc. and estimate how much you need to save. For example, if you need Rs 25 – 30 lakhs in the next 10 years for child’s education, you need to save an additional amount of Rs 12,000 – 15,000 per month; in total about Rs 50,000 per month. Once you know how much to save, you will figure out a way of how to save the money by cutting down on non-essential expenditures.
Suggested reading: Why should you get serious about retirement planning and start investing in mutual funds
Try to be debt free as soon as you can: At this stage of your career, the only debt you should be servicing is your home loan. If you have credit card, personal and car loans, you should have a plan to pay it off, as soon as possible. Interest rates of credit cards, personal and car loans are usually higher than home loans and they are a drain on your post tax income. Once you pay off these loans, you will have a larger investible surplus. You can continue with your home-loan because you will get tax benefit on the principal component (u/s 80C) and interest component (u/s 24) of your home loan EMI payments. Whenever you have surplus cash-flows you can consider pre-paying your home loan or investing it for your long term goals, depending on whether the floating rate interest of your loan is higher or lower than return on investments. Another factor to consider investing versus loan pre-payment is whether your spouse is working or not. If your spouse is working and can service the loan from her income alone, then you can prioritize investments over loan pre-payment.
Invest through SIP according to financial plan: We discussed earlier the importance of having a monthly savings goal, but it is not enough to just save. You should invest your savings to accumulate wealth in the long term. The best way to invest for your medium to long term financial goals is through mutual fund monthly Systematic Investment Plans (SIP). SIP is best for wealth accumulation because it can benefit you through the power of compounding and rupee cost averaging across different market conditions.
Select schemes based on your goals and risk capacity: Goals and risk capacity are related because your goal timeline will determine your risk capacity. Longer your goal time-line, higher is your risk capacity. For example, if you are 45 years old, you can go for riskier investments (with higher returns) for your retirement which is 15 years away but for your child’s college education, which may be just 5 years away, you will have to invest in less risky investments.
Suggested reading: Planning your child’s future
For long term investment goals with horizon of at least 5 years or longer, equity mutual funds are the best investment options because you can get highest potential returns. For moderate term investment goals with horizon of 3 to 5 years, hybrid funds are ideal choices because they limit downside risk. For short term investment goals with horizon of 3 years of less (e.g. pre-payment of home loan, upgrading your car etc.) you should invest in debt funds.
You may like to read: How you should invest in debt mutual funds – short term versus long term
Tactically invest with windfall cash-flows: From time to time, you may have one-time cash flows like a bonus, commissions, incentives, severance pay-outs, maturity corpus of insurance policies bought earlier in your career, PPF maturity corpus, proceeds from sale of ancestral properties etc. You should invest in them wisely for your different goals. There are various ways of investing in lump sum. For your longer term goals, you can take advantage of market corrections to tactically increase your asset allocation in equity by investing lump sum in equity funds. If you are not sure where you want to invest, then you can park your surplus cash-flows in a liquid fund or ultra-short duration fund and then invest according to your financial situation and needs.
This may include tactics like investing for long term in a desired scheme (equity or hybrid) through Systematic Transfer Plan (STP) taking advantage of market volatility. You should take the help of a financial advisor if required.
Asset Allocation: In the early stages of your career you can be heavily into equities (equity mutual funds) because your risk capacity would be high, but mid-career you need to focus on asset allocation to balance risk and returns. Asset allocation depends on your personal financial circumstances and financial goals, but the thumb rule of 100 – Age is useful as a guideline, especially at this stage of life, where you are concerned about risks and at the same need good returns for your long term objectives.
The rule of 100 – Age implies that you should have in percentage terms “100 – your Age” invested in equity and the balance in debt. For example - if your age is 42, then 58% of your assets should be in equity and 42% in debt. Asset allocation is one of the most important aspects of a financial plan and due importance should be given to it at the time of making fresh investments (lump sum or SIP) or when you are churning your existing mutual fund portfolio. Asset allocation will help you meet different financial goals irrespective of market conditions.
You must read: Why smart asset allocation is crucial for retirement planning
Asset Rebalancing: Asset allocation is extremely important for balancing risks and returns, but it needs to be revisited from time to time, at regular intervals to ensure that it does not get skewed over time. Rebalance your assets periodically to bring it back to desired or optimal levels. This may include shifting from equity to debt at bull market peaks and vice versa during bear market bottoms. Asset rebalancing is not easy; you need to have methodical approach and should consult a financial advisor if required.
When rebalancing asset allocation you should take into consideration the impact of exit loads and taxes. Hybrid funds can be very useful in your investment portfolio for asset rebalancing because these funds automatically rebalance their asset allocations from time to time without the investor having to take any action or worry about exit loads and taxes. As such, hybrid funds should form a substantial portion of the core investment portfolio of average retail investors in the mid-career stage of their lives. Asset rebalancing is important for meeting your short term, medium term and long term goals.
You may like to read: All you need to know all about hybrid mutual funds
Sufficient insurance cover: At this stage of life, the interest of your family / dependents is of primary importance. You should buy sufficient term life insurance so that your family is not exposed to financial distress in the event of an unfortunate death. Most salaried people are dependent on the group health insurance cover provided by their employers, but you may find yourself and your family without health cover if you unfortunately lose your job. At this stage of life, finding suitable alternative job opportunity may take longer than when you were young and your family may be exposed to health risks for a longer period. It is therefore, important to buy separate health insurance for your family to protect them from health risk and financial risks thereon.
Have a contingency fund: We have stated the importance of having a contingency fund a number of times in our blog. Contingency fund will help you overcome any financial distress arising out of income loss or sudden unexpected large expense without compromising on longer term financial goals. At a younger stage of life, a contingency fund that can meet 6 months of expenses is recommended but once you are near or above forty, your contingency fund should be able to meet 12 months of expenses. This is because as you grow in your career, you are likely to take longer to find a suitable alternative job opportunity. Having a sufficiently large contingency fund will provide you with valuable time to find the best possible opportunity, as opposed to taking up whatever you get in financial desperation, which may harm your career prospects in the long term. Your contingency fund should be highly liquid and safe, so that you can use it whenever required.
In this blog post, we have discussed some points that you should consider if you are approaching or are already in the mid-point of your careers. One of the biggest challenges at this stage of life is juggling multiple priorities. Therefore considerable thought should be given to your financial planning now.But if you plan well and have disciplined approach to investments, then you should be able to meet your long term financial goals. Consulting with a financial planner or advisor is always useful, should you need any help.
You should also read: Take control of your financial journey
Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.