Just as we age and change with time, so do our goals. Our life perceptions, needs, priorities, wants, desires, and aspirations also change gradually.
Our relationships with family and friends change, and our workplaces may change. And as is obvious that our financial goals would also change.
Then, how can we assume that the same financial plan would work out fine for our entire lives?
For instance, the way college student perceives and manages money is vastly different from how their parents, and grandparents do. While their parents may be in the prime of their work-life, the grandparents may be retired.
Your financial plan should be flexible enough to accommodate any major life events, and stages of life. For most people, such life stages are directly associated with their age.
Ages and Life Stages in Financial Planning
In the early twenties, as students, most of the financial worries are limited to buying a pair of sneakers or a gaming console. But later, when they start focusing on careers, get into jobs, start earning and taste financial independence for the first time, the whole perspective towards life get changed.
By the time you enter in your thirties, you take on more responsibilities at the home, office, and most likely have started a family. In your forties, the kids have grown up and planning for higher education.
In the fifties, the retirement, health of the parents, and the marriage of children are some of the most important considerations. In the sixties, our health, and retirement take center stage in our mind space.
And by the time you are in your late sixties or early seventies, the most important concerns remain of being solvent and healthy. If you are lacking in either of the two, you cannot imagine being happily retired and thinking of distributing the accumulated assets in the desired manner.
So, here is a quick reckoner for how should you approach your financial planning through life stages and ages.
Teenage Years: The early 20s
The freest of times, when you do not have any responsibilities. The most confusing time too, as there are multiple career options to pursue.
You do not have a proper active source of income, so, saving regularly and investing do not come to mind immediately.
What financial steps to take?
But this is also the time to inculcate some life-long habits.
- Start by saving from your pocket money and the occasional cash gifts from relatives.
- Understand that you cannot buy everything, so start prioritizing.
- Take time out to learn about income sources. Other things would follow naturally.
- If your schedule permits, start a gig work as per your choice and liking. You may try your hands on content writing, video editing, quick service restaurant, front desk, or sales. Especially on your vacations. Nothing can beat the life experiences learned on the job.
Coming of Age: Late 20s to early 30s
As you enter the workforce, you may have dreams of making it big in the world. The thrill of seeing your first salary in bank account or en cashing the first pay-cheque fills you with an inexplicable rush.
Spending the salary on a dream vacation, snazzy smartphone, or cool pair of sneakers is what is all on the mind.
When your Income is at your disposal, you may be tempted to experience new things which may be pitched to you to earn fast income and you get tempted towards stocks or derivatives trading, Cryptocurrencies. Or even if not, high return, you get sold towards safety which led you to buy Traditional insurance Plans. And believe me, all these are not good for your financial future. (Also Read: 7 Financial Planning tips for beginners)
What financial steps to take?
1. Keep a Check on Expenses
What most people ignore is how to manage cash inflows and outflows. The easy availability of credit cards makes them think they have an unlimited supply of money. (Read: Why cash flow planning is an important aspect of financial planning?)
To avoid getting into the debt trap, understand where your money is going. Prioritize and make a list of items you want to buy. Allocate the budget for entertainment and leisure and do not overspend.
Use an app, or even a pocket diary to track money and weed out unnecessary expenses. (Also Read: How to stick to a budget in this mobile app world)
2. Savings First, Investing Next
An expense tracker app can help you save every month. Do not get tempted by seeing all those savings in your account. Invest.
As you most likely do not have any responsibilities, you can take risks. Remember that Warren Buffett is what he is today because he started investing before he hit his teens! He had a long, long runway to make it big.
Start small but do start. Take the advantage of the fact that you are now earning and have the most important variable on your side – time.
3. Understand Taxes
You cannot ignore or defer understanding about taxes anymore. They are real, in your face, and might eat a large part of your salary.
If you understand them, you can take advantage of the provisions available in the Income Tax act to reduce the liability.
4. Create a Safety Net
A safety net keeps you from falling and getting injured.
An emergency fund and an adequate medical insurance cover are the must-haves at this stage. You should not ignore them at any cost. (Video- Significance of emergency fund)
Becoming an Adult: the late 30s and early 40s
A person truly becomes an adult – in their 30s and 40s – when they start a family of their own. It brings great and unbounded joy, with an equal amount of responsibilities.
As you become the backbone of your family on which it depends, the thought of not being around them is scary. You may at times neglect your needs. But you would go out of the way to meet their demands and fulfill their aspirations.
Here also this is the time when experiencing pressure from work and family, you may start finding your Income low and thus to earn easy and fast money, fall prey to Missellers or get into non-suitable products. Putting yourself into Discipline is a must here.
What financial steps to take?
As the number of dependents and obligations increase, your focus moves to:
1. Buying a House
A roof of your own, a place to call home is something every family person aspires for. The focus should be on location, neighborhood, means of public transport, and its distance from school and work.
From the financial perspective, you should check the liquidity in your portfolio and the affordability of EMI. Ideally, the Home loan EMI should be within the range of 30-35% of your net take home, not beyond that. (Also Read: How prepared are you for your house purchase?)
The house where you plan to spend the rest, or most of your life, is not an investment. So, do not overspend on it in anticipation that it will appreciate.
2. Involve Family in Financial Decisions
All major decisions – financial or otherwise – should be taken collectively. You must be as transparent with them as much as possible, consider their perspectives, and put your position as clearly as possible.
This will not only enable them, but everyone will gain from different perspectives of such a collective decision-making process.
3. Adequate Insurance
As you were already insured, you are well aware of its benefits. As new members join your family, you must take additional health cover to provide adequate cover for them. In addition, if you are the sole breadwinner in your family, you should have term life cover of an adequate sum assured. (Also Read: How much health insurance cover should you buy?)
If you have taken some liabilities, then your life cover should be over and above after covering the loan amount.
On a side note, the emergency fund’s size should also be increased accordingly to match at least six months’ expenses. In some specific cases, it is also advised to keep the quantum of the emergency fund up to 12 months of expenses.
4. Prioritize your financial goals
With many family members, there will be many new goals added to your life.
Some will be immediate (within 2-3 months, like buying a new car), while some will be long-term (saving for the higher education of your child which is 15 years from today, or planning for retirement). (Also Read: Laddering approach to plan for child education)
Once you identify and classify such goals into near-term, short-term, medium-term, and long-term goals, and soft goals and prioritize them, then it becomes easier to invest accordingly. It can also help you select suitable investment avenues for different goals according to your risk appetite and duration. (Also Read: How to prioritize your financial goals?)
5. Retirement Planning
Even though it is still 20 to 30 years away, now is the right time to plan your comfy retirement. Your retirement comfort and convenience solely depend on you much can you sacrifice today to have a better future. (Also Read: Why Retirement Planning should be the most important financial goal?)
If you wish to retire early, then the monthly savings rate should be at least three to five the usual rate of investments. Finding the balance of growth and safety is what you should be looking for. (Also Read: Early Retirement- Things you should plan for)
Mature and Responsible: the late 40s and early 50s
As you touch your late 40s and early 50s, you want more calmness in everything you do. Chaos and hustle do not excite you. There will be many competing requirements on your time and finances.
With children trying their luck, parents getting older, and you nearing your retirement, it is time for more maturity and sensible financial decision-making.
If you have not been following goal-based financial planning, then most likely you would have fallen short of meeting many milestones, or you have your Money scattered around different Asset Classes and products in the name of Diversification. But now, as your time horizon is inadequate, investing in aggressive asset classes could be riskier. (Also Read: 21 money mistakes you should avoid)
What can be done is:
1. Rebalancing Portfolio
As your goals’ due date nears, your investments should be switched out of more volatile assets and be geared towards stable assets. This will save you from the unexpected volatility and negative returns in the portfolio when you need it the most.
2. Do You Need an Upgrade
As their incomes rise, many people upgrade their homes – additional construction, a new flat, a farmhouse, or a summer home. Similar upgrades are done to lifestyles like club memberships, cars, and vacations.
If your important financial goals are near and you have insufficient funds, then blocking your money in such illiquid or depreciating assets is not a wise idea. (Also Read: Would your financial plan survive serious illness?)
3. Pay off Your Debt
You must focus on paying your debt with each bout of additional income. The debt – whether it is a home loan, car loan, or personal loan – starts by finishing off the one with the highest rate of interest and then the subsequent ones. You should give your retired self the best gift of retiring debt-free. (Also Read: What happens when you cannot repay your home loan?)
4. Plan Your Retirement
Living in the same city and home even after retirement may not be a wise decision financially. You may have chosen the home because of its vicinity to your work. But now as you would retire soon, it would not matter.
Similarly, most likely, your children are either studying or working in some other city or country. It would be financially prudent to choose a city or locality where your retirement can be calm, peaceful, and frugal without compromising on the quality of life.
5. Write your WILL
If you have not done it yet, you should not delay any more. It is high time you should start thinking of writing your WILL. It will help you distribute your assets to your loved ones as per your desire after your demise. You can also choose to donate a portion of your estate to a charity or a good cause, or make provision for your domestic help, driver, caretaker, or any other person. It is essential for your peace of mind and family members as well. (Also Read: a step-by-step guide to WILL writing in India)
Successful Retirement: Late 50s and beyond
Finally, you have crossed the finish line and can hang your boots. Like all other happy retirees, you now want to reap your sowing.
How to maximize your retirement?
1. Do Not Spend it All
The availability of gratuity and pension fund’s lump-sum payout in the bank account may induce retirees to gift large sums to their children or splurge on lavish parties. If you do not control your impulses, then you can blow a large part of the corpus in the initial months.
A misconception among most people is that their expenses will reduce after retirement. It is true only if you do it mindfully and only up to an extent. Expenses have a way to raise their ugly heads from (un)expected corners – healthcare, travel, house help, gifts, and hobbies. (Read: Expenses that can derail your retirement plan)
2. Make A Budget
Retirement does not mean you are free from making a budget. It is like your adolescent years with no regular income and too many things to do – all needing cash.
As you may live longer than most people around you, you must ensure that your corpus outlives you. For that, you should never stop budgeting and cut unnecessary expenses.
3. Tax efficiency
Successive finance ministers increase the ambit or limit of tax deductions for senior citizens and super senior citizens, every few years. Still, it is necessary to do proper tax planning as most of your income is from interest, rent, or dividends. Through proper tax planning, the tax outgo can be minimized to the maximum extent possible, being on the right side of the law. (Also Read: is financial planning for retirees too?)
4. Find a Second Income (If Possible)
You are experienced, skilled, qualified, and too much to share. By engaging a few gigs – on the consultancy or training side – you can hit multiple birds with a single stone:
- Keep yourself productively engaged
- Keep yourself sharp and focused
- Earn a second income
- Share your wealth of experience
- Give back to society
5. Systematic Strategic Withdrawal
You should have a systematic distribution strategy in place for your post-retirement income needs. Your financial planner can design such a strategy for you. This would help you plan for the strategic withdrawal of money from the corpus to meet routine expenses in a tax-efficient manner, without compromising on the growth aspect. (Read: Bucketing strategy to manage post-retirement income flow)
With a strategic and systematic withdrawal, there is a fair chance that you can let your funds outlive you and your spouse. You can also ensure that you leave a decent legacy for your family members and loved ones.
Conclusion – Life stage Financial Planning
Well, change is the only constant. Financial Planning through life stages needs to change too. It is essential to inculcate these changes in your financial plan. This would not only help you in a smooth transition across life stages but also answer all the what-if scenarios that may come up in the journey of life.
We are Fee-only financial planners and SEBI Registered Investment advisors and can help you with your personal financial planning, no matter whether you are in your 20s or 60s. You can check our service offerings here or schedule a call for a detailed discussion.