When you are young in your 20s or 30s and have time on your side, an asset allocation scheme would put you heavily into equities, maybe most or even all of your savings. You might even spice it up with a mix of small company stocks. As you move into your late 30s and early 40s, however, you'd probably want to give your portfolio some stability and income. Maybe you'd shift to a 75/25 blend – still favouring equities, but not overdoing it. The closer you got to retirement age, the more you would put money in bonds and less in equities. And in your last few years, when you simply could not afford big market losses, your portfolio would be heavy on short-term bonds or money-market funds – the least risky of all investments.
There is a general rule of thumb: 100 minus your age is the percentage you should have in equities. So if you are 35, you should have 65% of your money in equities. And if you are 65, you should have 35% in equities. This is a rough rule of thumb but it has some historical basis. It comes from studying nearly 80 years of stock market returns.
But equity can do well only when the risk in the environment is lower. So, a portfolio of about 60%-65% equities and about 40% in fixed income instruments like savings with post office could be optimal.
Lifespan investing is a continuous process and needs to be addressed at each stage of your life cycle. We will be covering these different strategies in a four part series:
- Early age (20-35 Years)
- The Middle Age (35 – 50 Years)
- Advanced Age (50-65 Years)
- The Late Age (65+ Years)
In this issue we will be covering the Third stage – Advanced age (50 - 65 Years).
For many people in the 50s and 60s: "It was the best of times; it was the worst of times." At best, these are the high-earning years, and you will be able to salt away plenty of income. At worst, this is also the time of life when the demands on your finances are high and retirement is looming near. Children at college or university, children getting married and, of course, you have to build up a lifestyle you wish to maintain. And, looming ever larger on the horizon is the prospect of retirement.
At this stage of life, you need to review your retirement plan, look into future needs, current savings and your insurance safety. And, because your assets, earnings and responsibilities are likely to have grown over the years, a consolidation of all your assets is needed to keep you rightly geared.
This is the definitive stage of your life. You will not get many chances to rectify mistakes. So do make decisions carefully. Since you are closing in to the retirement age, you need to plan your retirement not just in terms of financial need but also for your human needs. Do you feel the need to work post-retirement? There are many options available – consulting for your current firm, starting your own business, working part time – you need to understand those options carefully and start working towards them. For instance, if you want to start a business, you need to collect the knowledge, skills and resources for it. Any plan that is well researched and executed is bound to succeed.
Reviewing Your Retirement Plan: You're probably at the highest income level of your career, and can really focus now on building your retirement assets. To take stock of how you've done so far on planning for your retirement, first prepare a realistic estimate of what your expenses are likely to be during retirement.
For a more accurate estimate, think about the lifestyle you plan to have during retirement. Will you travel? Have a vacation home? Do you want to take up an expensive hobby? How much will it cost? Do a projected budget, keeping in mind that some costs (such as health insurance) are likely to increase, and some costs (such as education loans and costs associated with working) are likely to decrease or go away altogether.
To put foundations under these castles in the air, you now need to take a hard look at your current savings as well as at the additional amounts you might need to invest to provide you with the retirement lifestyle you envision.
Circumstances might have prevented you from keeping your promise to yourself to start the savings journey early. If you did not start saving until your 40s, you will probably have to put away at least 20% of your gross income on a monthly basis.
You have crossed the half-way mark in your working life and if you have not saved at least 50% of what you will need for retirement, then you need to catch up fast.
Asset Consolidation: Your 50s is also a good time to evaluate the asset allocation of your portfolio. Are you being too conservative by putting a large portion of your assets in fixed income investments? Are you taking more risk than you're comfortable with by investing too heavily in stocks or mutual funds?
The conventional wisdom suggests that as you get older, you should shift more of your assets out of stocks and into bonds for principal protection and monthly income. But financial experts today are recognizing that a 50-year-old person needs significant growth opportunities even though s/ he may be less than 10 years away from taking withdrawals to cover living expenses. That's because s/he can expect to live at least another 25 years. And 25 years is a long-term investment horizon. Historically, stocks have been the best place for long-term growth.
If you're concerned about market risk, consider gradually transitioning to conservative growth investments. A financial planner can help you establish an asset allocation that will position you for monthly income balanced with long-term growth throughout your retirement years.
Rebalance your portfolio and tone down aggressive investment. Depending on your risk appetite, a 20%-40% exposure in equity is still possible. Investment in equity funds or equity-based mutual funds will keep your corpus growing. The rest can be put into assured-return government paper or debt funds. Do make sure you take in account all the assets you hold while trying to understand your equity exposure.
Increase the health coverage for yourself and your family up to the highest possible level. Look for plans that will cover till the age of 70 or more.
Long-term health plans offered by life insurance companies are a good option too. Are there stocks and shares that you have hung on to for too long? Do a spring-cleaning of your financial closet and keep back only those assets that have future potential.
Other Considerations: This might also be a good time to critically evaluate your lifestyle. If you have neglected your health by not exercising regularly and indulging in unhealthy habits, now is the time to change. If you are physically fit, live and eat healthily, have your weight under control and get enough rest, you will be far better equipped to deal with the stresses of life. Physical well-being and financial well-being are far more related than you might think.
A Checklist:
- Make sure your assets are protected. Take insurance cover for your home and car; if you have an outstanding loan, ensure that you have cover for that amount
- Review your spending patterns to determine how much income you'll need at retirement.
- Calculate what you expect to receive from all sources (company pension plans, PPF, income funds, annuities and personal savings) when you retire.
- Revisit your retirement-savings goals. How much more do you need to save before retiring to reach that goal?
- Contribute the maximum amount to your retirement finding.
- Review your investments every three to six months.
- Identify the areas, both financial and non-financial, where you may not be prepared.
- Assuming all debts have been paid, begin setting aside at least a year's worth of living expenses in a liquid account as a contingency fund.
