It is always heartening to look back at the path travelled. For many of us in the 40-plus bracket, life began in the mid-eighties as management trainees, with a 'handsome' stipend of `1,200 a month. At that time, those who were ambitious expected to be earning `1lakh a month on retirement at the age of 60. But it is a completely different scenario now, and the economic liberalisation has paid a rich dividend to this generation. What are the financial planning challenges for this group?
First, there has been a change in spending and saving habits. While many grew up when frugality ruled, we discover at the peak of our earning career that consumption reigns. We cannot help but indulge ourselves in the best, which we believe we deserve. The generation of high earners is spending large sums on discretionary items such as travel, food, entertainment and hobbies. Some are reliving their younger years with a vengeance, by buying fancy gadgets. But keeping an eye on saving ratios should be a priority, lest spending exhausts surpluses. It is important to see that income tends to peak off before retirement, and lifestyles that become tough to sustain can hurt in the later years. Saving about 30-40 per cent of the regular income, and increasing the saving rather than the spending ratio should be the target.
Second, there is a change in life expectancy. If this generation hopes to enjoy 25-plus years of increasing income, it is also looking at 25-plus years into retirement. Thanks to healthy lifestyles, eating habits and medical care, it is likely to live long. But there is an important difference in support systems. If the earlier generations relied on their children to support them after retirement, this generation is proud of its independence, or is unable to draw on its children's resources. There would be rent and bills to pay, and medical expenses to bear in the long years into retirement. Many do not work in sectors that pay pensions. It is critical to build a large corpus that can generate an adequate retirement income. The mid-forties may represent the critical watermark, beyond which it may be late to begin to build that corpus. Only if the corpus that we have built can replace our regular income, after adjusting for inflation, are we ready to retire.
Third, there is a change in mindset towards earning and income. Several in their mid-forties have been bitten by the entrepreneurial bug, including yours truly. The urge to create and to be one's own boss is strong for many who think they have built scalable professional skills. It means drawing on savings created during the working years, living through years of low or nil income as the business is developed, and waiting for the value creation at the end of the slog. The risks to income and wealth from these ventures are high. It is important to stay realistic about your investments and returns. Unlike the past, when job markets were inflexible, today entrepreneurs are able to come back to full-time work, and are valued for their experience. The objective should be to enhance the value and return from the human asset, for as long as possible, as a core wealth enhancement strategy.
Fourth, there is an eager market to sell to the present generation. By virtue of going through a phase of prosperity, the generation is the target of sharp sellers. Sadly, many tend to be taken in by the feeling of being sought after, and fall prey to 'exclusive premium' and 'limited edition' deals. They are prone to buying houses bigger than their needs, invest in private equity deals they do not understand, choose expensive portfolio management solutions, buy exotic products such as art and pay fancy premium on insurance policies they do not need. It is important to choose a financial advisor carefully and to participate actively in the management of wealth. Without strategies that enhance and preserve wealth, this generation may end up risking the fortune they have made.