Most people realise they have managed their finances badly when they are in the mid-30s and 40-s. Here’s what to do to set finances right then
When you are in your 20s, you may not be very worried about your financial life or goals. However, when you are in your 30s, you need to have a financial plan depending on your individual circumstances. Also, in your 40s, your attitude towards retirement might have undergone a bit of change. You will no longer be thinking of it as something so distant. You surely need to start planning for your financial goals like your children’s education and your retirement.
In your 30s, you are likely to be married and may have a child or two. Your expenditure is bound to rise as your family size increases. This will also be the time when you would be acquiring a house, if you haven’t bought one earlier. This acquisition is likely to take up a huge portion of your savings since you will have to make a down payment even if you take a home loan. A large portion of your future income will also get committed towards loan repayments through Equated Monthly Installments (EMIs). You would also be spending to furnish your place to make it cozy.
If you admit your child to a private school, you might have to shell out anywhere between Rs 50,000 and Rs. 1.5 lakhs for the admission. Well established schools ask for security deposits and other fees, and if your children start going to one of these schools, there would be large one-time expenses. Of course, other expenses such as school fees, transport and tuitions will follow down the years. Thus, expenses will always seem to be chasing your rising income in your 30s.
If you lose your job in your 30s, it is imperative that you start hunting for a job immediately. During the interim period, don’t liquidate long term investments for meeting EMI and household expenses. Use part of your emergency funds and short-term instruments like fixed deposits, to pay your EMIs and manage your home.
However, the scenario changes or should change by the time you are in your fourth decade. In your 40s, you are more or less at the peak of your career. At this point, expenses tend to stabilize, even as your income keeps rising. Big ticket expenses such as your child’s marriage and higher education are still some distance away. During this period, your savings are likely to go up. If you neglect your investment efforts for retirement or spend the money kept aside for retirement, you might make your financial position shaky in retired life. The only additional expense during this period could be on your aged parents who might require your help to supplement their finances. As with your own retirement, you would need to plan correctly to help your parents in their retirement.
As you reach your late 40s, your children, or at least your eldest child would be set to go to college. You will need to pay high tuition fees if he or she decides to go for a professional course. Two major financial goals—children’s higher education and retirement—will, then, compete for your funds. In India, people typically draw on their retirement funds to supplement savings made for their children’s education, in the hope that their children would be able to pitch in if they face shortage of funds in old age. In the context of changing realities related to retirement, this may not happen due to three reasons.
First, work opportunities might take your children far away from where you stay. They may be too far to help you effectively. Second, with this approach you are likely to find yourself in an unpleasant situation where you wouldn’t have financial independence, something you were used to all your life. Third, you need to consider the financial burden it might impose on your children. Don’t forget about educational loans. So, let retirement funds remain for retirement. You should have a separate fund for your children’s education. If this fund falls short, it is better to let them take an education loan that you can guarantee. Your children can repay the loan from their incomes.
Thus, even in this period of your life, you should do nothing that has the potential to disrupt the growth momentum of your retirement accumulation.
Even if you understand the importance of retirement planning, it is not easy to determine the funds you might need on retirement. Three questions that you need to answer are – How much have you got today? How much will you need when you retire? How to bridge the gap between the two?
The funds required for a comfortable retirement would depend a lot on your present financial position, your lifestyle and your plans after retirement. Moreover, healthcare costs would be much higher after retirement and this should be taken into account. A useful tool that can help estimate your retirement needs is a retirement budget or cash flow statement. This involves projecting the income and expenses during retirement. Take the help of your financial planner if you find it difficult to do it on your own. The funds might be significant for those who have no savings. For instance, if you are retiring in 30 years and expect to live 30 more years after retirement, you might need Rs. 2.5 crores at the time of retirement (assuming that your present expenses are Rs. 40,000 per month and the average inflation is 4%.)
After estimating your present net worth and how much you will need at the time of retirement, you should devise a strategy to make your money work for you, such that your retirement funds last you a lifetime. You must put a savings and investment program into place. This must be done as early as possible.
A lot will depend on how your career is. If it is stable, you can easily save. If not, you need to get the right breaks until you are in the high-income bracket. So, it is very important that you make investments that give good returns and generate income. Any fixed income investments like Public Provident Fund, that you had made in the mid-30s might start maturing in your 40s. You need to carefully re-invest them to get good returns.
Take any investment product such as stocks, equity funds, pension plans by life insurance companies and mutual funds or even the National Pension Scheme – they all contain risks. Investment risk today is much higher than it was decades ago when the savings account was the only popular investment. Volatility in the stock and debt market has gone up in the recent past. So, your investments are always subject to risks. Inflation is another risk that could be detrimental in the long run. So, choose investments according to your risk profile.
More retirement articles
Subscribe & keep learning!