HOW TO DO A MID-LIFE FINANCIAL
REALITY CHECK
·
Many
people are financially well-placed but unsure about financial planning.
·
Several
have built wealth over time, leaning on friends and relatives to learn the ropes.
·
What
should they know about personal finance at this mid-life stage?
1. It is important to recognise the peaking of
one’s income.
·
A
middle-aged professional should recognise that the return on the human asset is
subject to risks, which can increase with age.
·
Retirement
is the most obvious risk, but economic cycles can create issues of job loss,
retrenchment and lower increments.
·
Poor
assessment of future income has led people into old-age penury.
·
While
some professions may be based on reputation built over a lifetime, others may
not be able to attract a consistent clientele with age.
·
If you
are 40, map your income realistically 50 years into the future, with a good dose of realism.
·
Not everyone
finds an alternate profession easily.
2. Get real about the damage inflation can
inflict over long periods of time.
·
The key
thing to remember is that the ‘safe’ bank deposit will provide a fixed and flat
interest income, while expenses will compound over time at the rate of
inflation.
·
If the
calculations are complex to comprehend, use a simple thumb rule.
·
At an inflation of 7-8%, your expenses will double every 9-10 years.
·
This
means your corpus should double every 8 years for you to stay above water.
·
There
are only two ways to deal with this problem.
·
First,
save as much as you can in the years in which your income is higher than the
expenses.
·
Second,
invest the savings in an investment that grows at least at the rate of
inflation.
·
At 50,
when you already have a house and a car, and have reached the peak of your
career, you should be saving 50% of your income.
·
Invest this for a later date when income falls and expenses move up.
3. Take a hard look at your assets and allocate
them for future use.
·
If you
have a house that you live in, and a few deposits, shares and mutual funds, map
these assets to your needs.
·
The
house will save you rental expense in the future.
·
The
other assets should also have an identified use—your child’s higher
education and marriage, your international travel plans, your need for
investment income when your regular income falls, and your need to leave behind
assets for your children.
·
Every
asset should have an identified purpose and a possible time at which it
will be liquidated or given away.
·
Don’t
simply build assets and hope it will be fine.
·
If you
leave your spouse with a large house and no income when you are gone, you
may not have provided sensibly, even if that was your intention.
·
Write
down what you own and how you plan to use it.
·
If the
rent from your second house is for funding your travels, put it
down.
4. Divide your investments into three portions.
·
The core portfolio is something you will need as long as you are
alive, and its only purpose is to provide for your needs.
·
You
should lose sleep if this core is lost, erodes in value, or is inadequate.
·
After
estimating your expenses, adjusted for inflation, as given in the
above-mentioned second step, ensure that the funds that generate this core
expense are put in this bucket.
·
Your
house, gold, provident fund, bank deposits, and every
other safe asset that will generate an income should be here.
·
If you
need an income that grows with inflation, this component
should double every 8 years.
·
Since
it is safe and generates income, it won’t appreciate in value.
·
You
have to augment this core component as long as you live.
·
This is
why you need the next bucket—wealth portfolio.
·
The wealth portfolio represents your risky portfolio.
·
Invest
this in assets that will grow in value over time, but may be volatile in the
short term.
·
Equity
shares, mutual funds and second property come in here.
·
Without
this portfolio, your core portfolio will struggle to fight inflation.
·
If your provident fund earns 8% and your equity earns 15% over a 15-year period, the equity
component helps your money last longer and enables you to save lesser than that
needed were you to depend only on the provident fund.
·
The
third bucket is your fancy portfolio.
·
The fancy portfolio holds exotic things you want to indulge in.
·
Equity,
derivative and commodity trading, buying and selling assets tactically, or
indulging in private equity and art, should be done here.
·
Needless
to add, the amount you invest here depends on how well you have provided for
the other two components.
5. Have a plan for every 10 years of your life.
·
At 40,
consider the above four points and review what you have.
·
Map
your income till you turn 50.
·
Find
out what you are saving, and save more.
·
Reduce
or eliminate your borrowings.
·
Build
assets to cover at least your current expenses until you are 50.
·
Whatever
is excessive, invest in the wealth portfolio.
·
If you
are doing well at 40, you will find that your core assets protect you from
job loss, and your wealth assets have enough time to grow in value.
·
When
you turn 50, enhance the wealth portfolio further.
·
From 60
onwards, keep transferring from wealth to core portfolio to maintain your
lifestyle.
·
If
there is more, indulge yourself.
·
By the
time you are 70, evaluate the wealth portfolio and begin to give away what you
don’t need.
·
By 80,
your core expenses may have fallen, and you may be able to live well,
transferring all your wealth to the core portfolio.
·
When
you work with your financial adviser, fit his recommendations into your own map of income, expense and needs well into the future.
·
Investing
will then become easy.