LEARNING CENTER
Level | Intermediate
What is life stage investing and what factors should you keep in mind while preparing for life’s various stages?

Life stage investing is the philosophy of investing that accounts for the various stages of life you and your family may go through and helps you build a financial plan that changes suitably according to the changes in your life. Designed to put you on a sound financial footing before each new stage of your life, it also gives you the opportunity to match your dreams and aspirations for your life and to attain them. Your life can be broadly understood by thinking of it in 3 phases –

the accumulation phase (when you add and build wealth);
the transition phase (when you require funds for fulfilling your goals);
and the distribution phase (after retirement, when you use your accumulated wealth for regular income).

Let us look at the various stages that people generally go through:

Young and unmarried

In terms of your lifestyle at this point, you tend to have a lot of expenses. Going out for meals, buying the latest electronic gadgets and socializing with friends can all be high expense items, but it’s all worth it to keep you enthusiastic and energetic. At the same time, this is a great time to start getting into the habit of investing as you have a great friend- time, on your side. Even if you can only invest small amounts, start investing them now. And do so as regularly you can, for instance, using SIPs.

This is generally an accumulation phase in investing, when you can take more risks with your money. As you have no dependants, you will be able to recover from or sit out any volatility in your investments. Furthermore, there are certain short to mid-term goals that you are likely to want to achieve during these years, such as buying a car or continuing your professional education – and investing wisely can help you reach those goals.

Life as a couple – young married

This stage is a partially accumulation and partially transition phase- when you’ve entered a new, more responsible stage in your life. It is likely that you will be in the midst of working hard, building a career and accumulating wealth, alongside aiming for other milestones such as buying a home for your family.

As time goes by, there will also be additional purchases, such as a car, items for the house, so you may need to release some of your savings or investments. Consider fine-tuning your understanding of your risk profile at this point: At this stage, while you should continue to purchase wealth generating investments, you may additionally need to consider some lower volatility products, which can help to fund your house or any other near term expenses. Also, you will consider products like life insurance to protect your family, in case any unfortunate event occurs- especially if you’re the only contributing member in the family and your spouse is dependant on you.

Married with young children

This life stage is also an accumulation and a transition phase. While you will be young enough to continue investing for your retirement and other long term goals, other priorities will now dictate your risk profile. You may have dependants and higher outgoings as a consequence, such as health insurance; you would like to start building funds for your children’s education. Investing for higher education for children should be a medium-term time horizon, of 10 years or more (depending on how early you start). Carefully research current fees and add inflation in order to calculate how much you will need when your children are ready for higher education. Given the time horizon, this goal is well matched by investment in equity mutual funds. By now, you must also start planning for your retirement, which can be funded by exposure to equity (especially through equity mutual funds) since it will be more than 15-20 years away and you still have both time and the power of compounding on your side.

Married with older children

This investment stage again is one of accumulation and a transition phase– your priorities are changing but your career is likely to be in full flight at this point. As your children grow older, you will need to think of their higher education if they so desire. You may also need to look further ahead and consider planning for their wedding. This needs a rethink in strategy and again, a conscious increase in contribution towards your portfolio, more towards equity but with a well diversified perspective to not be too aggressive or take too much risk. At the same time, don’t forget that your retirement is also getting a little closer, which will need you to rebalance your portfolio appropriately.

Pre-retirement

This is generally a transition phase- when retirement is only a few years ahead and your concerns now are largely limited to you and your spouse, as most of your children’s needs have been taken care of- after all you have been a responsible and smart investor and have planned for all of the earlier goals so well! Pre-retirement is a stage where you are likely to decrease the risks your portfolio may be exposed to, as you are close to retirement and may soon need to access some of your planned retirement funds. So during this stage, make sure that you adjust and re-balance your investment portfolio where necessary and ensure that you are ready for the next phase of your investment life: distribution.

Retirement

The golden years are finally here! Think of this stage as reaping the rewards of all your hard work – also known as the distribution phase. It is the stage that you have so carefully and meticulously prepared for: ensuring that you have enough wealth to be able to generate a good income to maintain your lifestyle and that of any dependants. Since you may not have an active income generating job now, your accumulated retirement corpus will serve the purpose of generating the required income for you.

In general, it is a good practice at this stage in life to retain your wealth in lower risk products, such as debt mutual funds, which, along with the Systematic Withdrawal Plan (SWP) option, will provide you with regular income. However, with medical advancements and generally more active health and fitness orientation, people are living longer and longer lives. So you may also consider still maintaining a decent portion of your portfolio (perhaps 20-25%) allocated towards wealth generating asset classes- such as a few dependable shares, some diversified and well established equity mutual funds etc. At the same time, you may also consider cutting back on certain discretionary expenses so that you are able to build a cushion for any unexpected expenses such as medical emergencies.

Conclusion: Remember that life does not always go as predictably as you may want it to. There could be unforeseen situations- both good and bad. Having a financial plan that accounts for most of these situations can seem complicated at first, but it is really simple in essence and can go a long way in helping you tide over any challenging circumstances as well as in helping you achieve most of your financial goals. It’s merely about maintaining the right balance in your portfolio at every stage, and being very aware of what’s going on and responding to it from time to time. The more you remain in control today, the easier you’ll be able to craft a happy tomorrow.

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Key Takeaways

  1. Life stage investing is a philosophy of investing that helps you understand what to do according to each stage in your life.
  2. Always look ahead to the next stage of your life and plan and invest accordingly.
  3. Rebalance your portfolio in times of a transition or a change in your life stage.
  4. Ensure that your retirement plan is started as early as possible and stick to it.