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What should your financial life look like at different life-stages?

Posted on 02 Jul 2021
Author: Sayan Sircar

Tags: Set Goals

11 mins read
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At various life-stages your finances, assets, income and investments will vary. Here is an overview

Life stage investments

The life-stage theory of investments is a very common way of looking at the financial life of every investor based on age, marital status, income, and assets owned. At every stage, financial goals change requiring a revisit of the current financial plan. If you want an alternative view using the amount of wealth accumulated so far, have a look at this post: How to climb the wealth ladder in India?

📚 Topics covered:

What you need at every life stage
Age range: 20-25 years: late education, early career
Age range: 25-30 years: early career, finances setup, debt management
Age range: 30-35 years: marriage, high discretionary expenses, aggressive investments
Age range: 35-40 years: parenthood, increase in debt, high expenses in childcare
Age range: 40-45 years: career consolidation, lowering debt, educational expenses
Age range: 45-50 years: income stability, passive income, low debt
Age range: 50-55 years: increase in passive income, lowest debt, portfolio compounding effects
Age range: 55 to retirement years: pre-retirement consolidation, career peak, portfolio peak
Age range: Post-retirement years

What you need at every life stage

An emergency fund with 6-12 months of expenses
A term insurance policy (unless you are retired with no income)
A health insurance policy (separate from the company-provided one, if any) for 10-15 lakhs as a base policy with a 50-100 lakhs super-top up
A personal accident insurance coverage to safeguard against accidents where you do not die but cannot earn
No high-interest debt like credit card or personal loans

Apart from these you should also work out a:

Minimum Savings Rate: This is the minimum that you need to save based on your goals. The right figure will be as per your investment plan
Asset allocation bucket (indicative): the indicative split between cash, income assets (like FD, bonds, debt MF, rental income, savings schemes) and growth assets (stocks and equity MF). The actual split will be as per your goals and will differ considerably among individuals.

The age bands are indicative and are not set in stone. Additionally, the path below (career, family, marriage and children) is an example and is not supposed to be recommended for following to the letter.

This is how you start: here.

Age range: 20-25 years: late education, early career

Emergency Fund: 3x of monthly expenses and EMI
Sinking Fund: Important
Life Insurance: Employer-provided
Health Insurance: Employer only, take a separate policy for parents if possible
Minimum Savings Rate: 10%
Asset allocation bucket (indicative): Cash:60%, Income:30%, Growth:10%

This is the typical early investor who has just completed education and started work. This is the time for figuring out some complex things: setting up a working life, living by themselves, juggling work and leisure. At this stage, there is not a lot to do except saving a lot of cash for the emergency fund and sinking fund. This is the time to start exploring term life and health insurance. A credit card at this stage should be avoided to keep credit card debt far away. The focus now is to build a strong financial base, avoid unnecessary debt and learn both skills for career and personal finance.

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Age range: 25-30 years: early career, finances setup, debt management

Emergency Fund: 6x of monthly expenses and EMI
Sinking Fund: Very Important
Life Insurance: Employer + Self = 15x multiple of CTC
Health Insurance: Employer + Parents + Self (separate)
Minimum Savings Rate: 30%
Asset allocation bucket (indicative): Cash:15%, Income:35%, Growth:50%

This stage builds on the base of the previous stage and targets an adequate emergency fund, tackles the budget via a sinking fund, and adds a health insurance policy for self. Taking this policy now reduces the risk of future health insurance being denied or premiums hiked due to pre-existing diseases. This will be a good time to take a life insurance policy of 15-20x CTC. The emergency fund should be hiked to 6x expenses and every effort must be made to pay off all credit cards and personal loans.

What are financial goals

The focus at this stage will be to formulate investment goals and start investing for goals via a proper investment plan. The asset mix should be aggressive based on the long time horizon of most goals. It is very easy to delay investments at this stage (which has a very high cost) or have the wrong (debt-heavy) portfolio. You should create a formal investment policy statement (IPS) for implementing goal-based investing. Investment tracking, rebalancing as per the glide-path will be implemented via the IPS.

Age range: 30-35 years: marriage, high discretionary expenses, aggressive investments

Emergency Fund: 9x of monthly expenses and EMI
Sinking Fund: Very Important
Life Insurance: Employer + Self = 20x multiple of CTC
Health Insurance: Employer + Family Floater + SuperTopUp
Personal Accident Insurance
Minimum Savings Rate: 35%
Asset allocation bucket (indicative): Cash:20%, Income:30%, Growth:50%

This is a stage of changing life situation mostly due to marriage. A key point to be considered is that the financial goals are of both spouses are aligned in terms of children’s education, asset accumulation (like house purchase) and career progression (early retirement and related). Goals should be suitably modified and asset allocation fixed.

A personal accident insurance coverage should be considered to safeguard against accidents where you do not die but cannot earn.

High discretionary expenses at this stage (vehicle, travel, entertainment, white goods) will require a well-funded sinking fund and avoidance of credit card debt. However, a credit card is a good way to build a credit history (for future loans) and a low limit card taken against FD will be a simple way to build credit history without having a tendency to accumulate a large balance. A trick that can be used is to charge Netflix and postpaid mobile bill to the credit card and then set an auto-pay in the issuing bank’s app to pay it off.

House purchase is the most important expenditure at this (or the next) stage and adequate care must be taken that the down-payment, EMI and ongoing related expenses do not jeopardize investments for future financial goals. Investments should be aggressive at this stage to ensure asset allocation is maintained.

The insurance scenario should be tweaked:

life insurance should cover both spouses
health insurance should be enhanced to family floater (10-15 lakhs) with additional super top-up (50-100 lakhs)

Age range: 35-40 years: parenthood, increase in debt, high expenses in childcare

Emergency Fund: 9x of monthly expenses and EMI
Sinking Fund: Very Important
Life Insurance: Employer + Self = 17x multiple of CTC
Health Insurance: Employer + Family Floater + SuperTopUp
Personal Accident Insurance
Minimum Savings Rate: 40%
Asset allocation bucket (indicative): Cash:15%, Income:25%, Growth:60%

Financial goals at this stage should be updated to include children’s education if applicable. The housing loan should be carefully handled along with the rest of the goals with proper prioritization: being debt-free vs. goal prioritization(for example educational goal vs. retirement).

Also read
What is the danger of starting investments late?

Age range: 40-45 years: career consolidation, lowering debt, educational expenses

Emergency Fund: 12x of monthly expenses and EMI
Sinking Fund: Important
Life Insurance: Employer + Self = 13x multiple of CTC
Health Insurance: Employer + Family Floater + SuperTopUp
Personal Accident Insurance
Minimum Savings Rate: 45%
Asset allocation bucket (indicative): Cash:15%, Income:25%, Growth:60%

This is a good time to take the salary income as a base or source of funding to cultivate secondary or passive sources of income to avoid redundancy risk. There should be a family discussion if Financial Independence and/or Retiring Early (FIRE)is a goal that should be considered. This is a calculator that can be used to check if FIRE is feasible based on current assets owned. If not, you need to focus on your sustainable savings rate that will get you to FIRE as soon as you can. Skill enhancement for career progression should be pursued diligently. This time should also be used to create a will and consolidate and share all financial documents with family.

Age range: 45-50 years: income stability, passive income, low debt

Emergency Fund: 12x of monthly expenses and EMI
Sinking Fund: Important
Life Insurance: Employer + Self = 10x multiple of CTC
Health Insurance: Employer + Family Floater + SuperTopUp
Personal Accident Insurance
Minimum Savings Rate: 50%
Asset allocation bucket (indicative): Cash:20%, Income:25%, Growth:55%

At this stage, salary growth will mostly stabilize however redundancy will be a high-likelihood risk that should be mitigated by having a secondary income, FIRE planning and skill enhancement. This will be a good time to consider how to deal with the housing loan - keep or pre-pay based on the income situation of the next few years. There will be a lot of emphasis on children’s educational expenses due to better visibility on the type of college, course and location.

Age range: 50-55 years: increase in passive income, lowest debt, portfolio compounding effects

Emergency Fund: 12x of monthly expenses and EMI
Sinking Fund: Important
Life Insurance: Employer + Self = 5x multiple of CTC
Health Insurance: Employer + Family Floater + SuperTopUp
Personal Accident Insurance
Minimum Savings Rate: 55%
Asset allocation bucket (indicative): Cash:20%, Income:30%, Growth:50%

This stage will see a big impact of compounding on the portfolio. Due to the increasing size of the portfolio, it is very important to manage risk via rebalancing frequently as per the plan. Any existing home loan should be paid off.

Age range: 55 to retirement years: pre-retirement consolidation, career peak, portfolio peak

Emergency Fund: 12x of monthly expenses and EMI
Sinking Fund: Important
Life Insurance: Employer + Self = 2x multiple of CTC
Health Insurance: Family Floater + SuperTopUp
Personal Accident Insurance
Minimum Savings Rate: 60%
Asset allocation bucket (indicative): Cash:10%, Income:40%, Growth:50%

This is the end stage of the career with the highest withdrawal (college education of children) but will also witness the highest income and portfolio values. Asset allocation at this stage should be slowly adjusted towards the one suitable for retirement.

Age range: Post-retirement years

Emergency Fund: 12x of monthly expenses and EMI
Sinking Fund: Important
Life Insurance: Not applicable since there is no income
Health Insurance: Family Floater + SuperTopUp
Personal Accident Insurance: Not applicable since there is no income
Asset allocation bucket (indicative): Cash:15%, Income:40%, Growth:45%

Entering retirement is a big life change. Good financial habits set up in the last 2-3 decades will give the rewards at this stage by lowering stress regarding finances. The goal here is to have enough money every month for living expenses, healthcare, travel, gifting and entertainment. This is the same as pre-retirement life with the important distinction being not having a regular source of income from salary or profession.

These are the big sources of risk in retirement:

Inflation: expenses rising faster than the portfolio return
Unexpected health care costs not covered by insurance
Taxation on income like dividends and savings schemes
Longevity: living too long and running out of money
Sequence of return risk: A few bad years, in the beginning, can deplete the equity section of the portfolio

For retirement, this calculator will show how long the corpus will last based on the expenses. You can consider if a pension plan is needed as well.

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