The investment requirements of a family keep changing over time. This is primarily because of the adjustments that need to be made with different stages of life.
Though investing needs will differ depending on individuals and families, there are certain investing patterns that are typical of certain ages and stages in one's life cycle.
Let us explore these life stages and what people should ideally be doing with their finances at that time.
The sowing stage
Yes, you are in your mid-20s and have just received your first salary. To start thinking about retirement right now does sound like a bit of a drag. But starting early allows you to save that little bit more and with smaller amounts as well.
The ability to save at this stage is higher as you have little or no responsibilities. So, channelising a part of your newfound cash flows into a retirement corpus is just ideal. Also, it is a big help at the latter stages when the responsibilities are more.
Let us illustrate this with some numbers. If you started investing for your retirement at 25, and plan to retire at 55, with a retirement corpus of Rs 3.5 crore (Rs 35 million), then if you start saving at 25, you need to save Rs 8,772 per month till age 55 in a balanced portfolio.
This portfolio is expected to give you an average return of 12 per cent annually. If you start five years later at 30, the monthly outgo for the same retirement corpus would be Rs 16,270.
Ideally use the systematic investment plan route in diversified equity mutual funds or even some mid-cap funds. Since you are young, aggressive investments are possible.
Also, buy personal medical, accident, critical illness and disability insurance for support, in case of any unfortunate incidents.
Accumulation stage
Upon marriage, consider adding term life risk cover policies for income protection. Also, start planning for a house, if you need one. A housing loan at this juncture will be not a burden as expenses are still not so high. Once you have children, expenses are sure to spiral.
Also, this stage is initially marked with marriage and then with children. With children, you will need to start investing towards their education and marriage as well. This is one of the most financially challenging periods in one's life, since demand for expenses as well as need for investment for various goals is at the highest point.
But you should take it up as a challenge and make it a point to invest towards all these goals.
With rising responsibilities comes the need to create a contingency fund. Ideally, you should have 6-12 months' expenses in a bank fixed deposit with overdraft facility or a liquid/short-term debt fund. This helps a lot in meeting expenses in emergencies or while shifting jobs.
The ideal investment avenue for children's goals would again be equity mutual funds. Look even at children's plans offered by various mutual funds. For marriage purposes, start an SIP in a gold exchange traded fund, which can be converted to physical format.
Transitional stage
In your forties, it is time to reassess your financial goals as your children are older and you are also approaching old age. If you have diligently done the above in the earlier years then there is a lot of breathing space and you should be in a position to review your goals upwards. For instance, you may want foreign education for your children, a bigger flat at a better location and so on and so forth.
Empty nesters
As you approach 50, the situation could have taken a dramatic turn. The children might have left to complete their higher education elsewhere. And to fund this, you would have started drawing out from their education corpus.
Since investment for children's education goals have ceased, you can use the extra sum to retire any existing loans. Moreover, this an opportune time to take a final call on your retirement plans and other goals post-retirement.
Harvesters
You have retired now. And there are three important things that you need to keep in mind; regular income, capital protection and liquidity.
Accordingly, put a large part of your retirement corpus into fixed income instruments, like senior citizens' savings scheme, bank fixed deposits or fixed maturity plans of mutual funds. If you want an equity exposure, it should be marginal, through monthly income plans or balanced funds.
If these investments are leading to taxation, you may also think of investing in debt schemes or FMPs with indexation benefits, to lower your tax burden. Another suitable avenue to park part of one's retirement corpus would be to purchase property, which will provide monthly rental income as well as capital appreciation.
As you can see there are different plans that one needs to put at different times in your life cycle. Start investing now for great results.
The writer is a director, Touchstone Wealth Planners.