Although things rarely happen as planned in life, it is never a good idea to go on without knowing where you want to end up. According to a quote from Benjamin Franklin, “If you fail to plan, you’re planning to fail.” This is particularly valid when it comes to investing and saving. Usually, wealth isn’t created overnight. Over time, it involves a number of intentional actions.
In light of this, let’s attempt to determine in this blog article how to invest and save money at every stage of life, whether you’re settling into your first job, beginning a family, or approaching retirement. I have tried to split this out into 4 stages – Starting your first job, Middle age, Pre-retirement and Post-retirement.
1. STARTING YOUR FIRST JOB:
You’ve either landed your first job or are just starting off in your career. Count yourself fortunate, as the greatest advantage as an investor is that you have a lengthy time horizon if you are in your twenties or thirties.
Saving strategies:
Start saving for the future by contributing to your employer-based retirement plans, such as EPF, VPF, NPS, etc., even if you only have a small amount to put aside. If you don’t have one, open an individual retirement account at a NPS, PPF, etc., which you can do by approaching a post office or a nationalised bank. Nowadays, this can be done online as well. The most important thing is to simply get started.
Just don’t ever stop contributing to your EPF. It is difficult to turn back on after turning it off. Instead, think about covering other costs or starting a side business and using the additional revenue to pay off other debts or other non-essential purchases.
People who are just starting out typically don’t make much money and don’t give saving much thought. However, there isn’t likely an easier moment to do it. Young folks claim they don’t have enough money for savings. The proportion of their income that is available for discretionary spending will never rise as they age since as you get older, your needs and costs start to rise.
The time value of money—that is, the fact that a rupee now is worth more than it will be in the future because inflation hasn’t yet reduced its current value—is the primary reason to begin saving early, even if it’s just Rs. 1000 or Rs. 2000 each month. However, there are additional advantages to starting early. It involves utilizing a number of strategies, including the time value of money, the advantages of compounding returns over time, and having enough time to recover from market falls. You have a higher chance of creating a decent nest egg if you begin investing in your twenties. It’s more difficult if you waited until you’re fifty.
Of course, the more you save, the better. Aim to increase your savings rate over time. Consider a 25-year-old person, who saves Rs. 5000 every month for the next 35 years. He would have contributed Rs. 21 lakhs in these 35 years, and by assuming an annual return of 10%, his corpus would have been around Rs. 1.91 crore when he turns 60. But if he increases his SIP amount by 10% every year, he would have invested Rs. 1.6 crore in these 35 years, but his corpus after 35 years would be a whooping Rs. 6.1 crore. This is the power of incremental SIP also known as step-up SIP.
Investing strategies:
The problem in your twenties and thirties is not how you invest, but rather that you invest. At this age, you must be aggressive. Hold equities or stock funds with 90–100% of your long-term investments. As you have time to recover from even a very sharp market downturn, you may structure your portfolio as aggressively as you choose. Your risk tolerance will determine whether the stock holdings in your portfolio lean 90% or 100%. Just remember that you can afford to take on greater risk because it’s the money that you won’t touch for decades. Don’t complicate things. Purchase shares of an exchange-traded fund or mutual fund with a wide market index if you’re not sure what to invest in.
Investing in individual stocks is a different ball game, and shall not be everyone’s cup of tea, as it requires time and dedication to analyse a company. As you grow more comfortable, or maybe more interested in investing after several years of analysing businesses, then maybe you can try your hand out on individual stock investing, but always keep it as the last investment option. Low-cost index fund is always a safe option to invest in for beginners.
Don’t be afraid of market volatility; accept it. If you save money at regular periods and spread your investments across time (a strategy known as rupee-cost averaging), you are likely decreasing the average cost of the assets you own. When you’re young, volatility is on your side. You have the advantage of time to bounce back from market falls and get compensated for your active equity investing.
2. THE MIDDLE AGE:
You are in the middle of your career and earning a decent living in your forties and fifties. However, your costs are also more. You own a home and a car, and if you have children, you’re saving for their college fees and spending money to provide them with the greatest experiences imaginable.
Saving strategies:
Purchasing a too large home or an expensive car is actually the largest saving blunder individuals make at this point. A person’s ability to live within their means or be comfortable enough to save for the future is largely determined by the amount of money they spend on their home and car purchase, as many splurge on a very large house, and a very expensive car, which is above their means. It’s not about giving up OTT subscriptions or skipping the weekend meal. Therefore, concentrate on avoiding the most expensive ones like luxury cars or costly mobile phones.
Don’t forgo retirement savings to cover your child’s educational expenses. Put your personal financial security before paying for their college fees and other expenses. If you have enough money saved for retirement, you can assist your children in repaying whatever college loans they may have. However, keep in your mind that you are the only one who will pay for your own retirement.
When it involves your investments, avoid trying to trade too much since this will raise the brokerage and other fees you must pay as well as the capital gains tax you must pay when you sell your investments. Thus, just build up your corpus as a long-term wealth-building activity. Always remember the buy-and-hold approach while investing and saving for your future.
Investing strategies:
In general, individuals in their forties should allocate between 80 and 90 percent of their retirement funds to equities, with the remaining portion going to bonds and cash. With a decade or two till the day of your retirement, it’s critical to keep your portfolio’s potential to grow intact with a suitable equity mix.
However, you should start reducing your equity allocation in your mid-fifties unless you have a significant net worth that can withstand any volatility. In your 50s, think about gradually reducing your stock holdings to 65% of your total assets.
How far along you are in your savings process determines a lot. You cannot afford to take your time building your portfolio if you are 55 and just starting out. If you don’t have a lot of exposure to equity, you will fail. Experts in finance advice that your retirement portfolio should ideally be worth about three times your present annual salary by the time you are 45. That increases to four to six times your annual salary when you reach fifty.
You may need to increase the amount you contribute to your investment accounts and retirement accounts, such as EPF, NPS, etc., if you are not yet nearing certain financial objectives.
The ultimate goal is to retire with a portfolio worth seven to fourteen times your annual salary. Simply put, high earners should aim for 14x as they would require more income after retirement, considering their high-cost lifestyle due to their high-earning phase. This is also the time when many investment objectives emerge, such your children’s higher education, their marriage, a second house, etc. Pay close attention to time while making investments toward those objectives. Avoid the stock market and choose a money market fund, fixed deposit, or high-yield savings account if you want to use the money within three years. Keep the funds in equities if the goal is seven to ten years away or later.
Investments designated for mid-term objectives, which span three to seven years, are “the most challenging” portion of your portfolio to manage. Think about a combination of secure investments such as bond mutual funds, FDs, and stocks.
3. PRE-RETIREMENT:
Your retirement is five to seven years away at this point. Most likely, you’re looking at your portfolio a bit more often to have a feel of confident nest egg brewing.
Saving (Planning) strategies:
If you haven’t previously, evaluate your “retirement readiness”. Examine and determine how much you will need to spend in retirement. Include any pension you may have and Social Security benefits in this savings strategy.
Think about collaborating with a financial advisor, such as a Certified Financial Planner. You don’t have to give up all of your money to hire one. Some will charge by the hour and meet once a year to check on your financial progress. He or she may assist you in creating a plan to reach and complete retirement, including determining how much you will need, establishing a strategy for handling short- and medium-term needs, and determining where to invest your money, among other things. Because of the major implications of these choices, you should carefully consider them. Whether you have enough saved is usually your greatest question. The amount you have saved thus far, your lifestyle, and whether or not the retirement corpus will sustain you for the remainder of your life will all influence the result.
Investing strategies:
Continue gradually reducing the risk in your portfolio as you approach your late 50s. The riskiest moment to take on portfolio risk is now. Right now, you should allocate a small portion of your investment to equity and a large portion to debt instruments. Although there are differing views, most experts advise a 30-70 allocation, which would have 70% in debt instruments like bonds and 30% in equities. Invest in Index ETFs or bond mutual funds to keep things simple.
This is the perfect time to review your stock portfolio if you have any stocks in it (for pro-investors who have the hunger to invest in specific stocks). Prioritize investing in reputable, stable companies as they are typically more robust and less erratic during difficult economic times.
A market fall that hits your investment portfolio around the time you retire might severely lower the income you’ll be able to generate, an effect known as sequence-of-return risk. Withdrawals made during a bear market reduce returns throughout the portfolio’s lifetime by locking in losses that you have limited opportunity to recover.
A larger emergency fund can also help you mitigate that risk, particularly if you have two to three years left before you retire. If a bear market occurs just before your retirement, having an 18-month to 2-year cash stockpile will provide comfort and liquidity. Don’t put money in the stock market if you plan to spend it within the next five years.
Before retiring, deploy funds in short- and immediate-term bond funds to cover an additional three to five years of expenditures. This will guarantee that, especially in the event of a market drop, you are not making any changes to your equity portfolio.
4. POST-RETIREMENT:
You should still be cautious with your investments three to five years after retirement. It is the time when your savings account provides a “salary” type fixed income or pension to you, for meeting your monthly expenses.
Spending strategies:
Even if we set aside money for retirement based on certain assumptions about our costs, there are times when we spend more and times when we spend less than we had anticipated. The fact that expenditure fluctuates from the start of retirement to the end adds to the issue.
The first ten years of your retired life often see the highest expenses, which subsequently decline over the next ten. But costs tend to increase in the last stages of your life, majorly due to the healthcare related costs. Keep two to three years’ worth of spending money in a high-yield cash or savings account once you retire. This amount should include both money for essential monthly expenses and money you would spend to enjoy life like trips, buying cars, etc. Similar to a monthly income, you must schedule a monthly pay-out from the account.
Investing strategies:
Since retirees have the most money in their portfolio during the three to five years following retirement, this may be a challenging time to preserve this capital and you should stop the urge to splurge it on unwanted big-ticket expenses. Also, it may have a significant detrimental impact on your lifestyle if your retirement corpus is invested poorly. Therefore, it’s crucial to have that three- to five-year bucket of spending in a short-term bond portfolio or in bank FDs in addition to your emergency cash cushion. However, don’t be overly cautious because retirement might endure for several decades. So people have to rely on equity exposure of their corpus, even after their retirement. That is, not all of the money you have saved for retirement will be needed right away. To protect against longevity risk—which is the possibility that you outlive your retirement corpus money—you should, in fact, have equity allocation in your portfolio, even after retirement (as against the notion that experts say – “retirees should have minimal to nil exposure to equity”).
Consider keeping at least 20% to 30% of your wealth in equity, with the remaining portion going to bonds and cash. Your level of savings and risk tolerance will determine whether you lean more toward equity allocation or less. You must strive to obtain a bigger return after retirement if you saved too little during your early years. That entails assuming greater risk, which is not possible after retirement. However, if you have saved a lot of money in your early years, you don’t have to take that chance of investing in high risk instruments after retirement.
Try to be diversified. A common error made by retirees is to place an excessive amount of emphasis on earning income. Retirees who seek assistance on how to convert their nest egg into a source of income have more and more possibilities. Maybe you can get an annuity plan or your NPS itself has an annuity plan built into it after your 60 years of age. SWP (Systematic Withdrawal Plan) of your mutual fund portfolio is also a good strategy to withdraw money from your accumulated corpus.
