Portfolio Ideas. Financial lifecycle — when to do what

If you are interested in managing your finances, you should know how your financial decisions change during your lifetime — from the start of your career till the end of your life.

In this article, we discuss why it is important to identify key actionable ideas during important stages of your financial lifecycle. We also show how you can set up processes to implement these ideas.

Your financial lifecycle can be divided into two — working years and retired years. The first part, your working years can be split into three stages — your initial career starting with your first employment till 30; your mid-career starting from 30 till 45, and your peak career starting at 45 and ending with your retirement, perhaps at 60. Consider your initial career. This is the time when you would have large discretionary expenses. Therefore, your savings will typically depend on your spending habits. So, your key actionable idea during this stage is to develop a disciplined savings habit.

You can do so by setting up a systematic savings plan; automatic transfer of money from your salary account to a specially-designated savings account to make appropriate investments. It is equally important for you to increase your savings every year.

Next, your mid-career. This is the stage when you will borrow money to create assets. The issue is that you may borrow more than you can comfortably repay. So, the key actionable idea during this stage is cash flow management.

One way to do so is to test your monthly cash flows. For this, set up a separate bank account. Then, deposit the designated repayment amount every month for six months as if you have already taken a loan. You should avail of the loan only if you are able to deposit the money every month and yet maintain your current standard of living comfortably.

For the purpose of our discussion here, we prefer to combine the last phase of your working years along with your retirement years. We call these the wonder years because of two reasons. One, it is hard to believe that you are nearing retirement! And two, retirement is a new experience and can be uncertain.

From 45 till your retirement, the most important objective is to work towards accumulating enough wealth to retire comfortably. With a disciplined savings habit already in place, your major obstacle would be to manage your portfolio’s investment risk.

So, the key actionable idea during this period is portfolio rebalancing. You can achieve this by reducing your equity investments and shifting to bonds that mature on retirement. As a general rule, consider reducing your equity allocation from age 45 and complete your rebalancing by 55.

Likewise, the key issue during your retired years is managing your investment risk. You would depend primarily on passive income to sustain your lifestyle.

A significant loss in portfolio value early in retirement will expose you to longevity risk — the risk that you will outlive your investments.

You can moderate longevity risk by first identifying the cash flow you require to sustain your living expenses (including basic healthcare costs) during your retired years. Then, you should either invest in monthly income bank deposits or annuity or a combination thereof to generate this basic cash flow.

Anticipating and managing issues through your financial lifecycle is important to create a comfortable future for yourself and your family. You should implement, wherever possible, these ideas explained above through systematic processes.

Of course, disciplined savings, cash flow management and portfolio rebalancing are important at all stages of your life.

But each of them has more importance during some keys stages of your financial lifecycle than others.

The writer is the founder of Navera Consulting. Feedback may be sent to portfolioideas@ thehindu.co.in

COMMENT NOW