Will you have enough money when you retire? Your 40s is the time to ask this question
If the home you live in and PF & tax saving investments are your only assets, you may not be doing enough.
A friend called to complain that he was being badgered to buy retirement planning products. He will soon turn 40. Why does financial advisory business frighten me into buying insurance, he asked. How should 40-year olds look at their financial position? What should concern or comfort them?
After the job-hopping spree of the early years of working, the 40s is the time to take stock. To ask whether one has developed a set of skills, knowledge and attitude to secure a stable and rising income. The 50s is typically the peak earning phase. One reaches the height in one’s profession at that time, while a few over-achievers would do so in their 40s.
If you are still complaining about your work, or resigned to doing what you dislike, or blame the world and everyone for preventing you from achieving your potential, you may be stuck in a less than optimal situation. Not all of us end up with jobs we love. But at some point, we have to evaluate what the job is delivering for us. The 40s is a reasonable point for that purpose.
The primary financial goal for most is adequacy of income. We should get to a point in our lives where we are happy and content with what we earn. If we think there is a problem, we should have done enough to fix it, or have a concrete plan to make it better.
We had a colleague who was an obsessive learner. He would enrol in courses and programs, online and offline, and acquire one degree and certification after another. The problem though was that none of it mattered in his career progression as they were all far from useful or relevant. They did nothing to his income. Avoid such pitfalls.
We may not be sure if we are earning enough, or about our potential if we bring too many factors into play. Especially the one about how much the neighbour is making. Converse with a friend or a mentor; speak with head hunters; scope out that business plan you imagined for the decision about setting up on your own; find out how your remaining earning years should pan out. By the time you are 40, you must have a clear strategic plan for your future income.
Adequacy of income is easily tested by the assets you have accumulated. If you are 40 and the only assets you have are the home you live in and the PF and tax saving investments you have done, you may not be doing enough. The insurance agent’s persistence needs explanation here.
How much insurance you need is a math that is designed to scare you. If you took the entire stream of future income and discounted it, you will get a large number. However, the assets you already have is reduced from that number. Why?
Insurance is your fall-back option. Should anything happen to you, your family should be able to earn an equivalent income by investing the insurance proceeds. They can do it if you have built assets too. Insurance is an arrangement to fill the gap, while you earn and build assets. As you accumulate wealth, your insurance needs drop.
The 40s is the nice mid-point in your earning years. Between the first 20 years of inadequate income, too many loans, and too little saving and the plentiful years of peak income, you must have acquired the good financial habits to building wealth: Earn enough; spend lesser; and save the surplus.
When you do this mid-point evaluation, you must have enough in the bank at the end of the month; you should be paying off your credit card dues in full; you must not have EMIs that take up most of your income; you must not have liquidity crunches that lead you towards borrowings; and you must have financial wealth that is sizable.
Which brings us squarely to the adviser who is urging you to plan for retirement. When can you retire? If your wealth can generate enough income that replaces what you are already earning, you are ready to retire. The 40s is the time to ask that question.
If the answer is no, you are the ripe candidate for retirement planning lessons. If you did not set aside enough money aggressively in the earning years, you will spend old age in poverty, they would tell you. It need not be so frightening.
If you are in a place where your income is poised to take off, you have to guard against lifestyle creep and the urge to spend it all on an extravagant lifestyle. If you balanced your allocations and began an aggressive saving and investing plan, you will build that blessed nest egg, that will protect you when you stop earning.
There is still one last piece: your asset allocation. If all your wealth is in the house you are living in, and you are habitually upgrading it to reflect your status, you may risk being asset rich and cash poor in retirement. You need financial assets that are easier to use. You need them growing in value while you bring in the income.
But the time you retire, you should have say 30% of your wealth in property, 30% in equity to offer growth and inflation protection, 30% in income assets that generate regular cash for your use, and the balance 10% for anything unexpected. The 40s is the time to set yourself towards building assets to a plan.
There is no perfect time for specific actions in personal finance. It is a journey with wealth, where we make plans but are willing to make mid-course corrections as needed. The 40s in the story is just an indicative point for evaluation. Do what sails your boat, but always ensure that your income, today and tomorrow is stable, secure and adequate.
Insurance agents and financial advisers draw your attention to a specific aspect of your personal finance. They are not privy to your current income or your future potential income, or your plans for how much you will risk to earn it, and for how long. You drive those goals and stay in charge always.
(The author is Chairperson, Centre for Investment Education and Earning.)