Are you at 40s and still thinking ??

There are very different kind of challenges when we are at our early 40s, and approaching the mid-point of our career. We would have already worked for about fifteen-twenty years, and may have about 15-20 years left for the retirement. This stage of our life is very important both from a career and financial planning perspective for the following reasons:-

i.     This is the stage of life, when we are more likely to be settled both from a career and family point of view. The lifestyle, we are living in our forties, is most likely what we want to have for the rest of the life. We might aspire for more improvement in our life, but a cutback in lifestyle is usually very difficult for us.

ii.     By the time we are in early 40s, most likely we may be in middle management or senior management role. Therefore our income is likely to be much higher than the earlier stages of the career. With higher disposable incomes we are better placed to save more.

iii.  Early 40s is the stage of life, when important goals of life like children’s college education, marriage and own retirement starts approaching. We would be comfortable enough if we have been saving for these goals since beginning of our career. However, if we have not saved adequately then this would be a very challenging time to manage various major expenses and also for future requirements.

iv.   This is the time, when the first warning signs come up on the health front. Now days health risks in the 40s are much higher than what it use to be one or two generations back. This is mainly due to environment pollution and lifestyle related issues. A serious illness can cause severe financial stress to the family and we must guard ourselves against health related financial risks.

v.   Now people have much more mobility in their careers as compared to what we generally had a generation back. However still the increasing age of the family does impose constraints on mobility. By this time the family is settled at a particular place and our children may be in the middle or high school, which makes relocating to new city for work, undesirable. BY this time we may have invested in property and that also restricts geographical mobility. Unless we get a very attractive career option we may not like to move and if we don’t get better opportunities in same place it puts constraints on career growth. Inability to find career growth opportunities may also led us to think for early retirement. Which need to be factored in for financial planning.

These are the reasons which makes it imperative that, we should have some proper financial planning when we reach the mid-point of our career at this age. In this post we will discuss 6 important mid-career financial planning to-dos.

1.      Health cover for difficulat times

Health is the most important aspect of life and at this age it is most critical for maintaining it. So proper health cover is very important at this age of life. We should have comprehensive health insurance cover for entire family and if we are responsible for the healthcare needs of your senior citizen parents, then I should also be properly covered. Even the government promotes it and gives up to Rs. 55,000 (30000 for senior citizen parents and 25000 for self and family) tax benefits for health insurance policy u/s 80 D for family and parents.

If our employer is providing health insurance benefit then it should be  checked for its benefits like sum insured, co-pay terms and exclusions  so as to evaluate whether it provides comprehensive coverage as required. Even if the employers insurance provides everything its better to take separate mediclaim for family so for any reason if we have to leave the organisation and could not find a suitable opportunity immediately; in that time also our family is properly covered for any unfortunate serious illness during that time.

2.    Take adequate Insurance for eventualities not just to save tax

We should have adequate life insurance cover which is able to meet the income needs of our family in the event of an untimely death. It should also be able to meet the future aspirations of your family, like children’s education and marriage.

We should not take life insurance as a savings scheme for children’s future or retirement with the expectation of certain maturity amount as promised but it should suffice the basic purpose of covering the risk of untimely death. Treating life insurance primarily as a Section 80C tax saving investment is a basic mistake, which many of us make.

Main purpose of life insurance is for risk protection. If we take life insurance policies as savings or investment schemes, It causes us to be under-insured and gives us sub-optimal returns on investment. The early 40s is a good time to review your life insurance needs. As discussed earlier in the post, this is the stage of life, when you are more settled from a lifestyle perspective. A life insurance cover bought when you were younger and had lower income, may not be sufficient to sustain the current lifestyle needs of your family.

If we find out that we need additional cover to meet our family’s lifestyle needs, buy additional term life cover. Also, if you made some of the other life insurance mistakes discussed here, we can correct it. by surrendering the policies, buy term life insurance and invest the savings in premium in suitable investment options to meet your financial goals. At this time, we can consider buying a critical illness and personal accident covers. Critical illnesses and severe accidents, can result in very high medical expenses, which may not able to get reimbursed through your general mediclaim policy. Further, critical illnesses and temporary or permanent disability caused by accidents can impair our ability to work, resulting in a loss of income for the family over a protracted period of time. Critical illness and personal accident covers, protects against such serious financial risks.

3.    Children’s Higher Education: A major Expense

Historically Inflation rates are highest in the education and healthcare sectors. Every parent’s dream that their children get best of the education however it is becoming expensive day by day. Therefore is it very important to start saving early for this major financial goal.

If for whatever reason, we have not saved till now for your children’s education and marriage, we should now start planning for these important objectives. How much we need to save and where to invest, will depend on personal situation i.e age of children, family’s aspirations, our income and savings and assets & liabilities, etc. We should consult with a financial planner to build a suitable financial action plan in this regard.

For this purpose we may be required to invest in those asset class which can beat inflation over a longer period of time; equities and equity mutual funds are best placed in the current scenario where the interest rates are falling down.

4.   Retirement Planning : Had we considered yet??

Generally we get involved so much to our short term goals that we forget that after certain age we would stop working and in our country we do not have any social security available for the old peoples. The cost of living goes up due to inflation and if we do not plan our retirement needs in advance it would be very difficult to manage the expenses at that time. As we go through various stages of life, the goal post of retirement planning may keep shifting. By the time we are in 40s, we have more clarity about long term aspirations, than in our 20s or 30s. The important factors to consider at this stage are, what would be lifestyle related expenses, how much income is required to sustain inflation adjusted lifestyle expenses, can we think of  some alternate source of income after retirement or do we wish to retire early etc. Accordingly we need to develop a suitable retirement plan so as to meet these requirements.

The earlier we start planning for our retirement, the easier it will be to achieve the required target. If we are unable to save and invest for our retirement till now, or even if did some saving but is not sufficiently large then this is time when we must have a retirement plan in place.

The 40s is not just middle of our work life but also of our entire life (generally our average life expectancy is around 80) and it is very important from a personal and professional perspective. At this age we are quite mature and independent. This period in life is prime of our working careers as well as extremely important from a financial planning perspective. At this age, we have more clarity into our aspirations, needs for self & family  and challenges we have to face. So it’s very important to take right financial steps at this critical stage of life which can make or break our financial health.

The Mistakes we should avoid while doing SIP in Mutual Funds

We all have heard a lot about benefits of systematic investments and SIP is the favourite tool for small investors to create wealth by making small- small investments. Regular investments is most effective tool for investors to create wealth in a disciplined and systematic way. In SIPs a small investors who has as small as Rs. 500/- also has the same opportunity to earns as  an individual who has got thousands or lakhs of rupees.  This is due to the power of compounding where every interest on interest is added to provide maximum returns. While almost all of us are aware of the power of Systematic Investment Plans or SIPs, we some times make a few fundamental errors when it comes to the actual investments and maintaining it. Here we are going to point out a few so that nothing comes between us in the process of creating wealth.

1. Plan your regular investment by analysing at future cash flows

The most important feature of SIP  that distinguishes it from other means of investment is the small amounts that we can invest. Hence, if we commit a huge amount at that start and then fail to continue it for few months because of lack of savings, high expenditure or some financial problem then we have actually lost the avenue for investment for those months. Although we can still invest the instalments missed for those months later on. However, out of 12 months if we manage to invest only for 10 or 8 months, our investment would not generate the return we would have expected?

So it is better that instead of being overly ambitious or optimistic regarding the monthly systematic investing, we should analyse of future cash flows first and then decide a realistic amount which could be manageable. It is important that we are comfortable with our finances after the investment. Our investments should not become a burden. If we cannot invest a stipulated sum on a monthly but on a quarterly basis we should opt for that option as well. Picking an amount that is too high or too low can put an unnecessary pressure and affect the performance of our investments.

2. SIP is not just for Small Investors

There is a common myth associated with Systematic Investment Plans that investors who cannot invest through lump sum should invest through SIPs. Or it is generally for the investors who have small amounts. This could not have been far from the truth reality.  SIP can be made for any amount and there are investors who invests lakhs of rupees on regular basis. It is like Instead of Rs. 5000 a month, if you we spare र 500,000 a month; we can always still invest in SIPs. The fundamental of Systematic Investment Plans or SIPs, i.e. time value of money, rupee cost averaging and compounding do not change irrespective of the amount invested. So if we can manage to invest large sums in lump sum or regularly per month, we can still invest in SIPs and get the same benefits.

3. SIP’s are for a year or so

As mentioned above SIP’s run on the basic principal of time value of money, rupee cost averaging and compounding, so if someone is investing in SIPs for a year or so he will actually won’t get any significant benefits and the purpose of SIPs gets defeated. The value of investments is not created through the amount we invest but it is created by the time period of that investment. The longer we stay invested, higher will be the value of our investment.

Value of Systematic Investment Planning over a period of time
Monthly Investment (Rs.)	Investment Period (Years)	Expected Annual Rate of Return	Invested Amount (Rs. Lakhs)	Maturity Amount (Rs. Lakhs)	Absolute gain (Rs. Lakhs)
5,000	2	14%	1.2	1.39	0.19
5,000	5	14%	3.0	4.36	1.36
5,000	7	14%	4.2	7.15	2.95
5,000	10	14%	6.0	13.10	7.10
5,000	15	14%	9.0	30.64	21.64
5,000	20	14%	12.0	65.82	53.82
5,000	25	14%	15.0	136.36	121.36
5,000	30	14%	18.0	277.85	259.85

As we can see form the example above  , if we continue the investments for a number of years, has been shown. In th first two years the corpus of Rs. 1.20 lakhs increase by only Rs. 19000 which is just 15.8% of the investment value.  However if we continue investing the same amount month after month and stay invested for 25 – 30 years the corpus grows to a phenomenal Rs. 1.36 crs to Rs. 2.77 crs which is 9 to 15 times of the total investment amount. As can be seen from the table above the investment value is created by the time period of investment and thus benefits from the power of compounding. Hence, if we are thinking of redeeming after a short period of time we would be losing on potential wealth creation and may also result in losses.

4. As the market falls we also fell of SIPs

We have heard a lot about it that someone says that I stopped my SIP as the market is falling so no point to continue with it. We try to time the markets and invest in rising markets and redeem in falling markets. In fact it should be the opposite, where the investors should redeem or stay invested in rising markets and invest in falling markets. Investors investing through SIP redeem SIPs when markets fall and this is a big mistake. They should look at this as an opportunity to invest more because if they invest in a lower market they get higher number of units as the NAV is low and benefit in terms of rupee cost averaging. Common investors do not have the expertise to filter noise from information. Short term market fluctuations are created by noise in the market and they have no significant impact on investments. Hence, if we hurriedly redeem our investments without analysing the situation we may actually be losing out on potential wealth creation.

Investors mistakenly think that short term fluctuations can erode their investments. That cannot happen. In fact, if we have planned to stay invested for a long period of time, these fluctuations should hold no value at all. The longer we stay invested, the lesser will be the impact of short term fluctuations.

5. Regular Income makes me feel happy

As an investor when we are choosing the fund to invest, We have two options: Dividend or Growth option. Dividend is basically a withdrawal from the corpus and thus if we are opting for that, the compounding effect is reduced and it hinders the growth of our targeted corpus. In growth option, no dividends are paid or declared and thus the corpus continues to grow and benefit.

Compounding, often called the eighth wonder of the world, works by creating a chain of interest on the interest calculated to the last divisible penny. Hence, the returns through compound interest are way higher than the return that is calculated through simple interest. In case you have already opted for the dividend option, we can change it to growth option or for dividend reinvestment option later on also. Dividend reinvestment option also gives same benefits of growth however it increases the number of units.

6. Keeping the SIPs same even if income is growing

As the time grows our income and expenses also keep on moving up. We may also go through financially lean periods and financial highs. During the period of financial high, we should accumulate as much as we can. However, if we do not have any urgent financial requirement or anything particular to do with that sum, the chances are we may spend it. Instead of allowing this to happen, we should add this to our existing SIP fund. Now few mutual fund companys offer options wherein we can automatically increase the SIP amount over a specific period. We can also add lump sums to the same fund in the same folio or account even if we are investing a lump sum amount. Adding a lump sum once in a while boosts the investments. After all, the SIP amount and a lump sum are bound to generate more returns than just monthly investment. If we have lump sum, we should always add it to your ongoing investments.

7. Redeeming in between then for

We some time tend to redeem parts of their SIP investments whenever there is requirement for some amount during some urgent need etc. And later on decide to either adding back the amount or not adding it at all. While adding later puts back the corpus to where it was supposed, however returns may not be similarly. However, If you have redeemed a part of the corpus only to add it back six months later, you have lost the return that the part redeemed corpus could have generated in those six months. We should always remember that It is not the corpus or the amount that determines the returns; but the duration of investment and the discipline that makes the difference. More importantly, the momentum of generating the targeted corpus for the long term gets disturbed. We should never redeem your SIP investments partly or fully during the SIP period. Systematic Investment Plan is a long term investment idea for wealth creation and therefore should not be used like a bank account. For any emergency or unforeseen events we should have sufficient balance in your savings bank account or liquid funds.

Conclusion

We can learn form mistakes but it would be much better if we learn from others mistakes or the from the experience from the experts It is often said, learn from your mistakes. We are not required to make the above mistakes to learn from them. As now we already know what the common mistakes are, we need to ensure that we don’t repeat them with our investments. Once we can follow these principals, there is nothing that stands in our way of wealth creation.