Life-Stage Investing

Life-stage investing refers to the Style of investment an investor should adopt at different stages of his/her life. From the perspective of investment styles, the life of an individual can be broadly divided into 4 phases – beginning of career, marriage, parenthood and retirement. At each of these stages an individual is faced with different set and quantum of responsibilities and thus has different investment objectives to accomplish. Before discussing what strategy an investor should follow at these different life stages, let’s have a look at the primary factors which impact an individual’s investment decisions at each of these stages:

• Amount of Disposable Income: Disposable income refers to the income which is left at your disposal after meeting all your regular expenses. This disposable income gets divided between savings and investments. A person’s disposable income gets affected by various factors such as the total income, number of dependants, outstanding debts, etc.

• Age: Age is a very dominant factor in an investment decision. Generally, the risk appetite of a person takes a downhill with increasing age. This is due to the increase in the number of responsibilities with advancing age, which makes him/her risk averse.

• Amount of Savings: Savings is another important factor which affects how much amount is available to a person for investment. It is advisable to start saving as early as possible so that a person has a larger corpus to invest.

• Economic Trends: An investment decision is also affected by the state of the country’s economy and ongoing economic trends. Investments increase during booming economic periods and decrease during times of recession.

4 Life-Stages of Investment

• Beginning of Career: At this stage of life, a person is around 20 years of age and has recently graduated from college. For most people, this stage marks the beginning of their career. With the first job, comes the first salary and the first opportunity to make an investment. During this phase of life, an individual can invest around 60%-70% of his/her income as at this stage one has fewer responsibilities. Due to the young age, the risk appetite of a person is also large at this stage of life. During this life-stage, most suitable instruments of instruments include equity funds, equities, real estate and IPOs (Initial Public Offerings).
• Marriage: The next stage in a person’s life is marriage. With marriage, both the investment objectives and the financial responsibilities of an individual change. At this life stage, the expenses in one’s life typically increase. During this phase, planning for the future also increases which further adds to the expenses leading to a reduction in savings capability. Also, the risk appetite of a person at this stage of life tends to be lower than the preceding stage due to the increased responsibilities. Thus, people generally invest 40%-50% of their income. Ideal investment options during this phase of life include hybrid funds, fixed deposits, national savings certificate (NSC), unit-linked investment plans (ULIPs) etc.
• Parenthood: Parenthood adds an altogether different dimension to one’s life. At this stage of life, the number of dependants in a person’s life increases. So do expenses and the need to plan for future expenses. This life phase also increases the requirement of liquidity in an individual’s life so that the person can meet sudden cash requirements due to emergencies. This stage also makes people significantly risk-averse. At this life stage, a person should generally invest 30%-35% of his income in instruments like debt funds specially liquid funds, fixed deposits, public provident fund, pension plans, recurring deposit, etc.

• Retirement: At this stage of life a person generally seeks regular income and the least amount of investment risk. The stage also demands the greatest amount of liquidity along with the preservation of wealth. At this stage an individual generally invests around 10%-15% of his/her income and should ideally invest in potential low risk/high liquidity options such as overnight funds, liquid funds, post office monthly income scheme, senior citizen savings scheme, etc.

Conclusion

Failing to plan is planning to fail. Thus, planning of investments early in life is as necessary as making investments. Life-stage investing is an appropriate way which helps people secure their present as well as their future. A well planned investment strategy increases the probability of timely achievement of financial goals that too at a steady pace.