Retirement plan: Money and you at the age of 40

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NEW DELHI: A friend called to complain that he was being badgered to buy retirement planning products. He will soon turn 40. 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.

If you are still complaining about your work 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.

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. By the time you are 40, you must have a clear 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. 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. When you do this midpoint 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 and you must not have EMIs that take up most of your income-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 you are in a place where your income is poised to take off, you have to guard against lifestyle and the urge to spend it all on an extravagant lifestyle.

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.
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.
(The author is chairperson of The Centre for Investment Education and Learning)

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