Structuring your financial plan in accordance with life cycle

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SummaryFinancial plans and investment needs are as different as each individual.

Financial plans and investment needs are as different as each individual. Investment needs change over a person’s life cycle. How individuals structure their financial plan should be related to their age, financial status, future plans, risk-aversion and needs. Let us discuss and review the various phases in an investment life cycle. Although each individual’s needs and preferences are different, some general traits affect most investors over the life cycle.

Accumulation phase

Individuals in the early-to-middle years of their working careers are in the accumulation phase. As the name implies, these individuals are attempting to accumulate assets to satisfy fairly immediate needs like making a house down-payment, buying a new car or taking a trip. Parents with teenage children may have a near-term, high-priority goal to accumulate funds to help pay college expenses. Because of the emotional importance of these goals and their short time-horizon, high-risk investments are not usually considered suitable for achieving them. Typically, their net worth is small. As a result of their long investment time horizon and their future earning ability, individuals in the accumulation phase are willing to make relatively high-risk investments.

Consolidation phase

Individuals in the consolidation phase are typically past the midpoint of their careers, have paid off much or all of their outstanding debts, and perhaps have paid, or have the assets to pay, their children’s higher education. Earnings exceed expenses, so the excess can be invested to provide for future retirement or estate planning needs. The typical investment horizon for this phase is still long (20 to 30 years), so moderately high risk investments are attractive. At the same time, because individuals in this phase are concerned about capital preservation, they do not want to take very big risks.

Retirement phase

The spending phase typically begins when individuals retire. Living expenses are covered by either by retirement income or income from prior investments. Because their earning years have concluded, they seek greater protection of their capital. At the same time, they must balance their desire to preserve the nominal value of their savings with the need to protect themselves against a decline in the real value of their savings due to inflation. The average 60-year-old person in India has a life expectancy of about 10 years. Thus, although their overall portfolio may be less risky than in the consolidation phase, they still need some safe investments, such as inflation-indexed instruments for inflation protection.

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