How Should You Invest Based on Different Life Stages?

When it comes to long-term investing, especially for retirement or for some far-away goals, one of the key parameters is the stage of life the investor is at.

In fact, the phenomenon of life-stage investing is viewed as an investing philosophy in itself. This method of investing maps the various stages of life an investor and their family may go through while helping them build a plan tailored specifically to suit their life’s circumstances.
 

The goal of life-stage investing is to help put the investor in a sound financial position before they enter each new stage of their life. This helps investors easily attain their aspirations and dreams in alignment with their income levels.

Stages of Wealth

The various stages of wealth accumulation and distribution from an investment perspective can broadly be envisaged as follows:
 

1. Accumulation Phase
In this stage of an investor’s life, they are essentially accumulating their wealth and multiplying or compounding it. This phase mostly comprises their younger years—from their 20s to the end of their 40s or even early 50s—when they are growing and reaching their peak earning potential. This is the phase when most investors typically tend to add to and build on their wealth.
 

2. Transition Phase
This is the phase when a person needs funds for fulfilling their life’s goals like buying a house, an expensive car, or putting their kids through college. This phase can often overlap with the accumulation phase and can last from around the 30s to retirement or even after that.
 

3. Distribution Phase
This is the post-retirement phase when an individual investor uses their accumulated wealth to live out their post-work life when they may not be actively earning. In this phase, which usually lasts from 20-40 years, the person draws from a portion of their accumulated wealth while trying to grow the rest of it to maintain the same standard of living they were used to during their working lives.
 

Life Stages

Young, Not Married, and Free
 

Most young people living the aspirational urban high life typically have significantly high expenses. Young people in their 20s and 30s tend to go out for meals, socialize, travel, buy expensive gadgets, cars, and clothes, and generally upscale their lifestyles. However, this is also the phase where they can and should maximize their investments relative to their income and expenses. The sooner they begin, the better, as they have time on their side and can compound their wealth over the course of the next four decades of their active work lives.
Young investors should start right away and consistently invest small amounts of money so that it has a chance to grow over time. They can use the systematic investment plan (SIP) route to do so. This is essentially their accumulation phase where they can take risky bets with their money and ride out the volatility in the stock markets.
 

Investment Journey as a Young Married Couple
 

This stage encompasses both accumulation and transition phases. This is when most young people find their life partners, begin settling down, and start having responsibilities. Not only do they start raising a family, but they are also working hard at their careers while taking care of their parents who may be nearing retirement or already in their golden years.
In this phase, young couples typically plan big purchases like buying a home or a car and planning for their kids’ education. They also have to plan for significant medical expenses that may arise. At this stage, savvy investors fine-tune their risk profile. While they should continue acquiring wealth-generating assets, they typically go for lower-volatility products that can offer stable, inflation-beating returns. Investors in this stage should also consider obtaining life insurance to protect their families against the possibility of a sudden loss of income in case of unexpected events.

Married with Children
 

Like the previous stage, this phase also involves accumulation and transition. But as children enter and grow up, investors need to reassess their risk profiles. Investors with growing children and aging parents should double down on health insurance and start building a corpus for their children’s education. Investing for their kids’ higher education with a time horizon of 10 years or more becomes a priority. Equity mutual funds can be very handy for this purpose as they help compound wealth over time. For such goals, investing in quality schemes for a 15-20 year horizon is essential.
As children grow older, funding their college education, both in India and abroad, and setting aside money for their marriage becomes necessary. This means that investors need to reassess their risk and invest in mutual funds and other assets that are less volatile but manage to beat inflation. At this stage, most people begin thinking about retirement, making it a good time to start planning for the phase when they will not be actively earning.

Towards Retirement
 

By now, most savvy investors enter a phase of transition as their retirement is just a few years away. Their kids have typically left the nest and are settled in their own lives. It is now time to gear investments fully towards retirement. At this stage, investors need to reassess the risk in their portfolio and reduce volatility. This is also when investors may want to start winding down their work and begin the process of withdrawing from their accumulated corpus. Rebalancing the retirement portfolio is essential at this stage.

Finally, Retirement!
 

Retirement ahoy! You have worked all your life, invested diligently, and accumulated wealth over time. At the same time, you are now free from most responsibilities and can look forward to a peaceful retirement with your spouse.
 

By now, you have hopefully ensured, through careful and meticulous planning, that your retirement is fully funded, and you have enough money set aside to ensure your final years are spent in peace. Since you may have no active income anymore, your accumulated corpus will help generate enough income.
 

At this stage, you may want to turn to low-risk, low-volatility debt mutual funds, along with a systematic withdrawal plan, ensuring you keep getting a stable income while remaining at par with inflation.
Given the advancements in medical facilities and healthier lifestyles, people are living longer. This means retirement years can be almost as long as active working years. For this reason, maintaining anywhere from 25-50% of the portfolio in equity mutual funds or high-quality dividend-paying stocks is advisable to beat inflation over a lifetime.
At this stage, some people may also consider cutting back on certain discretionary expenses to create a cushion for unexpected expenses, such as medical emergencies.

Conclusion
 

While one can plan ahead for the future, life can often be unpredictable. A sound financial plan should factor in unforeseen events, both good and bad. Savvy investors maintain a balanced portfolio, account for risk, and build long-term wealth for themselves and future generations.