Wednesday, August 31, 2016

6 important To Dos in your Mid Career (Early 40's)

When you reach your early 40s, you are approaching the mid-point of your career. You already worked for about twenty years, assuming you began your career in your early 20s and you have about 20 years to reach your retirement age. This stage of your life is very important both from a career and financial planning perspective for the following reasons:-
  1. By the time you are in your early 40s, you are likely to be in middle management or senior management role. Your income, therefore, likely to be much higher than the earlier stages of your career. With higher disposable incomes you should be able to save more.

  2. This is the stage of your life, when you are more settled both from a career and family lifestyle standpoints. The lifestyle, you have in your forties, is most likely what you want to have for the rest of your life. We aspire for more improvement in our life, but a cutback in lifestyle is usually very difficult for us.

  3. While people today have much more mobility in their careers, compared to what people had a generation back, increasing age of the family does impose constraints on mobility. With your family settled and your children in middle or high school, relocating to new city for work, is often seen undesirable. For some people significant investment in property can also cause them to have restricted geographical mobility. Unless you have sufficient career opportunities in your city, restricted mobility can put constraints on career growth. If you have restricted mobility and if you think that there are not ample career opportunities, you need to factor in early retirement in your financial planning.

  4. Early 40s is the stage of life, when you start approaching important goals like children’s college education, marriage and your own retirement. If you have been saving for these goals from the start of your career, then you should be comfortable. However, if you have been saving adequately, for a sufficiently long period of time, then this is time when you should get very serious about your long term goals.

  5. The forties are the time, when the first warning signs come up on the health radar. Health risks in the 40s in these times are much higher than what it was one or two generations back, due to environment pollution and lifestyle related issues. A serious illness can cause severe financial stress to your family and you must guard your family against health related financial risks.
The above reasons make it imperative that, you check off some important financial planning to-dos when you reach the mid-point of your career in your early 40s. In this post we will discuss 6 important mid-career financial planning to-dos.

Build financial contingency for unexpected risks

No one expects loss of employment at the prime of their career, but in this age uncertainty has become the new normal. While increasing globalization has resulted in more opportunities for us, it also exposes us to be impacted by global risks. Over the 10 years or so, it has been observed that, business cycles are becoming shorter and economic uncertainties increasing. It is easier to deal with uncertainty when you are younger, but dealing with financial uncertainty becomes increasingly difficult with age and responsibilities. When you are younger, you have lesser obligations and more career opportunities. When you are in your forties, career opportunities become limited while the financial obligations towards your family increases.
Prudent financial planning calls for setting up a contingency fund that can meet three to six months of expenses, in the event of an unexpected job loss. The contingency funds should be very liquid, so that you can draw from it as and when you need to meet your daily, weekly or monthly expenses. Most Indians keep their short term funds parked in bank savings accounts, but liquid funds can be better savings options for contingency funds, because they usually give much higher returns than savings bank accounts while providing almost as much liquidity (except on non business days) as provided by your savings bank account. If you have adequate contingency funds, you can use it, to meet your regular expenses without liquidating your long term investments, till the time it takes you to find a suitable opportunity and return to full time employment.

Reduce debt burden and have plan to be debt free in the near term future

Debt comes in many forms but invariably has a cost (interest) associated with it. Often we are not even aware of the magnitude of these costs, but if a significant part of your savings goes towards interest payments, it can be damaging to your financial future. By the time you reach your forties, the only debt that you should have is your home loan. If you have any other kind of debt, like credit card loans, personal loans, automobile loans, etc prioritize and pay them off with a high sense of urgency.
These kinds of debts are mostly related to lifestyle aspirations but the cost of servicing them can have long term implications Once you have paid off the short term debt, focus on your long term debt. Home loan is the most common long term debt of middle income households. The cost of home loan is huge and many households are not even aware about the magnitude of the cost. The cost is huge for three reasons. Home loans are multiple times larger compared to other classes of household debts. The tenure of a home loan is multiple times that of a car loan and other classes of household debt. Longer the tenure of a loan, higher is the interest paid over the tenure.
Since the home loan principal is usually a large amount, it is not always possible to repay the principal in a short period of time. But when you reach your early forties, you must try to reduce your interest burden in an accelerated time-frame, otherwise it will surely have long term financial implications as a big part of your monthly savings will go towards EMI payments leaving very little for other important financial goals. Set yourself a prepayment target every year and prepay your principal at a regular frequency (quarterly, semi-annual or on an annual basis). Over the past year or so, we have seen interest rates softening in India. This is a great time to prepay your principal, so that you can take the dual advantage of lower interest rates and lower loan balance.

Ensure that you have adequate health cover for your entire family

Health is the most important aspect of our lives. As discussed earlier, your family’s health risks are higher when you and your spouse reach your 40s. Also men are more susceptible to some specific health risks in their 40s, while women in 40s are more susceptible to other health related issues. Therefore, you should ensure that, you have comprehensive health insurance cover for your entire family. Further, if you are financially responsible for the healthcare needs of your senior citizen parents, then health insurance becomes even more critical.
If your employer provides health insurance benefit to you and your family, you should review the health plan benefits, including sum insured, co-pay terms and exclusions carefully and evaluate if it provides comprehensive coverage for your entire family’s health needs. If your employer’s health plan is not adequate for your needs, you should take separate health or medical insurance plan for your family. Buying separate Mediclaim for your family also makes sense because if for any reason you have to leave your employer and is not able to find a suitable opportunity immediately; your family will be without health insurance cover for the period, you are between jobs. If, unfortunately, there is a serious illness in the family then it will cause financial stress to your family.

Ensure that you have adequate life insurance protection for your family

In our blog, we have repeatedly stressed on the importance of life insurance in financial planning. Unfortunately, people make some very basic and potentially damaging mistakes, when buying life insurance. Many life insurance buyers choose their life insurance covers based on the plans their insurance agents want to sell and how much premium they can afford. This is a wrong approach. Your life insurance cover should be adequate to meet the income needs of your family in the event of an untimely death. It should also be able to meet the future aspirations of your family, including your children’s education and marriage.
If your life insurance cover is not adequate, your loved ones are likely to endure financial stress and compromise on their aspirations, in the event of an unfortunate death. Other common life insurance mistakes include treating it as a savings scheme for children’s future or retirement with the expectation of certain maturity amount as promised by their insurance agents. Treating life insurance primarily as a Section 80C tax saving investment is another mistake, which many of us make.
Life insurance should be treated purely as a financial instrument for risk protection. Treating life insurance policies as savings or investment schemes has two harmful financial consequences. 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 you need additional cover to meet your family’s lifestyle needs, buy additional term life cover. Also, if you made some of the other life insurance mistakes discussed here, earlier in your career, now is the time to correct it. Review your life insurance policies carefully, and if they are not suitable for your insurance and investment goals, you should consider surrendering the policies, buy term life insurance and invest the savings in premium in suitable investment options to meet your financial goals.
This is also a time, when you should consider buying a critical illness and personal accident covers. Critical illnesses and severe accidents, can result in very high medical expenses, which you may not able to get reimbursed through your Mediclaim policy. Further, critical illnesses and temporary or permanent disability caused by accidents can impair your ability to work, resulting in a loss of income for your family over a protracted period of time. Critical illness and personal accident covers, protect you and your family against such serious financial risks.

Invest for your child’s education

College and professional education in India is getting more expensive every year. Historical data, over the past decade or so, has shown that Inflation rates are highest in the education and healthcare sectors. A few years back, I read a post written by well known personal finance blogger in the US, known for her astute and sometimes counter-intuitive observations.. The blogger wrote that, in the US, people are getting married than before and, therefore, are having children at an older age compared to their parents and grandparents. This trend, by the way, is being seen in India also.
This blogger suggested young people to get married earlier and have children at a younger age; otherwise they may end up compromising on their retirement planning. In my opinion, people should get married when they want to and have children when they decide. Happiness and personal fulfilment should be the main purpose of life; not a large retirement nest egg, if it comes at the cost of happiness.
If your children’s higher education and marriage is too close to your retirement, managing multiple financial planning priorities becomes a difficult balancing act, unless you have saved enough at a younger age to meet both your children’s and your retirement goals. Given the high rate of inflation in education, Your child’s higher education and wedding expenses can easily add up to be 10 years of your savings.
Therefore, it is imperative that you start saving and investing for your child’s future early in your career. If for whatever reason, you have not been able to save for your children’s education and marriage, you must start planning for these important objectives when you are in your early 40s. How much you have to save and where to invest, will depend on your personal situation, including the age of your children, your family’s aspirations, your assets and liabilities, your income and savings etc. If required, you should consult, with a financial planner and build a suitable financial action plan.

Invest in Retirement Planning

Many of us, in India, do not pay sufficient attention to retirement planning until it is too late. It is typical human nature, to pay much more attention to short term needs, at the cost of long term needs. What is more disturbing to me is the fact that, we prioritize relatively trivial short term needs over long term needs. We often take retirement planning for granted, even in our 40s, because we hope that we will have our jobs forever. But the reality is that, corporate careers are getting increasingly shorter because changing market and technology dynamics, calls for new skills which older (relatively speaking) people can struggle with. Finding a new career opportunity suited to your career aspirations becomes exponentially more difficult as you age. People in their 40s should realize this and prepare themselves financially for such an eventuality. Even if you are able to work till the age of 60, retirement planning is not a walk in the park, for the simple reason that, we work for about 40 years, earn money, save a portion of it, and then live on those savings for the next 30 years after we retire 
The earlier you start planning for your retirement, the easier your task is. The later you start the more challenging the task becomes. If for whatever reason, you have not been able to save and invest for your retirement, and even if you were, you were not able to accumulate a sufficiently large nest egg by the time you are in your 40s, this is time when you must have a retirement plan in place.
You need to have a clear vision of what your retired life will look like. As we go through various stages of life, the goal post of retirement planning may keep shifting. By the time you are in 40s, you have more clarity about your long term aspirations, than when you were in your 20s or 30s. The important questions to ask at this stage are, what your lifestyle related expenses are, how much income you need to sustain your inflation adjusted lifestyle expenses, where will you want to settle after your retirement, will you continue to live in your current home or shift to a different house, will you like to start a business after retirement, will you like to retire early, so on and so forth. You then need to develop a suitable retirement plan or refine your retirement plan, if you have one in the first place, and start executing on it.
Conclusion
The early 40s is a very important stage of our lives, both from a personal and professional perspective. This period in life, for many of us, can be described as the prime of our working careers. This stage of life is also extremely important from a financial planning perspective. In our early 40s, we have more visibility into our longer term aspirations and challenges that we have had before in our lives. In this post, we discussed 6 important financial planning to-dos that we must review and ensure that we are on track to achieve success in our long term financial goals.