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Life Cycle Stages

 

Life cycle stage helps to understand how investors need changes over different stages of his life. This affects the priorities of an investor, his risk taking abilities and his investment preferences.

 

The life cycle stages of an individual can be typically divided into the following:

1) Childhood Stage

2) Young Unmarried Stage

3) Young Married Stage: Both Partners earn

4) Young Married Stage: One Partner earn

5) Young Married with Children

6) Married with Older Children

7) Post-family / Pre-retirement Stage

8) Retirement Stage

 

1) Childhood Stage

 This is a period of dependency which lasts till the full time education finishes. Most of the basic requirements are fulfilled by parents or relatives. Here, the priority should be given to long term investment of money received in the form of pocket money or gifts at various occasions.

 2) Young Unmarried Stage

 In this period of life stage, the dependency might still be on the parents or relatives, to some extent. People in this stage would not be able to afford large amount to financial planning because of lower income, but they have more risk taking ability. They might not have any dependents and hence might not need insurance. The main need is to protect their earnings against any disability or long term sickness. It is suggested to invest for long term when adequate short term savings have been achieved.

 3) Young Married Stage: Both Partners earn

 Where both partners work, they have two incomes to meet the burden of their costs. The priority should be to secure income loss of any partner against any disability, unemployment or long term sickness. There is a dire need to take adequate life insurance so that in case of the unfortunate event of any partner’s death, that part of income may be replaced. It is also of immense importance to create an emergency fund before committing money to long term investments. Preference should be given to medium to long term investments. They have a sound risk taking ability.

 4) Young Married Stage: One Partner earn

 If only one of the two partners earns the family living, their financial planning priorities will be different as compared to a stage where both partners earn. The death of the bread earner would deprive the survivors of the family income. Therefore, there is need for life assurance on the earning member’s life. The sum assured should be sufficient to replace a large part the earnings, possibly for the rest of the survivors’ lives. Also, with only one working partner, a good amount of importance should be given to start for pension provision at an early stage. Medium to long term investments should be preferred. Their risk taking ability is lesser than a stage where both partners earn.

 

 5) Young Married with Children Stage

 

 The arrival of children very quickly changes the financial situation of any young couple. This is a critical stage as expenditure rises at a faster rate than income. This reduces the money available to be spent on financial planning, but the protection need of the family increases greatly. A substantial life assurance on the bread earner’s life becomes absolutely necessary. How much insurance cover is needed depends on the family’s standard of living and the age at which children are expected to complete their education. Once protection needs are taken care of, the family should now make provisions for investments. The most common are saving for children’s education and marriage. Financial planning needs are highest at this stage as this stage is ideal for disciplined spending and saving regularly. Medium to long term investments are recommended at this stage of life cycle.

 

 6) Married with Older Children

 

 By this life stage, the parents are in mid-career and their incomes would have usually increased. With improving finances, the family’s lifestyle will have improved. The financial planning priorities would now shift from protection needs to investment needs because of pension needs. The term to retirement is becoming shorter and pension provision to provide an income that will be sufficient to maintain the family’s standard of living, becomes absolutely crucial by this life stage. This is also a right time to plan for an appropriate medical insurance cover. Also, plans have to be made to repay loans, if any. Medium term investments with high liquidity needs and a portfolio of products including equity, debt and a major contribution to pension plans is suggested.

 7) Post-family / Pre-retirement Stage

 The children may have become financially independent by now and the need to protect them against the financial consequences of parental death almost disappears. The parents may have now reached the peak of their earning power. It is their last opportunity to ensure adequate income to maintain their standard of living after retirement. At this stage, most people start experiencing some form of sickness or the onset of a disease. Hence, this is the time when a medical insurance plan will become handy. Maximum investment should be done in pension products.

 8) Retirement Stage

 Most people would like to maintain the same standard of living after retirement as they did when they worked. It is a thumb rule that people need an annual retirement income equal to atleast 70% - 80% of the income they were receiving just before they retired. Unfortunately, very few people are able to achieve this target. Most are able to achieve only 20% or less of their pre-retirement earnings. After retirement, the value of these incomes is often further reduced by inflation. Therefore, there is a need to preserve the value of savings against inflation. If one wants his retirement years to be carefree, one needs to act as early as possible. The earlier one starts, the better are the chances of reaching one’s retirement goals.