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Age Has No Relevance in Your Financial Planning

You will often come across articles, opinions and columns, advising you to choose your asset-allocation and investments, based on your age.

Beware! This simplified approach, without considering your specific financial profile, is fraught with immense danger.

Let's take one of the most common advise:

It is often suggested that your investment in equity should be 100 minus your age. So if you are 25, you should invest around 75% (= 100-25) of your savings into equity (either directly, or indirectly through mutual funds and ULIPs).

However, I have come across many young investors in the 22-27 years age group, who need to buy a house in next few years before their marriage.

They can't continue staying in a paying guest or shared accommodation. Even if they are staying alone in a rented property, it is better to switch to own house as soon as feasible. Paying EMI makes lot more financial sense than paying rent.

Thus, many young investors would require a large sum of money in next few years, for the down-payment. Given that the investment time-frame is short, clearly investing a large chunk of one's surplus money in equity is definitely NOT ADVISABLE. Instead, they would be better off investing say only around 20-25% in equity and balance 75-80% in debt.

This is one very common instance, where investing as per your age, could prove to be problematic. If the equity markets have been bearish during these 2-4 years, you may either have to sell your equity investments at a loss, or defer your house purchase.

age-and-your-financial-plan
Blindly using your age as an investment criteria, could put you into a financial soup.

Another common advise is to minimize your equity exposure after 50-55, as you approach your retirement.

However, I know of many investors who have not been prudent with their savings in their earlier years. They have nil or very little corpus available for their retirement. Believe me, a fairly large number of people fall under this 'careless and negligent' category. As such, they have a mere 5 to 10 years to invest their surplus money, to build a reasonable and useful retirement corpus. 

If they take the conservative approach with a predominantly debt-oriented portfolio, they will surely end up with insufficient corpus for their retirement. Given the long years and deadly inflation, it is 100% certain that this nominal corpus would soon be gone. And, they would suffer severe financial constraints in the last years of their lives.

Therefore, despite their late age, they must take a calculated risk with higher allocation to equity. If they are prudent and disciplined, they can expect to build a reasonable corpus. This higher risk is definitely a lot better choice than 100% certainty of no-money-in-later-years by being conservative. At least, there are reasonable chances of making the best of the limited time available.

Yet another common advice is to be free of "all" debt before you retire.

Important! But not always true:

From the tax planning perspective, it is good to have an investment property (caution: not your permanent residence) financed through a loan.

Such loans may be good even during retirement (provided, of course, you find a banker willing to lend you; many banks don't like to take retired or close-to-retirement persons as borrowers).

I have covered this in detail in my blog posts 
- Save Huge Taxes. Make Huge Money. At (Possibly) Zero Risk.
- Brilliant Tax Planning With House Property Income

These quite common instances go to prove that, 'blindly' taking your age as the investment criteria could put you into a deep financial soup.

Instead, what is required is a "wholistic" and "individualistic" approach. In other words, you have to look at YOURSELF and in TOTALITY, before you make your investment choice(s).

Thumb rules and general purpose advice are, normally not the right strategy to manage your money profitably.

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