earning: One size doesn’t fit all: 10 reasons why managing finances vary for those earning and those retired

A reader asked an interesting question: Aren’t personal finance principles universal? My father and I have arguments over our money decisions. That’s to be expected. So much has been already written about how one’s life stage influences one’s personal financial decisions. Can you compare and contrast the earning stage with the retirement stage, he asked. This column is another attempt.

First, risks to income in the earning phase come from the human asset. In retirement, risks to income come from the financial and physical assets. The primary source of income is the profession, job, or business when one is young. The skills one brings to the task, and the demand for those skills in the marketplace determine how well a human asset can perform and earn a stable, sufficient and sustained income.

In retirement, the income is generated from pensions, or from assets or investments. While most argue that not having a job is risky, in reality, control over income is better in retirement. Pension does not get impacted by performance appraisal, nor is it at risk from losing a job. It remains as long as one is alive. Returns from investment are subject to risk, but a large enough corpus and a sensible asset allocation can fix that problem satisfactorily.

Second, the adequacy of income and its ability to fight inflation are very different though. Pensions may not be sufficient. Their indexation to inflation may not be adequate. Even with a smart asset allocation and investment management, an insufficient corpus cannot offer an adequate and steady income. Retirement is constrained by the ability to flex and modify income levels. The earning phase enjoys tremendous facility to enhance income from new skills, new ventures, improved job markets, multiple sources of earning through moonlighting, and the ability to climb the career ladder.

Third, the presence of a potentially increasing income stream offers better cushioning in the earning years in making portfolio construction and rebalancing decisions. For example, if adequate income is available and some savings are possible every month, an earning member’s portfolio can be overweight equity. A retired person’s portfolio cannot overdo equity for two reasons: it needs to generate income and it has to hedge any serious fall in equity assets.

Fourth, the earning person’s portfolio is more capable of making tactical portfolio reviews and changes. A retired person’s portfolio needs to be more strategically managed. For example, we speak of taking advantage of a falling or fallen market, to enter into new long positions. Someone with a steady salary and investible surplus is always in a position to deploy funds into a bear market. A retired person will not have this tactical advantage, as they may have no liquid funds when an opportunity presents itself.

Fifth, a retired person’s portfolio will have to be strategically constructed and does not benefit from accretions. The value of the portfolio is closely linked to market performance. A bold equity allocation at the start can suffer a serious dent if the markets crashed thereafter. An earning member’s portfolio enjoys accretions from regular surpluses coming from growth in income over the years. Many have seen their saving ratios advance significantly as they earn better with the years. They may be able to spend and save more. A retired investor’s portfolio accretions are purely from returns from their assets, not contributions of surpluses.

Sixth, a retired person’s portfolio may be tuned to realised gains and reallocations, while an earning person’s portfolio might be focussed on allowing unrealised gains to run. Laddering and rebalancing are precious strategies for the retired. Booking profits out of growth assets and moving them to the income portfolio is often done to keep incomes strong and to prune equity allocations from going too high. They however end up getting out of winning assets prematurely. Since the earning member’s portfolio has no income requirement, they can allow profits to run and focus on cutting losses when they occur.

Seventh, an earning member is able to use leverage to enhance their gains and to fund their income needs without liquidating the portfolio. They can borrow against their assets, using their incomes to repay these loans while protecting their assets. A retired person’s ability to borrow and service loans is limited. Both by a limited and investment dependent income stream. A retired person with an income surplus might be conservative in their spending habits, or investment allocation, or both. They may therefore be reluctant to borrow, even if they actually can.

Eighth, an earning member’s portfolio benefits from being oriented towards defined financial goals. The run rate of the portfolio, or the required rate of return, is defined by the funding required for the financial goal. The saving and investment are tuned to that calculation. A retired investor enjoys the luxury of not having to worry about funding financial goals. The corpus that gets left behind for heirs can be treated as residual after their needs are met.

Ninth, a retired person needs no life insurance, though the health insurance needs may be high and expensive. A young earning investor needs life insurance first, before building assets. Health insurance may be provided by the employer or may be available at better rates. A retired person is able to use their assets if an emergency arises; a young earning investor may not have built adequate assets yet. Insurance is the protection until then.

Tenth, an earning investor may be keen on acquiring assets and building wealth, skewing their portfolio while trying to do so. Someone buying a house early in their career, will most likely have all their wealth in one property. The retired investor should ideally have a balanced mix of assets—equity, debt and property. If their portfolio is also skewed, it may become a constraint in generating income and protecting from inflation.

Much of these contrasts are well known. This listing is to contrast how the fundamental principles with respect to risk, return, income, growth, borrowing, surplus, strategic and tactical asset allocation are very different for those earning an income and those who may have retired. These differences drive how portfolios will be constructed, reviewed and rebalanced. In personal finance, there is truly no generalising; every person may have their unique objectives and constraints.


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