Middle Earning Years

This is the stage where retirement planning is either rescued or lost.

Income is at its peak and it is stable. Expenses have stopped climbing. Debt is steady and easy to service out of what comes in. For the first time there is real money left over at the end of the month.

The workbook is direct about what to do with it. This stage is a good time to catch up on all the shortfall in retirement savings by putting a larger share of available savings into it.

Two other things are true at once. Some goals are now close — a child's education — and money for those has to move into less volatile investments. Retirement, by contrast, may still be 15 to 20 years away, so it is still eligible for growth-oriented investments.

The portfolio guideline for the stage is 50 percent to 60 percent in growth assets, with a plan to reduce that as goals come closer.

The financial shape of the stage. Section 3.1.1 describes it as typically the peak earning years, with income levels high and stable, expenses likely to have stabilised leading to higher savings, and debt levels steady and easily serviced.

The two horizons, handled differently.

The allocation. Portfolios at this stage can hold 50 percent to 60 percent in growth assets, with a plan to systematically reduce exposure as goals come closer. Set that against the neighbouring stages and the glide is visible:

The non-financial advantage. The workbook notes something the allocation table cannot show: at this stage there is greater clarity on lifestyle preferences, interests and health issues, all of which matter for firming up the retirement plan. This is the stage at which a thumb-rule estimate of retirement needs can start being replaced by a real one.

The warning behind the catch-up instruction. Chapter 1 explains why the catch-up is needed at all: expenses and needs rise faster than income for much of the early and middle earning years, leaving very little for saving, and leaving savings for later in life when income is high may lead to goals being underfunded.

Mr and Mrs Ghosh are both 44. Their combined annual income has reached Rs 34,00,000, their home loan EMI is comfortable, and their household expenses have levelled off at about Rs 15,00,000 a year. They can now save around Rs 9,00,000 a year.

Two goals, two different treatments.

Daughter's college, 3 years away, needs Rs 24,00,000. Close goal. They move the Rs 18,00,000 already earmarked for it out of equity funds and into short-term debt funds and deposits, and add to it from current savings. Volatility here is not a risk they can afford to run.

Retirement, 16 years away. Still a long horizon, so it stays in growth assets. Their existing retirement portfolio of Rs 62,00,000 is split as follows.

Fifty-five percent sits inside the workbook's 50 to 60 percent guideline for this stage. Note that it is lower than the 60 to 70 percent the same workbook recommended to them ten years earlier in the Young Family stage — the glide down has begun, not because they have less appetite for risk but because the goals are nearer.

The catch-up. A review shows their retirement corpus is tracking about Rs 40,00,000 short of target. This is precisely the stage the workbook says to fix it in: they raise the retirement share of their annual saving from Rs 3,00,000 to Rs 6,00,000, which the settled expenses now permit. Sixteen years of compounding still lies ahead of that money. Left to the pre-retirement stage, the same shortfall would have to be closed with far larger sums over far fewer years — and out of a portfolio that by then should be 60 to 70 percent in lower-risk products.

Chapter 3, section 3.1.1 (Lifecycles and its Impact on Saving and Investing for Retirement), gives the five stages in order, and the Middle Earning Years is the third. Every stage carries its own allocation range, which is what makes this section so easy to set questions on.

Expect a which stage question from a description (peak income, stable expenses, retirement 15 to 20 years away), the 50 percent to 60 percent growth-asset figure asked directly, and the catch-up point — this is the stage the workbook names for making up a retirement shortfall. The workbook's own sample question at the end of the chapter asks at which stage growth assets should be reduced, and the answer is the pre-retirement stage, not this one.

• 50 to 60 percent here; 60 to 70 percent at the Young Family stage. The allocation goes down as the investor gets older, so the larger number belongs to the earlier stage. This inversion catches people out.
• Reduce growth assets at the pre-retirement stage, not at this one. The workbook's sample question tests exactly this. At the Middle Earning Years the instruction is to hold 50 to 60 percent growth and plan to reduce it later.
• Two horizons coexist. Near goals move to less volatile investments while retirement stays in growth assets. Moving the whole portfolio because one goal is close is the error.
• This is the catch-up stage. High and stable income plus settled expenses is the window for closing a retirement shortfall — the workbook says so, and it is the practical answer to a case-study question.
• Peak income does not mean the goal is safe. Chapter 1 warns that deferring savings to the high-income years is itself a cause of underfunding.
• Retirement is 15 to 20 years away at this stage, not 25 to 30 — that figure belongs to the start of the working life.