By Bhuvanaa Shreeram
Last week, Mr Rao, a long-standing client of six years, made a surprising call. He expressed his desire to redeem all his investments and switch to debt, citing his upcoming retirement in three months as the reason. Over the years, Mr Rao had been a diligent investor. He increased his systematic investment plans (SIPs) whenever his equated monthly instalments (EMIs) ended, his income rose, or when he finished funding his children’s education. Thanks to his disciplined approach and favourable market conditions, his portfolio had grown significantly. Yet, his recent observation brought a critical aspect of wealth management to light.
He explained, “I’m going to retire soon. Every penny is going to matter. In the early days, market fluctuations were small—just a few thousand, then a few lakh rupees. Now, every movement swings my net worth by tens of lakhs. In the last two months alone, I’ve seen a decline of Rs 25-30 lakh. It’s all getting out of hand, and I am worried.”
This conversation perfectly illustrates the complexities of managing wealth through different life stages, especially as one approaches retirement. It highlights the need for a shift in mindset as financial stakes and personal circumstances evolve.
Four Stages Of Wealth Building And Management
The Beginner Stage: At this stage, building a solid foundation and cultivating investment habits is the key focus. The skillset required is budgeting and creating a sufficient surplus to be able to invest regularly. The mindset required is that of patience and consistency. The focus is not so much on the returns earned, but more on establishing disciplined investment behaviours.
The challenges most new investors face are to stick to the budget. Market volatility might also be difficult to understand and digest. But with one or two cycles, most investors become comfortable with seeing portfolio values fluctuate without panicking.
Accumulation (2-5x Annual Income): At this stage, growing optimally is the focus. The skillset required is about asset allocation and diversification to reduce risks and understand newer investment avenues.
With better acceptance of risk and better confidence on managing the same, investors can explore new products and investment options to improve returns.
Sometimes, this new confidence encourages undue risk-taking. It is critical to have an investment plan that is aligned to one’s life goals and objectives so that one can adopt a balanced and thoughtful approach.
Wealth Maturation (Beyond 5x - 10x Annual Income): At this stage, the focus is on managing and maintaining larger amounts of wealth. The skillset required is for better risk management systems, consolidation, and simplification.
Reducing costs, tax implications, and optimising the risk-adjusted performance of the portfolio becomes important. The skillset required will be the ability to lay down and follow processes, be agile to changing trends and market conditions, and start looking at movement in terms of percentages and not absolute values.
The mindset required will be emotional discipline. Investors must avoid the temptation to micro-manage or react to every market dip or gain. Significant wealth creates higher emotional stakes, making it tempting to react hastily to protect gains or prevent losses.
Freedom (Beyond 10x Annual Income): At this stage, the focus shifts to using wealth effectively to enrich personal life experiences. The skillset required includes creating spending plans aimed at maximising personal fulfilment and enjoyment. Cost management and financial efficiency become crucial to ensure that expenditures align with long-term satisfaction and legacy goals.
One should have skills to use financial resources optimally to enhance one’s life quality without compromising on financial security. The required mindset is the ability to let go. Even affluent retirees find it difficult to shift from a savings-focused mindset to one that comfortably spends and enjoys their wealth. There is often a deep-rooted fear of depleting resources, which can hinder the enjoyment of accumulated assets.
Final Thoughts
The mindset that serves investors well during the accumulation phase may not be suitable as they transition into retirement. This shift requires not only a financial adjustment, but also a psychological one – recognising that the purpose of wealth changes over time.
Retirement planning is not just about reaching a financial goal, but also about preparing for the emotional and psychological changes that come with it. Proper planning and a flexible mindset ensures that retirees like Mr Rao can move into this new phase of life confidently, enjoying the wealth they have worked so hard to build.
The author is a certified financial planner and co-founder and head of financial planning, House of Alpha Investment Advisors Private Limited
(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)
