Balancing Wealth Creation and Wealth Protection Across Life Stages
Key Takeaways:
1. Wealth creation and wealth protection is a balancing act. One requires us to take risks, while the other requires us to be prudent.
2. We should look at our income, dependents, insurance against unexpected events, budgeting, and investing at different stages of life to balance wealth creation and protection.
3. During transitions between important life stages, be wary of any kind of market volatility that will impair decision-making.
Your financial needs will change as you go through life. As you start out in your career, you may think about paying off student loans, or buying a house. Once you enter your thirties, priorities may shift as you take on the role of a parent while growing your career. These priorities morph again in retirement. This time, the focus is on generating retirement income, covering your healthcare costs, and leaving a legacy for your loved ones.
Between every transition and at every stage, there needs to be a careful balance between wealth creation and wealth protection.
Given the changes we endure through life, adjusting a financial plan to suit your circumstances are essential to achieving long term financial goals. For example, tempering your investment risks as you approach retirement may be prudent to avoid jeopardising your hard-earned capital. In contrast, choosing not to invest in the market when you had the risk tolerance during your peak earning years may have been a forgone opportunity to maximise capital gains.
In this article we outline major financial milestones, and corresponding wealth creation and protection strategies.
What is the Difference Between Wealth Creation and Wealth Protection?
Wealth creation may be defined as the increase in one's net worth from generating a higher income, investment returns, or capital appreciation. It may involve the pursuit of higher returns, often through riskier investments. Wealth growing strategies include starting a side business, investing in the markets, or simply focusing on career development.
On the other hand, wealth protection focuses on preserving and protecting the assets you have accumulated. This is especially important in your retirement years. Some examples of wealth protection include diversifying your investments, managing risk, as well as having adequate insurance.
With this distinction in mind, let’s walk through some life stages and examples.
Starting Your Career
Some of the greatest benefits in your youth are fewer responsibilities and the freedom to pursue a variety of opportunities. At the same time, younger people enjoy longer time horizons than someone nearing retirement. Hence, it would be wise to focus on wealth creation as an early jobber.
Wealth Creation for The Young
Drawing a regular income is just the beginning of wealth creation. To grow your wealth, there are intermediate steps that can be taken.
The most rudimentary step would be learning how to budget, save and invest consistently.
Once a regular cadence is developed, hasten your progress in wealth creation by staying abreast of the opportunities available in the financial and job markets. Seizing opportunities in your prime years can help you accelerate financial success. Networking, upskilling or even developing an astuteness of market movements could help you catch your big break.
However, to even begin saving and investing effectively, it is imperative to quickly pay back any student loans you may have.
Wealth Protection for the Young
From a wealth protection perspective, it is not too early to begin protecting yourself with suitable insurance policies. At this stage, medical and health insurance gives you basic coverage. You may also consider replacing the health insurance provided by your parents during your childhood.
Similar to the levels of progress you can make in wealth creation, there are ways to increase your coverage. Purchasing life insurance is worth considering. Although colloquially regarded as something you don’t need until you have dependents, the cost of life insurance is significantly lower at this stage. This is because there is a very low probability of an unexpected death.
Embracing All of Adulthood
There comes a time when there is no shadow of doubt that you’ve outgrown adolescence.
Carefree days have been traded for more responsibilities in your personal life. Traditional markers of responsibilities in adulthood such as marriage, childrearing and homeownership, might ring true for you. As an adult with competing interests and responsibilities, balancing between wealth creation and protection is a delicate act.
Wealth Creation in Adulthood
For many, the saving, investing and budgeting skills developed as a youth will be a key determinant of future financial success. However, wealth creation opportunities might be limited given newfound long-term responsibilities and corresponding risk tolerance.
If you had started investing early in a sufficiently diversified portfolio, relatively greater portfolio resiliency is assumed in the face of possible market and economic fluctuations. The compounding effect across the years could be substantial, and this is an opportunity for wealth creation.
For a diversified portfolio to spread your risk, you might invest in a mix of stocks, bonds, and real estate to reduce the risk of losing all your money if one particular asset class performs poorly. You might also place a much larger allocation towards bonds or sovereign yields to spread your risks further.
Wealth Protection in Adulthood
Insurance has never been more important. Although medical insurance is reasonably affordable and offers a baseline of protection, many underestimate the impact of losing income and sluggish career growth due to a severe illness. Life insurance, critical illness insurance, and personal accident insurance should be carefully considered and budgeted for both you and your dependents.
Another area of protection during this stage is setting up an education fund for your children such as a low-risk investment portfolio. This is in addition to your main investing portfolio. A low-risk portfolio is generally considered safer and more reliable than a high risk portfolio. By doing so, it automatically sets the “budget” for the total investment risk you can take.
Retirement
If you plan to retire at a certain date, you need to begin transitioning from wealth creation to wealth protection as you age. Remember that market volatility may affect your wealth goals during this transitionary period.
Wealth Creation at Retirement
Assuming you have been investing in a mid-risk portfolio during your peak income years and want to convert it into a low-risk portfolio, you most likely would not want to coincide this move with any financial crisis. As the saying goes, “Time in the market beats timing in the market.”
Wealth Protection at Retirement
Here, opportunities include leaving a legacy for your children and descendants. You may also consider setting up long-term funds that could help your family after you have passed away.
Lastly, in terms of protection, you should set aside enough for your rising healthcare costs. An area of protection that is usually underestimated is the cost of long-term care, such as a nursing home or assisted living. Do not lapse on all the protection policies you have purchased to date, and speak to your insurance provider to make sure all your policies are intact.
Wealth creation and protection is a balancing act that requires careful planning. Speak to a Citi Relationship Manager or Insurance Specialist to explore your options.
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