This happens in our Lives

Amar Pandit , CFA , CFP

In my last week’s Nano Learning, I made an observation that “What’s happening in their Lives?” is the most important thing for investors to focus on rather than obsessing about “What’s happening in the market?

The average Life expectancy of a person in India is around 70 years, however, we are all also witnessing people living beyond the age of 90. It is ironic to say this in COVID-19 times but the reality is that with the progress made in medical science, we will all see people living in their eighties, nineties and many will hit centuries as well. I see Longevity as something we need to prepare Society for and one of the key risks for retirees will be “Maintaining Lifestyle during their Retirement Years”.

Not just retirement, I am seeing business owners who are living in their late seventies / eighties but not giving up control of the business to their children leading to issues and conflicts in many families.

Thus, the question “What’s happening in my Life or What’s likely to happen” is paramount for every individual and family to prepare for.

Every individual has pretty straightforward goals that one has to plan and provide for. Our goals are Retirement, Children’s Marriage, Education, Home Purchase, Car Purchase, Vacation, Health, taking care of our loved ones and Giving. Beyond this we have several Life Transitions some of which are outlined below. All of us will not go through each life transition but we will surely go through some or many of them.

  1. Career Transitions: In the current scenario, many people have lost their jobs or have a reduced income. This is an example of a career transition that brings with its financial life implications. Similar is the case when you sell a business or make any significant changes in it. It is a source of emotional stress and comes with financial implications (positive as well as negative).
  2. Personal Transitions: Divorce is a key life transition and a period of emotional stress in the family. Needless to say, this also has major financial life implications. Similarly, death of a loved one is a life transition every person will experience at some point of time. One common transition many of you would have seen is when children are living abroad, and their parents are all alone. Many of these children have no clue about the details of their parent’s financial lives, its impact on their lives and, what will it take for them to manage this in the future.
  3. Health Transitions: An example of this is the critical illness of a loved one or taking care of special needs children/siblings. In case of special needs children, the life requirements are the subject of a book in itself but the financial life issues must be thought very carefully and wisely.
  4. Financial Transitions: This is typically when you receive a windfall or inheritance and there is a huge influx of money. Most people think that receiving loads of money instantly will solve all problems. I am not saying you should not receive it or that it is not important. Money surely is important but when you receive loads of it instantly, you will receive a lot of attention, you will feel that nothing is impossible and chances of making costly mistakes just shoot up. One such mistake is mental accounting. This is a classic behavioural finance mistake where you are willing to treat this money differently because of its source.

    An example of this was of a lady on a show, “Dus Ka Dum”. This lady, from a modest background, had won Rs. 10 Lakh, which is a substantial sum of money. The next correct answer could have got her Rs. 1 Crore or she would lose Rs. 9 lakh and take home Rs. 1 Lakh. Instead of walking away with Rs. 10 Lakh she bet on Rs. 1 Crore and lost Rs. 9 Lakh.

    Would that lady have bet Rs. 10 Lakh that she earned by working hard  on something as risky as this? Never ever, but the very fact that Rs. 10 Lakh was earned in not even 10 minutes and through a different source made her treat it differently.

    Similarly, many people would treat a windfall from parents or other sources differently than they would if the money had come from the fruits of their hard labour.

    Just because you have won a lottery, received a windfall or a gift does not mean that the money does not belong to you or that you need to treat it differently. Think of your money (all inflows and outflows) in terms of your balance sheet and not something that you bracket depending from where it has come from.

    According to CNBC, Lottery winners are more likely to declare bankruptcy within three to five years than the average American. I am sure the figures are no different here.

  5. Succession Transition: This is a big one for business owners and their children. This is a huge source of conflict and one of the biggest causes of destruction of businesses & families. I had written in my book about a family where the son had shot the father dead. There are thousands of such examples and even if they are not so extreme, succession issues cause real conflict if not handled well. This is again a very complex matter and deserves not just a column, but an entire book devoted to this subject.
  6. Other transitions include Mid Life, Emotional, Retirement, Succession, Black Swan Event Driven and so on. There are more than 60+ life transitions that have been researched and recorded.

During these life transitions, our judgements are likely to be clouded and thus we need wise counsel not just during these times, but our advisors must prepare us and help us navigate these financial life transitions successfully.

Thus, the role of an advisor is not what you really think – to choose tools for you. The role is to help you live the life you have imagined and to never ever worry about money.