In client conversations, one question that crops up often is – “I feel my job can be replaced by AI any time. How should I prepare my finances for this?”
This query comes mainly from tech employees and spans all age groups. The solutions clients come up with, are drastic. “Should i liquidate all my equities and move to cash?” Or “Shall I park Rs 50 lakh in bank FDs as emergency money?”
In our view, it is important not to go overboard planning for an AI apocalypse. Today we are in the early stages of enterprise AI adoption. It is quite hard to predict the extent to which enterprises will adopt AI, whether it will be cost-effective to do so (if tokens are no longer subsidized), whether there will regulatory pushback against AI cannibalizing jobs. The sectors, job roles or skillsets that will be disrupted by AI are unclear.
Given this backdrop, it does not make sense to take drastic portfolio actions that will disrupt your financial journey, in preparation for AI apocalypse. Here’s how you should think about preparing your finances for job losses due to AI.
Don’t overdo the emergency fund
A common piece of advice to address any kind of job risk is to have a sufficient emergency fund. But the definition of ‘sufficient’ is fluid. The standard advice a few years ago used to be to park 6 months’ worth of living expenses in an emergency fund. Now in light of AI disruption, the advice is to stretch that to 1 or 2 years’ worth of expenses.
But this advice neglects the fact that as investors, we don’t have unlimited savings. Parking money in an emergency fund entails an opportunity loss. Therefore, we need to weigh the mental comfort of having a large emergency fund against what it costs you in terms of returns.
Assuming your current monthly expenses are at Rs 1 lakh and you pencil in 6% annual inflation, you’ll have to put away about Rs 25 lakh as an emergency fund to meet two years’ expenses. Emergency money needs to be both liquid and safe, so your parking options are limited to bank FDs, liquid funds or money market funds.
These yield 6-7% returns and in the 20% tax slab, this means a post-tax return of 4.8%-5.6%. These returns won’t even keep up with inflation. Therefore, your Rs 25 lakh emergency fund will steadily lose value over time, making a negative contribution to your financial goals.
What’s worse, if you book profits on your equity portfolio to create this emergency fund, you’ll be interrupting your compounding and losing out on the 12-15% long-term returns that are possible from equities.
Therefore, an XL emergency fund can only be a solution if you’re swimming in money. If you are still in the accumulation phase of your life with unmet financial goals, it is better to stick with a 6-month or 9-month emergency fund.
Financial assets over property/gold
Many clients in their 40s or 50s have healthy assets built up over their working life. However, in case of a job loss, what will matter is how liquid those assets are. On the face of it, a net worth of Rs 5 crore or Rs 6 crore looks more than adequate to deal with career breaks.
But not if assets are held mainly in apartments, plots of land or physical gold and silver holdings. In times of crisis, it can be very difficult to find a counterparty to take high-value plots, property or gold off your hands. During Covid, there was a phase when the property markets went into deep-freeze in many localities, with zero transactions. Gold and silver at all times are very difficult to sell, without taking large haircuts on the price. It is financial assets like stocks or mutual funds that really bail you out in emergencies.
This makes it important to pay attention to liquidity when accumulating assets. When you take stock of the asset allocation in your portfolio, don’t just bucket your investments into equity, debt, real estate, commodities and so on. Categorize your net worth into liquid and illiquid assets. If your liquid net worth is low, add financial assets like stocks or mutual funds until they make up at least half of your overall net worth. Don’t count a self-occupied home as part of your net worth.
Think thrice about loans
EMIs, and loans of any kind, infinitely complicate a career break situation. Therefore, if you think your job is prone to AI disruption, think thrice before taking on large loans to buy property, plots or other illiquid assets. Generally, it is a good idea to postpone your property purchase until you have decided where to settle down and work. This is because rental yields in India work out to just 2-3% in major metros and cover less than a third of your EMI. Get into the habit of delayed gratification so that you can upgrade your lifestyle out of your savings, instead of running up credit card dues or taking on consumer loans.
Have a debt allocation
To fund your expenses in the event of job loss, you don’t have to rely only on a specially earmarked emergency fund. Your other debt investments – bonds, debt mutual funds and EPF (employees provident fund) or public provident fund (PPF) balances – can work just as well.
Debt instruments work better in the case of sudden withdrawals than equities. In the case of equity investments, if a stock market drop coincides with a job loss, you will be forced to withdraw from a depleted portfolio and suffer permanent loss of capital. This makes an asset-allocated portfolio essential. This may seem obvious. But given the very adverse debt taxation in India (where all interest and capital gains are taxed at the slab rate), we see many investors running 100% equity portfolios.
While choosing your debt investments, you can look for higher returns than available from vanilla bank FDs or liquid funds. You can go in for FDs with small finance banks or NBFCs, max out your PPF contribution, go in for debt mutual funds investing in high yield pockets like corporate bonds, NBFC bonds, SDLs etc. These can deliver returns of 7-8% which give you a fighting chance against inflation on a post-tax basis. However, do ensure that some form of liquidity is available on your debt investments, even if it entails a penalty on returns.
Have health/accident cover in place
If there’s one kind of emergency that can disrupt any financial plan, it is a medical emergency triggered by sickness or an accident. If such an event coincides with a job loss, your emergency funds can get quickly cleaned out. To guard against this, it is essential to have a generous health insurance cover outside of that provided by your employer. If you have dependents, ensure that you have individual health insurance covers for them too. Personal accident insurance covers come at pretty reasonable costs in the Indian context, so get one to cover against that contingency.
It all depends on your age!
Finally, how you prepare for AI-driven job loss also depends on the career stage and financial situation you are in. A young employee in her 20s or 30s may not have sufficient assets built up to tap into in the case of a career break. But then, she may be able to upskill and adapt more easily to the changing skill requirements and land a job pretty quickly after losing one. Such an employee may be able to tide over job loss with a 6-month or 9-month emergency fund.
Someone in their 40s may have reasonable liquid net worth built up when AI job loss hits. They may face a longer career break as finding consulting gigs or alternative employment may be tougher. In this case, tapping into their investment portfolio apart from emergency funds may be inevitable.
For someone in their 50s or later, AI-driven job losses may mean planning for early retirement. This could mean taking stock of their entire net worth, cashing in on less liquid assets, moving to financial assets, and putting a retirement withdrawal plan in place, a few years earlier than they expected.
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