I'm in My 40s
Eyes on the Prize: Financial Planning in Your 40s
Most people in their 40s are near the peak of their professions and earning power. Unfortunately, most people in their 40s are also at the peak of life's major expenses: They're paying a mortgage, raising children, saving for college, and saving for retirement. If that weren't bad enough, these financial obligations also cause most people in their 40s to carry some amount of credit-card debt.
- Health and Lifestyle - If you're one of those 40-somethings simultaneously paying a mortgage, saving for college, and saving for retirement, be sure to give a very high priority to the latter. (Remember: There are no scholarships for retirement.)
As long as it's manageable, credit-card debt is not necessarily a problem. Be sure to stay current with your payments in order to keep your credit score in good shape.
In addition, there are some things that just make sense regardless of your age:
- Eat well, rest, and exercise.
- See a doctor regularly.
- Avoid debt.
- Create a budget and use it.
- Maintain an emergency fund of 3 months' household income.
- Planning Your Retirement - Hopefully, you've got a retirement plan in place by now. If so, be sure to validate its plausibility every year or so. Also be sure to check your asset allocation regularly: Is your current mix of stocks, bonds, and cash likely to get you to your goals? Is it too aggressive? Too conservative?
If you don't yet have a plan, now's the time to put one together.
At FSI, we feel that there are three basic questions to consider about retirement: What, when, and how:What will your retirement be like? What will you do with your newfound free time? Are your hobbies and interests expensive ones?
- When will you retire? You can start drawing Social Security anytime between age 62 and 70, but some people manage to start even earlier.
- How much will it cost?
- Saving for Your Retirement - When it comes to money, today's longer life expectancies are a mixed blessing: The longer we live, the more money we'll need.
Whatever your other goals, retirement must now be your top saving and investing priority.
The first step is to calculate what you already have. Take a look at your portfolio, at what's called the "asset allocation." The mix of stocks, bonds, and other investments should change over time, according to your circumstances, age, and risk tolerance.
- On the one hand, as you get older, your portfolio should typically become less risky: You should have less money in stocks and more in income-producing investments.
- On the other hand, your money needs to last at least as long as you do, so you should not let it become too conservative. You should consult with your qualified independent advisor about your asset allocation at least once a year.
Most people have two retirement-savings options: IRAs and employer-sponsored savings plans such as 401(k) plans and 403(b) accounts. If your employer offers a retirement savings plan, it should go without saying at this point that you should be participating in it, and you should be contributing at least enough to maximize the company's matching funds program. (After all, it's free money!) Of course, this depends upon the quality of your company's plan: Some have too many choices, some too few. Either way, a qualified independent advisor like FSI can help you sort through it all.
But don't stop there: If you can afford it (and by "afford" we mean it should hurt at least a little) contribute the maximum allowed by your company's plan.
If you're just getting started in your retirement saving, you may need to additionally consider opening a non-employer account, where you can save and invest in investments that don't create much taxable income. Be sure to contribute bonuses, tax refunds, or other unexpected windfalls straight into your retirement savings. Because you won't miss them, they're perfect candidates for investment.
If you change jobs, consider taking your 401(k) with you: Unless your old company had an exceptional set of investment options, you'll simplify your financial life by rolling it into an IRA. Regardless, don't withdraw the money: You'll probably pay both taxes and penalties, and you'll lose the momentum of your compounded growth.
- Estate Planning - Estate planning is not just for older folks, is not just for the wealthy, and involves more than simply giving away your stuff when you die. In fact, some of the most important components of estate planning come into play while you're still alive.
- a will
- a durable power of attorney, which gives a trusted person the power to make financial decisions on your behalf if you become unable to do so yourself
- a living will, which describes your wishes regarding lifesaving treatments in the case of serious illness or injury
We strongly recommend consulting with an attorney in developing these legal documents.
In all areas involving beneficiaries (e.g., retirement accounts, insurance policies, etc.) review and verify your beneficiaries annually.
Buy the appropriate insurance to protect your current and future wealth.
- Insurance - Make sure you have the right kinds and enough of it to protect your loved ones.
- Medical Insurance - These are the years when, in general, things begin to break down. Pulled muscles take longer to heal and bones break more easily. Dinner conversations with friends gradually turn from vacations and good movies to medications and good doctors. Be sure you're covered for the statistically likely chance that you will soon need medical attention of some kind.
And remember: Medical expenses can be enough to bankrupt anyone. Even being in perfect health doesn't protect you from accidents.
- Long-Term Care Insurance - Nearly one in three people will need long-term care in their lifetimes. This makes long-term care, of all the things that we routinely insure against, one of the greatest risks.
Consider insuring yourself in your 40s, while premiums are inexpensive.
Life Insurance - Some say that life insurance should more properly be called "income insurance": It will help your loved ones to pay the bills if you should die. With this in mind, consider your circumstances and ask yourself if it is necessary for you. (By the way: If you have a spouse and/or children who depend on your income, life insurance is pretty much non-negotiable.)
Disability Insurance - While you're still working, your earning power is among your greatest assets, and you'll want to protect it with disability insurance. Take advantage of your employer's plan; if your employer doesn't offer one, find an individual policy.
Homeowners and Liability Insurance - Throughout our lives, our homes are typically our largest asset. In retirement, a home can remain a cornerstone of your financial stability. So protect it now, with sufficient homeowner's insurance. In addition, make sure you have adequate liability insurance. Raise the liability limits on your homeowners and auto insurance policies to the maximum, and consider adding a personal liability policy (also called an umbrella policy). In general, maintain liability coverage equal to one to two times your net worth.