Making the correct financial decisions in your 40s can have important ramifications on the success of your long-term and retirement plans. For many in their 40s, the challenges of starting a family and embarking on a career are things of the past, leaving them feeling like there are not many near-term milestones to shoot for.
However, during this “wedge” age, investors have rising incomes and one of their biggest opportunities to take steps towards securing their long term goals. As you navigate through your work towards your peak earning years, there are four important tips that can help you build a strong financial foundation and make important strides towards a dream retirement.
Tip #1: Get Rid of All Your “Bad Debt”
“If we command our wealth, we shall be rich and free. If our wealth commands us, we are poor indeed.” – Edmund Burke
While not all forms of debt are bad, there are certainly types of debt that can serve as a challenging impediment to your long-term financial health. For example, credit cards often carry interest rates of nearly 20%.
Regardless of the reasons you may have accumulated credit card debt, it is important to get those balances paid off as quickly as possible before you can begin making substantive investments towards your long-term goals. Otherwise, the high rates of interest on your credit card balances will likely outpace any returns you can reasonably expect from your investments. By making payments above the minimum amount required and getting rid of those monthly obligations quickly, you can help free up cash that can then be directed to your long-term savings.
If paying off your debt all at once isn’t a viable option, the next best option is to consolidate your debt. This will help make your monthly payments straightforward and you can potentially refinance into options that may offer lower interest rates. Some credit cards offer zero-interest balance transfer deals for a period of months or years. This can be a helpful way to aggressively pay down your debt while not accruing interest, but make sure you have a plan to get it paid off before the promotional deal ends and the interest rate spikes. Student loans are often a good prospect for refinancing as well, as new private lenders in the space have helped make rates more competitive.
Tip #2: Maximize Your Savings
“Wealth is the ability to fully experience life.” – Henry David Thoreau
Once you have your debt situation under control, take full advantage of the different tax-friendly retirement accounts that may be available to you. Depending in part on your income level, you should have the opportunity to invest in some or all of the following types of accounts: Roth IRA, Traditional IRA, or 401(k) (or any other employer-sponsored accounts). Contributing the maximum amount into of these accounts will allow you to save $19k in an employer retirement plan and $6k in an IRA, both of which can offer deferral or elimination of taxes.
Earlier in your career it may have been challenging to contribute the maximum amount. However, as your income grows throughout your 40s be sure to also increase your contributions so you can get the full benefit.
It is also important to save money outside of these types of retirement accounts. This will help you maintain flexibility with your money in case you happen to need it in an emergency. Retirement accounts do provide important tax benefits, but pulling money out prior to turning 59 ½ years old may incur a penalty and forfeit that benefit all together.
Tip #3: Stay Invested and Diversify
“Know what you own, and know why you own it.” – Peter Lynch
While in your 40s, the prospects of retirement may seem to be closing in, causing individuals to become more conservative in their investment approach. In reality, the beginning of your retirement is likely still 15-20 years away and the average life expectancy suggests you’re likely to live an additional 40 years.
That is a long time!
Resist the temptation to drastically scale back your exposure to stocks in lieu of more stable investments. Also, when downturns in the market do occur, stay invested according to your long-term plan. Making emotional decisions during periods of volatility can lead you to buy-high and sell-low. That’s the opposite of what you should do.
Investments in stocks offer higher long-term expected returns than bonds and will play an important part in helping you reach your retirement goals. Maintaining a portfolio that is diversified between stocks, bonds, and other investments will help to reduce the level of risk that your portfolio is exposed to while still participating in the market. Within stocks and bonds you should consider diversifying even more by investing in companies of varying sizes and geographies. Make sure that you are working with a trusted advisor who can help you determine the proper investment mix depending on your financial goals.
Tip #4: Maintain Appropriate Insurance
“There are risks and costs to a program of action. But they are far less than the long-range risks and costs of comfortable inaction.” –John F. Kennedy
Insurance is often a subject that gets overlooked because people tend to focus mainly on savings and investments. However, being properly covered by insurance has the possibility of saving your long-term goals if something unexpected were to happen. If you have children, make sure that you are protected by enough life insurance to ensure your spouse and family can continue to live comfortable lives if you were to pass away.
While In your 40s, your most valuable asset is your career and your ability to earn money and make a living. Disability insurance can help you stay on track to meet your financial goals by paying a portion of your salary should injury or illness prevented your from working for an extended period of time. With the rising cost of healthcare, long term care insurance can also help protect your financial assets throughout retirement. While these policies can be quite expensive, it can be beneficial to begin thinking about these things while you are still young and healthy, which may help reduce the total cost.
If you’d like guidance building your financial foundation, schedule a consultation today.
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Prior to implementing any investment strategy referenced in this article, either directly or indirectly, please discuss with your investment advisor to determine its applicability. Any corresponding discussion with a Bedel Financial Consulting, Inc. associate pertaining to this article does not serve as personalized investment advice and should not be considered as such.
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