Updated: Aug 15
Throughout the month of March I will be offering advice on investing and finances at various stages of your life and earnings years. Last week's article focused on 7 accounts to optimize your savings while this article focuses on those in their 40’s.
I remember feeling mature and accomplished when I turned 40. At the time, I was running the Treasury Operations for the University of Illinois System. This included UIUC, UIC, UIS and the University of Illinois Hospital & Health Sciences System. I was saving money aggressively in my 401a, 403b, and 457 plan. Further, I had just sold my real estate holdings and had some money to re-invest. That is how I wound up purchasing a home in Colorado. I’m a value investor when it comes to real estate, so we bought the house for about 50% of market value. The house had been squatted in for a period of months and it was in foreclosure. But this is a story for another day.
In any case, the aggressive savings during my 30’s and throughout my 40’s enabled me to build enough of a nest egg for retirement as well as a cash cushion to make Peak Wealth Planning my full time vocation. If you are in your 40’s, here are the four most important things I can share with you.
1. Save and Invest Aggressively and Regularly
You likely have increased income during your 40’s, so socking away as much cash as possible in savings and investment accounts gives you time for compounded returns. Hopefully you started in your 30’s and increased your monthly investing as your income grew. If you are saving in workplace retirement accounts, brokerage accounts, and IRA accounts, that is fantastic. If you have company stock grants or an ESOP that is certainly a bonus.
Ideally, in my view, if you have a high income that you want to replace during retirement, then you should be saving 20 to 25% of your income now. Why so high, when the guideline you often hear is 15%? Well, what if you get laid off and you need to look for work for a year? During that time you may need to spend some of your emergency savings. And, you will be skipping contributions while you are looking for work. Moreover, what if you learn you have a serious health condition at age 56 that will shorten your life expectancy? Perhaps you want to retire early and travel for 2-3 years with your spouse or partner. Having a little extra put away could make the difference between traveling to Asia for six months and staying put in the cornfields.
Pro Tip: If you have to choose between saving for retirement and funding your kid’s college with cash instead of loans, favor your retirement. You cannot make up for lost time, but your kids can work during college, borrow money, and they have a longer time horizon than you do.
2. Purchase Excess Insurance
Buy more term or permanent life insurance than you think you will need. This is true for the face amount and the number of years. Later in life you may need insurance to fund estate taxes (assuming you become wealthy) or you may need insurance to satisfy bank covenants on a real estate deal or business transaction. Insurance premiums are way more expensive if you take out a policy at 55 than at 40. Many policies that are permanent will allow you to reduce the face value at a later date. However, increasing the face value when you haven’t paid premiums for a long time can be quite expensive.
While you are at it, review your umbrella liability insurance each year to make sure in the event of a car accident or lawsuit, your growing nest egg is protected.
Make sure you have sufficient disability insurance to replace your income in the event of an accident or illness that leaves you unable to work. Ask your financial advisor whether you have sufficient long term care insurance to not drain your nest egg and destroy you or your spouse’s lifestyle during retirement.
3. Manage your debt load
Only take on debt for assets that appreciate in value, such as investing in a business or real estate. Keep in mind that your luxury home may be beautiful to live in, but if it is in a high property tax area, it may not appreciate much in value. Is your home really an appreciating asset? Or, should you consider a $600k home instead of a $1.5 million home and invest the other $900k over the next 20 years with the goal of turning that into $3 million.
Pro tip: Prepare a balance sheet each year as well as a household budget and review those with your spouse or partner each year. Trim expenses periodically that you no longer truly enjoy. Watching your wealth grow and tracking your progress can make it easier to make wise decisions.
4. Invest in Equities or Your Growing Business
By investing your time and energy in growing a business, you can often reap the benefits of steady income later in life as well as the satisfaction of serving your customers and community. If you are not inclined to be an entrepreneur, don’t sweat it. Work with your financial advisor to develop a long term asset allocation plan that meets your risk tolerance and time horizon. By saving regularly and enjoying compounded growth of equities over three decades, you can still grow wealthy and you won’t have to play IT guy on the weekends.
Bonus tip: Plan for higher taxes in the future. Check out our article on Roth conversions. Conversions are great for reducing taxes across your lifetime instead of merely focusing on lowering your taxes this year.
Are you comfortable with your progress towards retirement? How about helping future generations meet their financial goals? If you have a net worth over $2 million and need help from a wealth manager, the Peak Wealth Planning team can assist you.
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About the Author
Peter Newman is a Chartered Financial Advisor (CFA) and president of Peak Wealth Planning. He works with individuals nationwide that have accumulated wealth through company stock, ESOP shares, real estate, or running a business. Peter applies his unique background to help clients achieve their specific goals and enjoy peace of mind.
Peak Wealth Planning provides concierge services to meet your wealth management needs. Services include: financial planning, investment management, esop diversification, retirement income, insurance, and estate planning advice. Peak Wealth Planning is a fee-based financial advisor based in Champaign, Illinois, and Fraser, Colorado.