Money In Your 40's: It's A Marathon, Not A Sprint
Continue The Good Work You Started In Your 20's and 30's
Just like your 30's, there’s never a bad time to sit down and map out a simple plan or strategy to accomplish and identify your financial goals. Your simple 30's plan focused on retirement, education for the kids, funds for a business, and your tolerance for investment risk. This same planning should take place every decade.
Simple 40’s Plan
It's time to put together your simple 40's plan. The theme for this decade is to remember it’s a marathon, not a sprint. You’ll want to continue to build on all the work you put into your financial planning in your 20’s and 30's. Be sure to include the following seven areas in your plan:
1. Continue everything. By now, your 401K or 403B should be cooking, and your IRAs should be set up and added to each and every month. If you have recently had children and still haven’t set up college savings accounts like the 529 plan or educational savings plan, there’s no time like the present. Continue discussions with your spouse about your individual goals, who’s working full or part-time, and what your goals are together.
2. Cash is king. Cash here refers to cash reserves, emergency cash, and short term cash. Six to twelve months of money market funds, CDs, and short term bonds won’t make you rich on paper but will provide you the peace of mind, liquidity, and flexibility that will make you feel rich. This cash backstop will provide you career flexibility, allow you to take advantages of short or intermediate term career opportunities such as earning a master’s degree (yes even in your 40s) or being able to start or join a new business venture. Cash equals flexibility, and the peace of mind that goes along with that is priceless.
3. Career. Continue to look at your career as you would a stock or a bond. One path could be highly risky with high rewards. The other; safer, more predictable, and more stable. This should affect how you approach your investments. Make your investment risk the opposite of your career risk. Big earning, hit or miss type careers like commercial real estate warrant very conservative investments. Middle school teachers or nurses should look at their job and paycheck as safe and steady, increasing the amount of risk they can take in their investment portfolio.
4. Income. Now that you're in your 40's, your career path and direction is well formulated whether you like it or not. It doesn’t mean that you can’t change the direction for the positive, but you should have a very good idea of what you and your spouse will be earning from year to year. This is also a time to have continued discussions with your spouse about who is most comfortable working full or part time.
5. Autopilot. By now, the autopilot button should be fully engaged in the “accumulation phase – part II," as part I began in your 30’s. Right now, you still don’t need to worry about the distribution phase, as that will come later in life once your nest egg is built. Continue saving 10% of your gross income as a minimum goal, but saving 15% or even 20% would really make this decade work for you. Remember, the earlier you get started the longer funds will have to compound. Here’s the order:
*401k (up to the match)
*ROTH or Traditional IRA maximum
*401k (up to the maximum if possible)
*After tax accounts
6. 4 Keys: Diversify, allocate assets, and keep fees and taxes low. The easy answer here is Exchange Traded Funds (ETFs). ETFs are an investment vehicle that can accomplish all 3 of these goals. Some examples (please note these are not recommendations) are:
*U.S.: Vanguard’s Total Market Index VTI.
*Internationally: iShares MSCI EAFA (EFA).
*Fixed Income: Vanguard’s Total Bond Index BND iShares Investment Grade Bond ETF (LQD).
*For true inflation hedges: The iShare TIP (inflation protected treasuries) and GOLD which can be accessed through the SPDR ETF symbol GLD.
7. Seek help. Now would be a good time to engage a fee-only, certified financial planning professional. Fee-only advisors should be product agnostic and completely objective in helping you choose the best vehicles and strategies to accomplish your goals. Working with a CFP® professional will again increase the odds that you are working with someone who subscribes to the investment industry’s highest code of business ethics, conduct, and education. Your CFP® practitioner should be able to quarterback your investment and risk tolerance needs, as well as partnering you with the right tax professional (CPA), estate planning attorney for your wills and trusts, and an insurance professional that will help you with life and disability insurance.