In the first installment of this series, we gave you some pointers on investing in your 20s and 30s. In this next segment, we explore investment tips for your 40s and 50s.
Your 40s and 50s can be when you’ve hit the sweet point in your professional life – for most, you’re enjoying the groundwork you’ve laid in your early years. You may even be amid the busyness of juggling family life while continuing to make strides in your career, so you’ll want to make sure you’re saving for the long-term.
Modify Your Game Plan
While you have 20-plus years until retirement, the pressure is still on to make sure you’re on track. You’ll want to make adjustments to your game plan as necessary. “Small adjustments to your financial behavior such as spending and investing could have a significant impact, and will enable you to achieve your financial goals much faster,” explains Neal Frankle, CFP® and founder of Wealth Pilgrim.
For instance, if you find yourself with more cash due to, say, a work promotion or after paying off some high-interest debt, figure out how to best invest any freed-up cash. Making tweaks to your plan will help ensure you’re doing all you can to make your money work for you.
Revisit Your Vision of Retirement
There’s a good chance that your vision of a dream retirement has changed over the years. Based on your current income and how much you’ve managed to sock away for retirement, you’ll have a better sense of what your living standards might be in your golden years. Use that new knowledge to get a clearer idea of exactly how much you’ll need to save for your retirement.
Automate Your Investments
If you don’t already do so, Frankle recommends automating your investments so that you make steady progress on your long-term goals. Besides investing through an employer-sponsored plan such as a 401(k) or another defined contribution plan, set up recurring contributions to your Roth, or invest in low-fee ETFs through an investing app or robo-advisor. By setting your savings on autopilot, you’ll have one less thing to worry about.
Beware of Lifestyle Inflation
Your 40s and 50s are the decades when you’ve most likely reached your maximum earning potential – and when you have the most disposable income. Frankle recommends that you be watchful of debt.
“Typically this is a period when your lifestyle expands, and that’s fine as long as you don’t get sucked into a debt trap.”
While you want to make sure you’re comfortable and enjoying your life, you can budget for guilt-free spending by socking away money each month toward your retirement. It’s perfectly OK to splurge on a long-desired purchase or a fun vacation every so often, but ballooning expenses could devour your earnings.
Nip Your Debt in the Bud
Besides your mortgage, pay down all other debt as quickly as possible. Figure out which debts you want to tackle and in which order. That being said, you’ll want to heed caution with incurring any additional debt. Frankle recommends not sending your children to a pricey college if you’re paying for their tuition and can’t afford it. “There are some cases where it might make sense to finance school with debt,” explains Frankle, “but only if the school your child attends is the least-cost alternative or if the school sets them up for a unique opportunity to earn much more money once they begin their career.”
If you’re helping your child to pay for college, look into ways to fund your kid’s education fund, such as opening a 529 or Coverdell Education Savings Account (ESA) account. Consider asking close friends and family to make a contribution to your child’s 529 account in lieu of Christmas or birthday gifts. Talk to your kids about ways they can get money for college, such as being awarded grants and scholarships.
Set Clear Expectations with Your Kids
Especially in our modern age of boomerang kids, there’s a chance that your grown-up child may want to return home for a bit. When the time is right, have a candid conversation with your children about how much support you can offer them as they become adults. It’s important to set up expectations and boundaries now to make sure both you and your kids are on the same page, and that you aren’t taking on more financially than you can afford.
Find Other Ways to Defer Taxes
So that you can make your money grow, you’ll want to look for other types of accounts that can serve as investment vehicles for retirement. When you defer taxes until you start taking out contributions, you’ll be able to save more of your hard-earned money into investments that will grow over time.
Besides an employee-sponsored 401(k), consider investing into a Roth IRA. A Health Savings Account (HSA) is tax-deferred and available for those with high-deductible health plans. While these are typically designed to use for qualified medical expenses, you can also use an HSA as a way to save extra cash for retirement.
The beauty of an HSA is that unlike a Flexible Spending Account (FSA), all the funds you contribute to an HSA are yours to keep; you don’t have to use the funds by year’s end. Instead, you can use it as an investment account. You can contribute up to $3,400 for individuals and $6,750 for families, plus a catch-up contribution of $1,000 if you’re 55 and older.
Take Advantage of Catch-Up Contributions
For company-sponsored plans, such as 401(k) and 403(b) plans, you can squirrel away an additional $6,000 on top of the standard $18,000 a year. For Roth and traditional IRAs, you can contribute an extra $1,000 to the standard $5,500.
Your 40s and 50s are the prime time to really hone in to your retirement goals to ensure that you’re on track. “Run financial projections to make sure you are saving enough,” says Frankle. “You still have plenty of time to correct and have a far better outcome.”
As always, be sure to contact your financial adviser to evaluate your personal situation.
What steps are you taking with your investment portfolio in your 40s and 50s? Let us know in the comments!
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