Investing With Confidence in Your 40s

Your age and current stage of life impact your financial decisions more than you might realize. While in your 40's, you’ve established financial goals, invested in your workplace retirement accounts, and set aside money. Now it’s time to make sure you’re investing all you can for retirement.

Investing in Your 40s: 4 Finance Strategies to Put in Place

By the time you’re in your 40s, you have probably established some financial goals, invested in your workplace retirement accounts, and set aside money for a rainy day. It’s also more likely you have gotten married, bought a home, and had a few kids. Next comes the question of whether you’ve done everything you can when it comes to retirement planning.Short answer: probably not.

The good news? You’re moving into your peak earning years, which means you can start making up for any lost investing time. There are plenty of late investors who still reach their retirement goals. It’s all about making smart financial decisions now.

Here are the top strategies to put in place in your 40s to plan for your future:

1. Get Strategic with Education Savings

Aside from planning for retirement, the most common goal for investors with children is saving for education. There are several vehicles for education savings, but the best is a 529 savings plan, which functions similarly to a Roth 401(k) or Roth IRA. .

Contributions to a 529 plan grow tax-deferred, and withdrawals are tax-free when used for qualified education costs. Many states even offer state income tax deductions on contributions to a state-sponsored plan. As long as you end up using the account balance, you’ll never pay taxes on the amounts contributed or growth within the account.  

To grow your account, consider setting up automatic deductions from your paycheck or checking account directly into a 529 plan so that those contributions immediately invest in a well-diversified portfolio using an appropriate mix of stocks and bonds. The overall costs of these plans along with the tax benefits make 529 plans far more efficient in saving for education costs than opening up a taxable account on your own or with a financial advisor. In some situations, an advisor may recommend a 529 plan as an estate planning vehicle because contributions are considered completely completed gifts to the beneficiary.

4 Reasons Why 529 Savings Plans are Beneficial

4 Reasons Why 529 Savings Plans are Beneficial

It’s also important to remember that you shouldn’t prioritize your children’s education over your own financial well-being. Kids can always take out student loans, but the same cannot be said for funding retirement. Plus, if you need to tap 529 funds for a non-qualified purpose, there is a 10% penalty—plus earnings are taxed as ordinary income in the year you withdraw them. Some states, like California, impose an additional 2.5% state income tax penalty. Penalties can be waived under certain circumstances such as when a beneficiary receives a tax-free scholarship, receives educational assistance through a qualifying employer program, or attends a U.S. military academy.

2. Optimize Your Taxes

Beyond claiming all available deductions, you could be doing yourself (and your savings) a disservice by failing to optimize your investment contributions. Any time you can leverage the power of compounding interest in your favor, it deserves your full attention. When you have the opportunity to earn compound returns (the rate of return on your investment taking into consideration the compounding effect of that investment annually),while also enjoying a tax benefit, you should definitely take advantage.

The type of IRA you choose will depend largely on your projected tax bracket in retirement. Those on the lower end often go with a Roth IRA, but traditional IRAs still provide tax-deferred growth and may be tax deductible depending on your—or your spouse’s—workplace retirement plan.

However, IRAs aren’t your only option for optimizing taxes in retirement. A Health Savings account (HSA), is one of the best retirement accounts available. An HSA offers contributions that are 100% tax deductible, tax-deferred interest and earnings, and tax-free and penalty free withdrawals (when used for qualified medical expenses. And if you can contribute to it annually and pay your medical expenses out of pocket, you can allow your HSA contributions to grow tax-free until you need the funds later in life.Beyond leveraging tax-advantaged accounts, having a CPA run a tax projection can help you better understand the potential tax impact of different options. Tax projections can help you make strategic financial decisions like determining if and how much to donate to charity, whether or not a partial Roth conversion makes sense, and if you should accelerate or delay income expenses as a business owner. By examining potential moves through the lens of tax savings today and in the future, you can feel even better about the decisions you make.

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Read our Compounded Annual Return vs. Average Annual Return blog where you'll learn how compounded annual returns can accurately measure the compounding effect of your investments each year.

3. Tackle Your Debt

Generation X (currently, people aged 40-55) carries the most consumer debt of any generation. For example, the average credit card debt balance is $8,125 for Gen Xers. That’s on top of almost $240,000 in mortgage debt, $21,570 in auto loan debt, and $39,981 in student loan debt.

Before taking steps to become debt-free, you need a plan — especially if you also want to build up savings. The debt snowball and debt avalanche methods are the most common. Both the debt snowball and avalanche methods are proven to work and provide a clear path to:

  1. Organize debt
  2. Direct additional monthly payments
  3. Track progress 
  4. Save money on interest

However, one may be more advantageous than the other given your situation. With the debt snowball method, you pay the minimums on all debts and direct any remaining funds to the smallest debt. Once that smallest debt is paid in full, you’d roll those payments into the next smallest debt, and so on. It’s a way of building momentum. You can start your debt snowball by:

  1. Listing out your debts in order of smallest to largest 
  2. Paying the minimums on all your loans
  3. Apply extra payments to your smallest loan
  4. Working your way down the list!

With the debt avalanche method, you pay the minimums. But instead of using any extra funds to pay the smallest debt, you pay the debt with the highest interest rate. This approach allows you to save money on interest payments over the long term. You can kickstart your avalanche by: 

  1. Listing your debts from highest interest rate to lowest interest rate
  2. Paying the minimums on all of your loans
  3. Apply extra payments to the highest interest debt 
  4. Work your way down the list!

While it’s important to pay down high-cost debt as quickly as possible, prepaying lower-cost debt like a mortgage isn’t essential. But with mortgage rates near historical lows, now might be a good time to refinance your mortgage—particularly if you can shorten the term and lower the interest rate. Before you do this, you must consider your “breakeven” period or how long you need to stay in your house to make up the associated costs of refinancing. If you’re planning on living in your house for at least as long as it takes to breakeven - or longer - than refinancing may not be the best option.

4. Hire an Advisor 

You don’t need to overcomplicate your journey to financial success, particularly when you already have a mountain of responsibilities. High-pressure jobs, family obligations, managing the day-to-day errands and chores required to be a functioning adult, trying to maintain a social life, and hobbies outside of work—they all add up.

It’s OK to feel overwhelmed by your finances, but it’s not OK to let that stop you from making progress toward your financial goal. Thankfully, you don’t have to do this alone. Working with a financial professional can help you make smart choices about money so that you achieve your goals and fulfill your values. Even better, a financial professional frees up valuable time for you to spend elsewhere.

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Of course, not all advisors will put your interests first, so it’s important to find someone that always acts as a fiduciary. The most fail-safe way to ensure you work with a fiduciary is to ask your advisor to put that fiduciary commitment in writing. If your advisor isn’t willing to do that, then you should seek help elsewhere.

There’s no time like the present to set yourself up for the future. Even if you’re late to the party, don’t let that stop you from putting a plan in place and making smart long-term and short-term investments and financial decisions. No matter your age, you can still achieve financial success.

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Disclaimer: This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice. All investing involves risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You should consult your own tax, legal and accounting advisors.