Financial Planning Through the Ages - Top Tips for Forty Somethings

Forty Somethings often have responsibilities for both growing children and aging parents, so it is no wonder that most people in this age group haven’t saved much for retirement and lack some important financial basics such as an emergency fund or insurance. It is tough, but this is the decade that you must start making your financial life, and particularly saving for retirement, a priority. The great news is that you are likely earning more than ever, have some financial and life experience under your belt and still have enough time to get on track before you knock on retirement’s door.  Below is a list of a few priorities for you in your forties.  Like all big projects, we recommend breaking this punch list into parts and tackling one every few months.  While retirement planning is the focus of this decade, you’ll note that there are a few priorities you must tackle even before planning your retirement, especially if you have a family that depends on you.

  1. Create a Back-Up Plan for Your Family.Priorities in your 40s

Certainly, you want to make sure that your family is properly cared for if something happens to you, so it’s time to get life insurance and an estate plan. You would never forgive yourself for not having enough insurance if the worst happened and you were not properly insured, particularly since term insurance is relatively inexpensive in your forties.  If you do not have enough insurance to replace your income during your working years in which you are responsible for loved ones, it should be your number one priority even before saving for retirement.  An estate plan is the other vital piece of your family back-up plan as it sets out the instructions for your wishes of how funds should be used to provide for your family; it also nominates guardians to care for them.  While the plan is likely to cost a few thousand dollars, allocating resources to put this plan in place should, like insurance, come before saving for retirement or even thinking about something lower on your priority list like a vacation.

  1. Create an Emergency Fund.

Unexpected emergencies arise and you want to cover them without going into credit card debt or relying on family. If you think your home equity line of credit is your emergency fund, think again, as many lenders froze lines during the recession given the dropping home values. You will want to set aside 20% of your after-tax income until you have built up enough cash reserves to cover three to six months of expenses. It is only after you have built up your emergency fund that you should reallocate savings towards retirement. If you do not think it is possible to save 20% of your take home pay for financial priorities such as creating your emergency fund, you need to take a closer look at how you prioritize and where you spend your money (see tip #6 below).

  1. Keep Bad Debt in Check.

While saving for retirement is vital, paying off credit card debt makes more financial sense and can even save you money by improving your credit. Twenty percent of your take home pay should be allocated towards financial priorities such as saving and paying down debt, but if you have credit card debt, the entire 20% should be used to pay down your highest interest rate card first; then, pay off cards charging lower interest rates.  Once your credit cards are paid off, only charge what you are able to afford to pay off each month, which should not be a problem as long as you stick to your budget.

  1. Saving for Your Retirement Must Come Before Wants.

It’s tempting in your 40s to want to buy a bigger home, especially as your salary increases, but the more you ramp up your lifestyle without ramping up your savings, the less likely you will be able to maintain the lifestyle in retirement to which you have become accustomed. It is also tempting to put your children’s wants before your needs and use your savings or neglect saving in order to put your children through college; but remember, they can get loans or a part-time job – you can’t get a loan to pay your expenses in retirement. You need to automate savings and think of it as a non-negotiable future bill.  If you crunch the numbers (see tip #5) and determine your retirement savings are on track, go ahead and explore other goals such as helping your children pay for college or upgrading your home.

  1. Understand What It Takes to Retire.

Now is the time to estimate whether your savings plan will produce a large enough nest egg when combined with Social Security to cover your living expenses in retirement. If you do what most people do and wait until you are near retirement to crunch some numbers your only choice might be to learn to live a less expensive lifestyle in retirement.

You may be on track to living comfortably in retirement if you have consistently saved 10-15% of your paycheck over the years. You can roughly estimate if you are on track to be able maintain your current lifestyle by looking at how much you have already saved for retirement.  By age 40, to live a lifestyle similar to what your after-tax salary affords, you should have saved roughly three times your current income towards retirement and four and half times your current income by age 45.1 If you are not there yet, it is not too late to get on track. Your first step is to crunch some numbers. A Beacon Pointe advisor can help you create a plan that lets you know whether you need to make some decisions to create more savings to get you on track, but generally you should find a way to save 15-20% of your paycheck towards retirement. If you don’t think it is possible to save this amount of your take home pay for retirement, you need to take a closer look at how you prioritize where you spend your money.

  1. Aligning Your Resources to Your Priorities.

To align your resources to your goals (saving for retirement, saving for college, saving for a second home, etc.), you need to know where your money goes each month. You might be surprised how much you are spending on items that really don’t mean much to you and how, with some small changes, you can align your spending to your goals. To get started, either download Beacon Pointe’s Expense Worksheet from our website or consider using technology to track your expenses over time. is also a popular online budgeting website that categorizes your spending on credit cards or ask your Beacon Pointe advisor to get you set up on our budget app to track and categorize expenses.

Once you know where your money goes, you should make sure that 20% of your after-tax income is allocated toward meeting your financial priorities.  We recommend breaking up your income into three categories with 50% allocated to needs (housing, transportation, food), 30% allocated to wants (cable, vacations, and dinners out) and 20% allocated to meeting your financial priorities (saving for retirement, paying down debt, creating an emergency fund). You choose what you spend within each bucket, but the key is to spend only what you have allocated to each bucket.  For more on this budgeting technique, talk to a Beacon Pointe advisor.

  1. Know How and Where to Invest Your Retirement Funds.

Many 40-year-olds treat their retirement savings like a Crockpot meal – set it and forget it – but you can’t just set and forget your retirement plan and expect to get a great result. You might have many options as to where to save your funds for retirement (401(k), Roth IRA, SEP IRA, etc.) and a Beacon Pointe advisor can help you look at your options. You should also know how to evaluate your investment performance and determine whether your asset allocation fits your risk tolerance.

If you could benefit from a conversation with our advisory team, we would be happy to provide a complimentary consultation.    

Consider our tips for thirty, fiftysixtyseventy and eighty somethings.



Important Disclosure: This report is for informational purposes only. Opinions expressed herein are subject to change without notice. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified, or attested to, the accuracy or authenticity of the information. Nothing contained herein should be construed or relied upon as investment, legal or tax advice. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein. All investments involve risks, including the loss of principal. An investor should consult with their financial professional before making any investment decisions.

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