If you’re in your 40s, you can be categorized as a Generation Xer or a late baby boomer. In either case, you’re at a stage in your life where you should be setting youth aside and making financial plans for your future and the future of your family.
People in their 40s often have to balance saving for their children’s college expenses, contributing to their retirement accounts, and either purchasing a home or saving for a down payment at the same time. You can work out where your savings should go in your 40s with the aid of financial professionals.
Increase your cash on hand
The first step in any financial planning, according to Roy Laux, president of Synergy Financial Services in McKeesport, Pennsylvania, is to create an emergency fund.
Laux advises that you should keep three to six months’ worth of expenses in a secure, liquid account. “You should also have savings for anticipated expenses in that account. For instance, you should put money aside in your savings account if you know you will need to replace your furnace in a few years.
A single person might require six months of reserves, according to Ronya Corey, a wealth management adviser with Merrill Lynch Wealth Management in Washington, D.C. Two-income households might be secure with three months of expenses saved.
Pay off your debt
Your top objective should be to lower and ultimately pay off any debt you may have, including credit card, student loan, and medical costs, so that you may use your money to start saving and investing for the future.
If you have credit card debt, you should try to pay it off as soon as you can, advises Corey. If you have student loan debt, check to determine if it is tax deductible according to your tax bracket first. If not, you ought to pay that off as soon as you can as well.
In addition to financial planning, Corey advises that you look for cheaper interest rates on your credit cards and school loans.
Corey advises utilizing all available money to pay off debt if you have a lot of it. “If you have a little amount of debt and, for instance, $2,000 a month available for savings, you should utilize one-third of that amount to pay down your debt and save the remaining funds for retirement.”
Utilize all of your employee advantages.
In your 40s, Laux advises, you should at the very least be contributing to your 401(k) in an amount equal to the employment match. “Even if you weren’t generating any money on that investment, the employer match makes your money twice.”
Every business offers a distinct retirement plan, so according to Corey, you should research your contribution cap and make the most of it.
You may be able to contribute more than you think, Corey advises, so find out how your pretax contribution will affect your cash flow.
2015 tax-deferred 401(k) contribution limits for people in their 40s are $18,000 maximum.
Laux hopes that the employer-sponsored retirement plan has a representative who can explain the plan’s investing alternatives. People need to know, in instance, why it could be wiser to be slightly more aggressive with their investments at 42 rather than at 62.
Set up your own retirement strategies
According to your income, Merrill Lynch’s Corey advises contributing as much as is permitted to either a regular individual retirement account or a Roth IRA in addition to retirement savings at work.
For persons in their 40s, the maximum contribution to a Roth or regular IRA increased to $5,500 in 2013. With a Roth IRA, you pay taxes now on your contributions but can potentially avoid paying a greater tax down the road. A Roth IRA would be a better option if you share my belief that tax rates are rising.
While Roth IRAs are only open to married couples with an adjusted gross income of up to $183,000 and single filers with an adjusted gross income of up to $116,000 in 2015, traditional IRA contributions are not income-restricted.
Retirement may feel far off at age 40, but it’s crucial to make the biggest contribution you can to your retirement plans, advises Corey. “You’ll need $2 million in assets if your annual income in retirement is $80,000. If you’re in your 40s, I wouldn’t recommend including Social Security benefits in your planning since they might not be available or they might be means-tested.
Save money for college costs.
Depending on your children’s ages, if you have children and you are in your 40s, you may already have begun saving for their college expenses. The best financial advice is to begin saving as soon as you can following the birth of your children, even if you can only save a tiny amount. As your salary improves, hopefully you can raise the amount you set aside for education.
To lessen the amount you or your children would need to borrow to attend college, you can start a 529 college savings plan. A prepaid tuition plan is another option that many public colleges provide, allowing you to lock in tuition at the current rates.
According to Laux, families should have a reasoned discussion about options to reduce college costs, such as selecting a public university over a private one, serving in the military, or enrolling in a four-year university after two years at a community college.
Starting your college savings early is one of the best things you can do, advises Laux. “Paying for all of your children’s college expenses may not be advisable or suitable if you’re in your 40s, have kids who are close to college age, and haven’t saved much for retirement.”
Laux suggests that one solution is to let your children work during their college years to cover some of their own expenses.