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Your finances in your 40s

It’s really, truly make or break time, baby.

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Your 40s are when things should really take shape for you financially. If you aren’t saving for retirement yet (naughty!), you absolutely must start now. You should also be approaching your earnings peak, and bedding down your lifestyle. If you get your 40s right financially, you can truly coast your way to a happy retirement.

Remember, of course, that I am assuming the good habits and relationships you built in your 20s and 30s are in place – you’re tracking your spending, saving every month, you have appropriate life and disability insurance coverage, and you have made wise decisions about major purchases like a home. With that under your belt, let’s look at what you should be doing in your 40s, finance-wise.

1.      Maximise your family’s earnings

This probably sounds a bit weird, but ask yourself if your family is earning as much as it possibly can. When you have young kids, oftentimes one spouse will stay home or work part-time so as to be available for the tots. But in your 40s, you’re likely to have older kids, so does it perhaps make sense for you and your spouse to both work full-time? And are your kids old enough to start working? It’s incredibly valuable for teenagers to learn about managing money and taking responsibility, so if you can, let your teens get part-time jobs, and help them learn to manage the money they earn.

And if both you and your spouse are working, are you earning as much as you can? Take an honest look at your skills, see if you can find out what other people in your job are earning, and be proactive about maximising your salary – it may be time to ask for a raise (here are some tips on how to do it from CNBC and USA Today), it may be time to try for a promotion, or it may be time to look for a new job. Whatever you have to do, make sure your family is earning at its maximum.

2.      Knock out debt

Your salary is probably higher than it’s ever been, so now is the time to concentrate on ridding yourself of debt. If you have managed to build up any credit card debt, make paying it off a priority, and develop a plan to pay off your home loan ahead of schedule. The faster you pay off your home loan, the more you save on interest, and even a small uptick in your monthly payments can make a big difference.

It’s also very important to avoid building up additional debt in your 40s. With your higher salary and your budding taste for the finer things in life, it’s very tempting to start spending more on luxuries in your 40s, but you should only do so if 1) you can do it without taking on any debt and 2) you can do it without negatively affecting your savings commitments.

3.      Make a plan for your kids’ schooling

If you have teens, you’re probably starting to worry about their university education. Hopefully you’ve been saving for this (and if not, start immediately, since every bit helps), but if you haven’t, it’s time to talk options. While you surely want to give your kids the very best, you shouldn’t hurt your own retirement plans to pay for their schooling – you’ll just be a burden on them down the line.

Instead of sacrificing everything, consider options like student loans, which often have reasonable terms and can be paid down quickly, bursaries (my dad went to university on a bursary, and had a first job lined up to boot), scholarships (a chunk of my university fees were paid for with academic bursaries and work-study deals), and part-time studies – my brother did his degree part-time while working, and has a great job today.

4.      Buckle down on that retirement saving

If you haven’t started saving for retirement, you need to start today. According to Allan Gray, “The rule of thumb for retiring financially independent is that you will need a capital sum of 10 times your final annual pre-tax income. This will give you an income equal to about 70% of your income at a retirement age of 65 (if you buy a conventional annuity with 5% escalation at retirement).

To achieve this you would have to save 10% of your salary from age 25. This is based on the assumption that inflation over the period averages 6%, your salary increases average 7%, and your investments achieve a real (i.e. above inflation) return of 5.5%.

If you start at 40, the picture is rather different.  To achieve the same level of income (70% of final salary), you now need to save approximately 23% of your salary or achieve an investment return of 11.5% above inflation.  Both seem daunting.  If you can achieve an investment return of 7.5% above inflation (i.e. just 2% more than in the example above), you’ll have to save 17.5% of your salary.”

In other words, if you’re behind on your retirement savings in your 40s, you need to start saving a large chunk of your salary, and you need to invest relatively aggressively to ensure you make a good return. Meet with a financial advisor, and get started.

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