One’s 40s can be frenetic years as you juggle career, children, school functions, bond repayments, home maintenance, and possibly looking after your ageing parents. Many adults in this life stage feel as though they are being pulled from all angles, never knowing what to prioritise first.
It is during this decade that many forty-somethings start to neglect their finances in the hopes that they can re-visit their financial planning when life quietens down. It’s during these years that some mistakes can be made which may have far-reaching effects on your longer-term financial planning. Here is what to look out for.
Incurring too much lifestyle debt
Generally speaking, one’s 40s are lucrative years in terms of earning but relatively lean years in terms of debt. This is the decade where many choose to buy property, upgrade vehicles, travel overseas or possibly purchase a holiday home. Many people fall into the trap of incurring too much debt in this life stage by upgrading their vehicles or over-capitalising on expensive home renovations as and when their salaries increase. Lifestyle creep has a habit of conspicuously whittling away at disposable income, leaving one laden with expensive debt and the inability to save for the future. Keep a handle on your income to debt ratio, and don’t view your salary increases as a licence to spend more – but rather as a reason to invest more.
Not appreciating the financial consequences of divorce
According to Stats SA, four out of 10 marriages in South Africa end in divorce by their 10th anniversary, which means that the chances of getting divorced in one’s forties are high. Divorces are expensive and almost always result in both spouses being set back financially, so think very carefully before entering a marriage.
Not giving thought to where you live, work and educate your children
Where you choose to live in relation to your place of work and your children’s school can have huge financial and logistical implications for you, so think carefully and do your research before buying a family home. Transfer costs are expensive, and if you have to buy and sell your home a number of times in this decade, it can result in a financial setback. Working too far from home and schools can also add an additional layer of costs to your budget in respect of transport, au pairing and tutoring, so be intentional about where you choose to buy your family home.
Not preserving your retirement fund money
When moving between jobs, you may be tempted to cash in your retirement funds although this is generally not advisable. Withdrawing prematurely from your retirement fund interrupts the compounding process causing you to lose out on future investment returns. In addition, you will be heavily taxed on your withdrawal which means that the net value of your funds in real terms will be significantly reduced.
Not taking calculated risks
In your forties, you still have a relatively long time horizon when it comes to retirement funding, so if you have a workable business plan or solid ideas for a business venture, now is a good decade to take some calculated risks. Ideally, do as much groundwork and set-up as possible while you are still employed and earning a regular income. It will obviously be hugely beneficial if your spouse is also generating an income to help tide you through the first months and years of the business.
Investing too conservatively
Unless you are planning on a really early retirement, you are likely to have an investment horizon of at least 20 years by the time you reach your forties, and it is important to ensure that you are not invested too conservatively for this longer-term horizon. With 20+ years to retirement, you will want to ensure that your investments are adequately exposed to growth assets so that your returns can beat inflation over time and the value of your investments can grow in real terms. If you’re contributing towards a group retirement fund, be sure to determine the nature of the investment strategy you are in. Many default investment strategies on pension funds are quite conservative portfolios that are more suited to investors nearing retirement.
Not making use of tax deductions
While you are generating an income, you enjoy significant tax benefits if contributing towards a retirement fund and it does not make sense to leave free money lying on the table. Investing with before-tax money not only reduces your overall tax liability but allows you to channel more money each month towards your retirement funding than if you were investing with after-tax money.
Not making plans for your children’s education
While not everyone can afford to pay in full for their children’s tertiary education, now is certainly the time to start planning for it. Without compromising your retirement planning, start investing money every month towards your child’s education. When choosing an appropriate strategy, give careful thought to your investment timeline and when you are likely to need the money. Remember to explore all funding avenues, including bursaries, scholarships, student loans and NSFAS funding, and to start managing your child’s expectations in terms of what you are likely to be able to afford.
Not protecting assets intended for your minor children
While your children are still minors, it is important to update your will to ensure that they have adequate protection in the event that you and your spouse are no longer around. This means appointing a guardian (and possibly an alternate guardian) in your will to ensure that they will be cared for by a trusted loved one should tragedy strike. Further, you may want to consider setting up a testamentary trust in your will for the purposes of protecting any assets you intend bequeathing to your minor children. This type of trust will only come into formation in the event of your death and will mean that your children’s inheritance will be managed by your nominated trustees until your children are old enough to do so themselves.
Going offshore for the sake of going offshore
Crime, corruption, and a contracting economy means that many South Africans are looking for offshore investment opportunities. Investing offshore should be part of your overall investment strategy and not a knee-jerk reaction to negative local events. While it’s always a good idea to build global diversification into your portfolio, the manner in which you take your funds offshore should be aligned with your financial objectives. There are tax, CGT and other financial implications when investing directly offshore, so be sure to fully understand your reasons for doing so first. Further, be sure to investigate the many indirect offshore investing opportunities offered by a number of reputable local platforms, and preferably seek independent, fee-based advice.
Becoming financially dependent on your spouse
If you intend to become a stay-at-home spouse, think carefully about the consequences of losing your financial freedom at such a young age. Not only can not generating an income shift the dynamics of your relationship, but it can also create feelings of anger, regret and resentment. The nature of your marriage contract will also play a role in determining how this could affect you in the future. For instance, if you are married out of community without accrual, you could find yourself financially prejudiced if your marriage were to come to an end through divorce. Ideally, consider ways in which you can still generate an income from home while remaining relevant in your industry.
Not keeping your income protector updated
When taking out your income protection benefit, you will have had to nominate your income which is the amount that will be used to determine what you will be paid at the claims stage. As and when your income increases over time, it is important to notify your insurer of your actual earnings as failing to do so can result in you receiving a smaller benefit than you need in the event of temporary or permanent disability. Similarly, if your earnings have reduced since taking out your policy – for instance, if you have lost earnings as a result of the Covid-19 pandemic – you will need to understand the implications of this from your insurer.
Not taking care of your health
Your ability to continue working and generating income depends on you being healthy enough to do so, and taking care of your health in your forties is critical. Finding time to exercise and prepare healthy meals might be challenging, but failing to do so could result in you paying the price later on. Lifestyle diseases such as diabetes, heart disease and hypertension, if left unchecked, can affect your health to the extent that you find it difficult to hold down a full-time job and this can have disastrous consequences for your finances. It may also result in you having to retire sooner than what you had made allowance for which, in turn, can compromise the quality of your retirement.
Thinking it’s too late to start saving
If you haven’t started investing towards your retirement by the time you reach forty, remember it is never too late to start – especially if you are open to the idea of working beyond age 65. While you may have very little disposable income after making your bond repayment, paying school fees and covering the costs of living, keep in mind that your ability to save will increase as you pay off vehicles, settle your home loan, and when your kids eventually become financially independent of you. If necessary, start contributing a manageable amount towards a retirement annuity and then bump up your contributions as and when your circumstances allow.
Not talking to your parents about their finances
If your parents are not sufficiently funded for their retirement, you need to know about it as soon as possible so that you and your siblings can start making plans. This is difficult to achieve if your parents are intent on remaining private about their financial affairs. If necessary, seek the advice of an independent financial advisor with experience in generational wealth planning who can guide you and your family through the process. Early intervention can lead to better outcomes, especially if it involves selling property, recalibrating investment portfolios, reducing drawdown rates or realising other assets.