Personal Finance Checklist for Age 40

Age milestones are good times to revisit your finances and retirement saving plans. See what to review once you hit age 40.
By Richard Barrington

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People often are not sure how to feel about age 40 as a milestone. It has traditionally been thought of as the official entry point into middle age, but it does have some compensations. Compared to 10 years earlier, you are likely to be wealthier, your career should be further along and your personal life is probably more settled.

All those developments entail some changes to your financial situation. While such developments usually happen incrementally, your 40th birthday is a good reminder to take a look at how much your circumstances have changed, and what adjustments you should make as a result.

Personal finance checklist for age 40

Here are 10 financial issues to address once you turn 40:

1. Gain traction on retirement saving plans

According to the National Institute on Retirement Security, average retirement assets more than double between the 35-to-44 age group and the 45-to-54 group. In other words, your 40s is where retirement savings need to accelerate so you can begin to accumulate a significant balance.

2. Take stock of progress on retirement targets

It might be comforting to witness that retirement plan balance growing, but don’t look at that balance in isolation. Always look at retirement plan targets to see how you are doing relative to your goals. Even an impressive retirement plan balance looks a lot thinner once you spread it out over a couple decades of retirement spending.

3. Consider if savings targets fit your lifestyle

Say your savings are on target with your retirement plan. Now consider when you formulated that retirement plan. If it was back in your early 30s, both your income and your lifestyle may have improved since then. If that is the case, it may be time to raise your retirement targets so they would support that improved lifestyle. Early on, it is unrealistic to base retirement planning on the assumption that you will achieve financial success, but once you reach that success, it is wise to adjust your plans and the amounts in your savings accounts accordingly.

4. Assess whether your house meets your needs

If you have owned a house for several years, think about your present family situation and decide whether you are likely to stay in that home or move to something that better meets your needs down the road.

5. Look into buying if you currently rent

If you rent your current residence, age 40 is a good time to evaluate whether homeownership is ever going to be in the cards for you. Your conclusions will determine whether you should focus on making your current living arrangement more cost-effective, or whether you should start saving for a down payment on a new home purchase.

6. Research options to save on mortgage

If you are staying in your current home, see if you can save money on your mortgage. Refinancing is one option, but if you are financially comfortable, other options include shortening your remaining mortgage term or paying the loan off altogether. Both of these moves would reduce your long-term interest expense by eliminating years of interest payments.

7. Set a timeline for eliminating high-cost debt

If your mortgage is not the only debt you have to deal with, formulate a plan for paying off that debt over a specific period of time. Otherwise, chronically carrying debt balances is going to steadily erode your wealth, especially with credit card debt.

8. Get serious about college savings contributions

As you move through your 40s, your kids will probably be rapidly approaching college age. At this stage, saving for college is no longer just a matter of putting the odd hundred dollars aside on the kids’ birthdays. Saving money needs to be geared toward a specific plan to meet their needs when the time comes.

9. Update your life insurance

Life insurance is intended to help your loved ones replace your income should you die. If you got that insurance back when your income was much lower, chances are you need more insurance now to replace a higher income.

10. Determine job market competitiveness

Don’t let your skills get out of date – consider new training if necessary. If you already have in-demand skills, think about whether you are maximizing the career opportunities for those skills.

Ideally, this financial review will find you are starting to reap some of the benefits from financial moves you began making around the time you turned 30. If not, don’t worry – it’s not too late to start, but it is time to get going so you have some progress to show by the time you turn 50.

Frequently Asked Questions

Q: What’s the best way to invest $12,000? I am 46 years old.

A: The mid-40s is a tricky age for investing because you might find yourself torn between short-term and long-term goals. There is no way to responsibly give you a definitive answer without knowing the specifics of your situation, but there are some key questions that will help guide you to the right decisions.

Here are three questions that should help, discussed in the context of an investor in your age group:

1. What are you trying to accomplish?

In your mid-40s, you are far enough along in your career that you should definitely be building up a retirement nest egg, but you might also be facing shorter-term financial obligations like mortgage payments or sending kids to college. These goals require very different investment approaches. If you are just focused on retirement, at your age you should have a long-term time frame and thus be invested primarily for growth.

As growth investments can be volatile, diversification is important, but generally speaking with 20 or so years to retirement, a stock-bond mix with an emphasis primarily on stocks would be appropriate. However, if home payments or college create more immediate demands, you may need to be much more conservative. For those needs, try to match certificate of deposit terms with when those payments are coming due, and get the best CD rates you can within those terms.

2. Where does this money fit?

In deciding how to invest this money, you need to look at what other assets you have. For example, you may be juggling short and long-term goals, but already have money allocated to more immediate needs. That would allow you to take a longer-term approach with this $12,000.

Conversely, if you have a solid pension plan to look after your retirement needs, you might want to invest this money in CDs, savings or money market accounts where it can be more available for short-term needs. If you want to pursue both retirement saving and shorter-term goals, it would clarify things if you divide this $12,000 between the two and invest those two pools separately, rather than try to take a middle-of-the-road approach that serves neither goal properly.

3. What is your personal comfort level with risk?

On paper, it is likely that someone your age should own stocks, but that also depends on whether you have the risk tolerance for the possibility of losing money. Just keep in mind that at the other end of the spectrum, deposit vehicles like savings accounts have had trouble keeping up with inflation in recent years, and that loss of purchasing power is also a form of risk.

People your age are usually close to their peak earnings years. That also means that these should be your peak years for saving money. So, beyond the question of what to do with this $12,000, you should be asking yourself what you are doing to continually save money and add to that $12,000.

More from MoneyRates.com:

Over 40 with no retirement savings? Take these 6 steps

Turning 30? See this personal finance checklist

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Richard Barrington