Welcome to the Invest By The Decades series! Every Wednesday, I'll break down how members of each decade should be managing their money to set themselves up for sustained success with their cash. This week, we'll be looking at your 40's and how to shift from a growth-only mindset to a preservation one. This article is for entertainment purposes and should not be interpreted as investment advice. Each situation is different, so please contact a professional for your own individual needs.
Welcome to your 40's. If you have some kids that are a little older, you've been married for a while and alcohol is the only thing that makes you happy, you're in the right place! While your 40's can be viewed as "the forgotten decade" as your priorities begin to shift to other areas of your life, it can also be the most financially beneficial. According to a 2018 study from Payscale, American wage growth tends to cap at age 45, showing a plateau, or even decline, as older workers begin to age out of the workforce. According to the study, jobs traditionally held by women (teachers, health care, etc) tend to have salary caps that are reached quite early, whereas jobs traditionally held by men have salary caps that are reached later in life because they're higher. So what we see in income levels is almost an accidental disparity: women tend to cap out at age 41 while men tend to cap out at age 53.
So while we focus on kids and new homes and shifting priorities in our 40's, it's also time to shift our mindset about investing once you hit this time in your life. "Growth" is no longer the only game in town (although a different kind of growth might be necessary if you get what I'm talking about). Now, it's all about taking advantage of what you have to make it work harder for you. This is Investing in Your 40's.
1. Make Sure You're Consolidated
OK, this one is cheating a little bit since it's borrowed from the 30's edition of this series, but it's worth restating. The typical American worker in their late 40's has had between 7-10 different jobs. If you've stayed at the same company that whole time, that's cool (also, why?), but chances are that you've hopped around. With that hopping comes different (hopefully) retirement accounts. Whether it's your various 401(k)'s, Traditional IRA's, Roth IRA's or HSA accounts, make sure to take an inventory and to roll them over into one account to stay consolidated. By this point, your spouse will likely be in the same boat, so ensure that you're staying consolidated across not just your accounts, but your spouse's accounts as well.
2. Stay Aggressive, But Mainly In Your Contributions
As I mentioned earlier, your 40's tend to be your peak earning years, so they should also be your peak contributing years, right? Well, theoretically yes, but probably not. The reason is that you have a lot of high-ticket items on the horizon, or ones just passed. Maybe you're upgrading your home or purchasing a new one. Maybe you've just had another child, or you're beginning to invest in the ones you already have (more on that in a minute). Your 40's are a time where you're making quite a lot of money, but you're also writing checks with both hands and seeing money fly out of every door and window of your home.
I know it's tough, but you need to stay on top of your contributions and make sure you're planning for your future. Stay strong on your 401(k) and keep maxing out that Roth IRA. Continue contributing to your HSA and don't forget about your emergency fund! The emergency fund will likely get neglected as you begin to pull money from savings to cover things like down payments or a new car, so ensure you're topping it up as you go along.
3. Start Investing In The Future of Others
Right, let's talk about kids. Kids, while incredibly important and special, are a huge drain on resources. According to the American USDA, the average cost of raising a child through age 17 in 2020 was $233,610. Keep in mind that's just until age 17, so that doesn't include college tuition, which will increase that overall number dramatically. So let's introduce some pointers to help you give your children the best chance to succeed as a parent, because that's your job, right?
Open a 529 Plan
So, not to give you too much of a downer, but I'm about to introduce another investment account that you should consider. I know, I know, it's a lot, but this one is super important. A 529 Plan is an education-oriented investment account that functions a lot like a Roth IRA: you contribute post-tax money to the account, which can then be invested in mutual funds, ETF's, securities, bonds, whatever. That money then grows over time and can be withdrawn tax-free if used for the purposes of paying for education (whether that's private school K-12 or college education costs).
The plan is magical, and should be opened as soon as your child is born. There are also no annual contribution limits, so you can contribute as much as you can afford to ensure your child isn't taking on crippling student loans once they hit their early 20's. And here's another benefit: despite the money being post-tax that you contribute, many states offer tax breaks up to certain limits. For my home state of Georgia, married couples filing their taxes jointly can write off up to $8,000 per year in 529 contributions. Additionally, other family members can choose to contribute to this account up to $15,000 per year with no tax impact, making this a popular vehicle for estate planning.
Finally, the most common question around 529 plan contributions is: how will this impact my child's ability to qualify for financial aid? The answer is: not likely, but check with your personal accountant and state. If you as a parent are contributing to the plan, then there will likely be little to no impact on your child's financial aid status. However, it gets a little murky when a family member contributes to the account as that is viewed by some states as "direct cash to support a student," and that can impact the ability of the student to apply for financial aid. Again, check with your individual accountant on all qualifying situations.
Start Credit Early
One of the biggest super powers you can have in this world is a great credit score. It unlocks better interest rates when you borrow money, makes you more likely to be qualified for a loan, and financial services companies just treat you better overall. The toughest part of building credit is just getting started, because how are you supposed to get credit with no credit? This is where you come in as a parent.
As an already established member of the credit community, you have the option to add your child as an authorized user to your account using their name and Social Security/tax ID. Then, you can make purchases on this account and pay it off in full, helping maintain your excellent credit standing while building your child's own credit history. Do this from birth through age 18 and all of a sudden your child is a college student with an 800 credit score. Everyone wins!
One word of caution: not all credit card companies report the credit history for minors, including the method I just described. Chase, for example, does not report credit history for minors, making this method ineffective with Chase-originated credit. Do your research and contact your credit card company/bank of choice prior to executing this method.
Start a Custodial Account
OK, I lied earlier: there's one more investment account you should think about opening. This one is called a "custodial account," and is a brokerage account for your child. This way, you can start them early on the path to investing, letting compound interest have its absolute maximum effect. Let's play it out:
Your child is born and you immediately put $100 in their custodial account, invested in an S&P 500 index fund that returns 10% per year, inclusive of dividends. You continue to contribute $100 per month until they turn 18. Here's how much you've made them before they even realize this account exists...
But let's then play out the optimal scenario: that they continue contributing $100 to this account once they turn 18, and keep it rolling until they're 50. Here's the new amount.
This is the absolute power of this type of account.
Get Them Financially Educated
This goes hand-in-hand with the custodial account, but the money you're passing along to your kid won't matter much if they don't know how to manage their money. Getting them started early with lessons in financial education is key. When I was a kid, I would do chores and get a small weekly allowance. Nowadays, we've digitized that process. Apps like Greenlight actually allow you to give your kid an allowance, as well as teach them about debit versus credit and how cash back works. It's a really powerful tool that can set the kid on the right path to financial freedom at a very young age.
4. Consider New Investment Decisions
When you're in your 40's, you're getting close(ish) to retirement. Ideally, you'd like to hit that 60 mark, walk into your boss's office and flick them a finger or two before strolling out and playing 18 with the fellas. This means that you need retirement money to fall back on, which, if you've been following the proper procedure, you do. However, you don't want that money to disappear all at once should the market crash like it has done on 13 different occasions since the 1920's. Your 40's should be a time where you consider switching from fully aggressive with your portfolio balance to a little bit more conservative. But what does that actually mean?
Well, investing is a game of options. You have stocks, bonds, crypto, ETF's, mutual fund, options, the stock your buddy Mike peer-pressured you into buying, gold, commodities, futures and enough avenues to make your head spin. The foray into investing for many people is to put it all in an index fund, which is great! But there's something else you should be aware of, called a "target date fund."
A target date fund is what is most commonly offered by 401(k) custodians because of its ease of use and "hands off" approach for the employee, but it's essentially a pre-built mix of funds that give you exposure to various asset classes that rebalance over time. TDF's that you sign up for generally have a date on them that they're targeting (see what I did there?), and that gives your retirement money something to aim for. They're made of a mix of domestic and foreign equity funds, bond funds, real-estate funds, "hedge" vehicles (like gold) and cash/cash equivalents (CD's, etc). As you age and get closer to retirement, a target date fund will automatically rebalance your money to lessen the exposure to more "risky" parts of the fund (the equities) and increase your exposure to the more conservative parts (the bonds).
So why do they do this, and why might this be a good option for you? Well, as stated before, as you get closer to retirement you don't want the bottom to drop out of your nest egg. Stock markets fall, and sometimes they fall HARD. The market enters a correction statistically once every 18 months, dropping somewhere between 10-20% over a short period of time. The market has actually crashed over 20% 13 times since The Great Depression, which you can read more about here. What that means for you is you don't want one of those to occur right before you retire, leaving you with significantly less retirement money than you'd planned for and forcing you to stay in the workforce longer than you wanted to. Though bond funds do also fall, they don't fall quite as hard. They also provide a steady dividend, giving you increased income in your twilight years. So evaluate if a target date fund is the right retirement vehicle for you through your 401(k).
5. Ensure You're Insured
Look, I don't want to be the one to break this to you, but you're in your 40's. You're probably going to start seeing some health issues pretty soon, no matter how well you take care of yourself. According to Healthline, your 40's are when some persistent problems begin to rear their ugly heads, including Type 2 Diabetes, mental health issues and problems related to over-consumption of alcohol. While I obviously hope none of this applies to you, it never hurts to be insured. I know I have quite a few international readers, so this probably won't apply to you since you do healthcare correctly. For us stuck in the United States, we have to deal with the garbage privatized healthcare system, which means you have a ton of options to pick between. PPO, HMO, FSA, HSA and every other acronym to describe different ways that insurance companies try to squeeze money out of you. I'm no insurance expert, so I will tell you to talk to your HR department and significant other about the different options available to you. This is just your reminder to drop into your HSA account, make sure everything is up to date and that you're invested for a rainy day. You never know when one might hit.
Are you in your 40's reading this guide? Did anything surprise you? Do you have anything to add? Let me know in the comments below!