Financial planning advice in your 40s

40_year_oldWe’re going to make the assumption that you’ve been investing now for some time, maybe not too long though. Now is a great time to reevaluate where your portfolio stands, and think about reallocating assets to somewhat less risky choices. Our rule of thumb is 120 less your current age, should be your stock to bond ratio. So Say you’re 45, that would mean take 120-45 = 75. You should be at around 75% stocks now, with 25% in less risky money market accounts and or bonds. Granted, that’s somewhat aggressive, if you want to be conservative, use a factor of 100 instead of 120 (100-45=55%) and your mix would be 55% stock, 45% bonds. So, by now, your asset mix should be some where between 55%-75% stocks. You’re probably saying that’s a huge swing, which is true, but the more aggressive path should be used by those trying to make up more ground, while the conservatives would be those who started investing earlier and their interest is in preserving capital, not necessarily being risky to accumulate more.

Good financial planning advice in your 40s is to not panic, remember that you still have around 20-30 years to reorient your finances and optimize your retirement fund. If retirement saving has not been topmost on your agenda till now you need to consider maximizing your contributions to the top limits on any 401k or IRAs that you do have, and consider pumping up as much as possible with the catch-up contributions.

It is good to not rely solely on employer-sponsored pension type plans and buy into at least one private retirement fund plan. Your 40s are the ideal life stage to review and adjust your financial assets or to get going if you’ve procrastinated til now, remember, you still have a bunch of time to make up. Look at the big picture when it comes to your whole financial position. If you have been investing aggressively in the more volatile investments such as stocks and mutual funds then now is the time to move toward consolidation. Scale back on those stock options to around three quarters of your total assets, and move that cash into saver options such as bonds and or certificates of deposit.

As you enter your 40s, you will probably be at or around the peak of your earning power. You need to review your financial portfolio so the mix of funds can move from growth-oriented investments to wealth consolidation funds, while re balancing your holdings towards those in money market and bond funds. Your late 40s may even be the time to consider buying an annuity for early retirement. Annuities can be a good way to make good a shortfall between your projected income and your life expectancy.

A necessary piece of financial advice in your 40s is to make the best possible ‘guesstimate’ of how long you will live and to set financial goals accordingly if you haven’t done so already. If you want to leave a maximum of assets to the beneficiaries of your estate, then you will require a different investment strategy to a situation where you simply want a good income for the whole of your life and leaving nothing ‘on the table’ when you die. If your best estimate of life expectancy is say 85 and your investments only give a target income to 80 then an annuity can provide the extra five years of income and will cost you less if you buy it in your 40s. Consider a living will too, if you already haven’t done so.

As your retirement approaches, the balance should shift further from wealth consolidation to bonds that yield a regular income stream but without reversing your capital growth rate. You should still hold on to some growth funds in your portfolio to ensure that your assets will be sufficient to see you through the remainder of your retirement in the lifestyle that you want.