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The fifth decade of life is important for your finances. We’ve written about why your 30’s are a great time to get serious about retirement planning. What makes your 40’s any different? Though you’re metaphorically “over the hill” after 40, your finances should be in their prime! 

  • You’re entering your peak earning years. Studies show age 44 to 55 is when you earn your highest income.
  • Student loans are likely paid off. On average, it takes 18.5 years for borrowers to pay off student loans. This puts the average borrower around 40 when loans are finally gone.

There are some financial milestones you should hit in your 40’s. Let’s take a look.

How much should you have saved for retirement?

Everyone wants to know how they stack up to others. How much should I have saved? Am I on track?

A common rule of thumb is to have the following amounts reserved for retirement. By age:

  • 40: three times your annual salary 
  • 45: four times your annual salary 
  • 50: six times your annual salary 

If your annual salary is $100,000, a benchmark is to have $300,000 saved for retirement when you enter your 40’s.

At this age, you should be maxing out some retirement accounts. The annual limits for retirement account contributions are:

  • 401(k): $19,500 each ($39,000 total for a couple)
  • IRA/Roth IRA: $6,000 each ($12,000 total for a couple)

Think of it this way: to hit the maximum contribution for Roth IRA’s, a couple only needs to save $1,000/month.

How to invest

At Stewardship, we believe how you are invested is determined by your goal’s time horizon. If you plan to retire in your mid-60’s, you still have 20 plus years to invest. This would suggest having a stock-heavy portfolio in your 40’s. In fact, a rule of thumb is to maintain a stock allocation above 75%. If you are comfortable with volatility, having your stock portion closer to 90% can be good for your future nest egg.

Bonds have their purposes but building wealth may not be one of them. Researchers peg the next 10 years to be especially bad for bonds. Some show the average expected return to be below one percent.

Additionally, don’t neglect a global portfolio. The US makes up about 54% of the world’s total stock market. Too often, investors neglect international companies. Whatever stock allocation you choose, try carving out anywhere from 30% to 50% of it for foreign stocks.

How to buy your next house

The average age of a homebuyer is 47, up from age 31 in 1980. But the average age of first-time homebuyers is 32. This tells me people in their 40’s are likely moving from their “starter home” to their “forever home.”

When making this move, consider:

  • The amount of equity you transfer. If you’ve owned your current home for a while, chances are you have a lot of equity. Make a plan for its wisest use. It may or may not be best to transfer all of it into a down payment.
  • The loan term. If you plan on staying in this house into retirement, choose your term carefully. Having no mortgage when you retire can be helpful. However, paying off your mortgage five years before retirement might actually hurt your finances, as it takes more cash flow that’s not being used elsewhere.
  • The house you buy. Just because you’re approved for a larger loan doesn’t mean you should get it. A rule of thumb is to keep your mortgage payments under 30% of your income.

How you protect it all

Life insurance in your 40’s is as important as it was when you started your family.

That 20-year life insurance policy you got in your 20’s is coming to an end. Surprise—you still need life insurance! Consider these life insurance rules of thumb:

  1. Take 80% of your current annual income.
  2. Multiply this by the number of years until retirement (age 65 or 67).
  3. This is the total amount of life insurance to purchase.

For someone making $100,000 per year, his family would likely need $80,000 per year if he passed away. If his spouse is 45, she would need this income for 22 years, until her full retirement age.

$80,000 x 22 = $1,760,000

For a more detailed approach, use a calculator that considers inflation, getting a return on the money, and accounts for other one-time expenses.

What’s preventing you from maximizing your 40’s?

Though this decade is prime for building wealth, it’s also a decade of competing goals. Families find that kids are getting more expensive and college is right around the corner.

If you want to maximize these crucial years, consider partnering with Stewardship Financial. Our financial plan is designed to map out your goals and find the best way to maximize your wealth and income.