How to Invest in Your 40s

Your financial future depends on finding the “right mix between earning, spending, saving and your investment time horizon” in your 40s. (Getty Images)

Investing in your 40s can be the difference between retiring on your own terms and relying on your children for financial support. Determining how to invest in your 40s requires a strong financial plan and a willingness to try new things so you can be as carefree as the retirees you see leaving the workforce ahead of you.

The 40s are the unsung decade. Wedged between the more illustrious 30s and 50s, they’re often overlooked when discussing financial planning milestones – or really any milestone. Who makes a hoopla of turning 40, after all?

But the 40s are a “critical and opportunistic time in people’s financial life cycle,” says Michael Farrell, managing director for SEI Private Wealth Management in Oaks, Pennsylvania. Your financial future depends on finding the “right mix between earning, spending, saving and your investment time horizon” in your 40s.

Welcome to your (almost) peak earning years. The forgotten 40s are momentous partly because they’re our peak earning years. The pay for most college-educated workers peaks between 40 and 49. What better way to celebrate this achievement than by ramping up your savings?

“Often people in their 40s forget to keep saving for themselves,” Farrell says. But this can be a deadly mistake.

At 40, “you conceivably have more years ahead of you than you’ve lived,” says Peter Faust, a wealth advisor with Tanglewood Total Wealth Management in Houston. And you’ll probably be living them with less outside financial support.

Someone in their 40s today will likely retire right “when Social Security is expected to go bankrupt,” says Steve Ng, a professor at Clark University and independent registered advisor at Woodland Investment Consulting in Boston. While it’s unlikely the administration will let bankruptcy happen, 40-somethings need to “have realistic expectations that [Social Security] will be very different when they retire.”

You should have two to three times your annual salary saved by your mid-40s, Farrell says. And yes, that’s two to three times your current peak salary, not your starting salary.

Financial planning in your 40s. Herein lies the challenge: While your income is peaking in your 40s, so, too, is your spending.

It’s easy to let your lifestyle expand with your paycheck. To prevent lifestyle creep from derailing your financial plan, save twice what you spend, Farrell says. Anytime you indulge – say in a five star hotel or new car – “double indulge in your savings.”

Faust prefers to flip this approach on its head. Your savings should dictate your spending, not the other way around, he says. Rather than taking your income and subtracting your expenses to determine how much you save, start with your income and say, “I want to save this much.” The rest is what you can spend.

You should be saving with a clear goal in mind, namely how much you’ll need to retire. If you don’t know that number yet, it’s time to figure it out. A financial advisor or online retirement calculators can help you determine what you need to save for retirement.

Once you’ve painted a target on the wall, regularly assess how far off it you are, Faust says. It’s easier to make corrections farther out from retirement. By five years to D-Day, you should be heading for a bull’s-eye.

Consolidate your accounts and investments. By 40, you may “have a lot of different accounts scattered all over the place,” Faust says. The more spread out your investments become, the harder they are to manage.

Look for ways to streamline your portfolio. This may mean consolidating your investments under one brokerage firm or merging accounts, such as rolling over old 401(k)s into a single IRA or your current workplace plan. Less is more in financial planning.

As you consolidate, watch for overlap in your investments. Do you have the same fund in all of your accounts? Or do multiple funds all have significant holdings of the same stock? Most financial firms provide free portfolio analysis tools that can help you spot overconcentration.

Also avoid under-concentration. “You don’t want a thousand little positions,” Faust says. He calls such portfolios “hodge-podge portfolios.” Even though you have more money to invest in your 40s than you did at 30, your portfolio doesn’t need to be any more complicated.

You should have a portfolio of “meaningful parts that work together,” Faust says. If a fund you bought at 20 or 30 is still doing what you intended, there’s no reason to change it, he says.

How to invest in your 40s. With 50 to 60 years still ahead, you need a relatively high allocation to stocks to prevent running out of money in retirement.

“It’s not unusual for our clients to have 70 to 75 percent of their portfolio allocated to [globally diversified] equities,” Farrell says. He recommends two-thirds domestic to one-third international stock.

Within fixed income, diversify across core government bonds (munis in taxable accounts), high yield bonds and emerging market debt in decreasing proportion. For instance, you might allocate 12 percent of your bond portfolio to emerging market debt, with a little more than that in high yield and the bulk in core bonds, he says.

Investing in real estate and startups. As your wealth grows, consider investing outside the stock market.

Your 40s are a time to learn new things, Farrell says. Broaden your investment horizons with other income sources like physical real estate, angel investing or even starting your own business, he says.

For instance, renting out a future retirement home would let you use the rental income to pay down the mortgage so you end up with a debt-free home in retirement, he says. And in the meantime, you’ve created another income source for yourself that isn’t correlated with the stock market, meaning if your investments stop paying, your rental still will.

As with all investing, diversify your alternatives. Farrell suggests having two to three alternative investments in any combination of real estate, angel investing or small businesses.

Whatever investments you use, make sure they’re in areas you’re familiar with. “The worst thing you can do is buy into an idea you don’t really understand,” Farrell says. Get professional guidance and keep any investment a small portion of your overall portfolio – 5 to 10 percent for most investors, he says.

In your 40s, you can take advantage of these riskier investments because you still have time to recover if they fail and can capitalize if they succeed.

At the end of the day, the future is long and uncertain. Investing in your 40s requires a willingness to stay aggressive and, as Jerry Maguire would say, find new ways to show you the money.

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