Turning 40 is a big deal. This decade of life is a time when you really start putting it all together. Once you make it into your 40s, you have tried out different occupations and gained tons of work and personal life experiences. Finally things all converge when you figure out who you are, what you’re passionate about (professionally and personally), and a realization of how quickly life goes by.
From a financial planning perspective, 40-somethings have this unique timeframe where they have this amazing life knowledge and still have 20-30 working years to make a big impact for long-term plans.
The first action item once you hit the big 4-0 is to take an inventory of your financial situation. Do this by creating a net worth statement of all assets and liabilities. It doesn’t need to be complicated, but list all accounts and types of debt. Use Word or Excel to make it easy to update every year. Tracking your net worth truly helps with sticking to savings goals and paying down debt.
Now look at the portfolio. How much is in bonds and stocks? A portfolio invested all in stocks is not balanced or very smart. A 40-something might have 60 to 80 percent of their investments in stocks depending on risk tolerance with the rest invested in bonds.
The savings goal for 30-somethings was to hit the maximum 401(k) contribution of $17,500 by the age of 40. Hopefully you made it with incremental increases each year. If you didn’t and are now in your 40s, it’s time to start thinking about the “future you.” The 70-year-old you is not going to like living on just Social Security. Save something now for that future you so that time will be fun too. Not saving for retirement really boils down to the present you being selfish and not considering the future you.
Parents need to begin saving for college. Go to SavingForCollege.com to research 529 plans. Decide how much to contribute each month. Remember, kids can get loans for college but parents can’t get loans for retirement. Never sacrifice saving for retirement to pay for kids college.
Insurance is the last topic to touch on. Get term life insurance if you have dependents. How much depends on each person’s situation. 10-15 times annual salary is typically enough life insurance for most people. For example, a person with dependents making $50,000 will probably need $500,000 to $750,000 of life insurance.
Call your insurance agent to sign up for an umbrella liability policy. These policies are inexpensive (about $20 per month for $1 million of coverage) and provide important coverage. Let’s say you cause a traffic accident and someone is seriously injured. You will get sued and probably have a large settlement against you. An umbrella policy will pay this settlement.
Those are some of the more important action items for 40-somethings to complete. Good luck and see you in your 50s!
Steve Doster is a Certified Financial Planner™ professional providing commission-free financial advice for do-it-yourself investors. You can reach Steve at Doster Financial Planning by phone 619-688-1192 or email steve@dosterfinancialplanning.com. You can also follow Steve on Facebook, Linked In, Twitter, or blog to get more personal finance advice and tips.
