If you are in your 40s, you are at halfway point. Your children may be closer to their college years than kindergarten. You are also closer to retirement than an entry-level position. Your 40s can be a critical point in your financial future. You need to balance competing goals with a finite amount of money: saving for your children’s education; paying your mortgage and for your children’s soccer lessons and ballet classes, and saving for your own retirement. Midyear checkups during your 40s can help ensure you are not sacrificing one financial goal for another.
This is the decade to define your goals. You cannot race to the finish line if you do not know how far you have to run. You should set your end goals then determine how to pace yourself to get there without sacrificing your strength along the way.
You can research online or through school counselors to get an estimate of how much college may cost for your child. You can then set a target for your savings. You may want to decide now if your child will contribute to their education with earnings from a part-time job or with student loans. With a goal in mind, then you can determine how best to save. Usually, 529 plans offer generous tax-advantaged savings for education expenses.
Your 40s are also a time to evaluate your household budget. Your earning potential is still increasing, which may result in more monetary commitments than ever. Your children may be participating in multiple extracurricular activities, or you are considering buying an additional car or vacation home. Your best moves during this decade are to pay off your unsecured debt and prepare for that rainy day. You may consider beefing up your emergency fund; however, you should also consider protecting your earning power with disability and life insurance. Any setback that jeopardizes your future income could significantly derail your financial plans.
We’re not done yet, as you still need to save for your own retirement. Your children can borrow money for education. You can likely get a loan to help in an emergency. You cannot borrow money for retirement. As your 40s are potentially your top earning years, you may want to save as much as you can. Contribute enough to receive your employer’s match. This is free money someone is willing to give you. Since deferrals are pre-tax, contributing to your 401(k) will lower your taxable income for the year. If you are eligible, consider contributing to a Roth IRA to provide you tax-free withdrawals in retirement. Once you maximize your Roth IRA contributions, consider maximizing your 401(k). You can defer up to $17,500 to your 401(k) in 2013.
Next week, I’ll take a look at reviewing your financial plan in your 50s.
William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.