Cents & Sensibility – Advice for readers in their 40s and 50s

Beth Peabody

In last month’s column, readers in their 20s and 30s were urged to take advantage of their relatively young age by contributing money to tax-deferred accounts like a company retirement plan or IRA once a savings account of three to six months of expenses is established.

This month’s advice focuses on readers in their 40s and 50s and who are in the middle of their careers. At this stage, many may be near their peak earning years and generally have more complex financial needs than when they were younger. 

Juggling financial goals, such as saving for retirement and college, with the need to support lifestyles while paying for insurance to protect assets can be a real challenge. 

Listed below are a few steps that can simplify the challenges faced by this age group and create greater confidence in the plan for your financial future: 

  1. As suggested last month, the primary goal for all age groups is to reach a goal of establishing a savings amount equal to 3-6 months of expenses. These balances should be invested in a savings account or money market fund that pays interest but will not lose value. 
  1. If you have credit card debt, pay it off as quickly as possible because interest rates are generally very high.  
  1. Live within your means. At this stage of life, it is often easy to let the extra income lure you into purchasing a bigger house, fancier car or taking more expensive vacations. Before making such decisions, consider if it is really necessary. 
  1. As income increases during these years, so does the opportunity to save more for retirement. If you are not saving enough to meet the company match percentage or maximum allowed by the IRS each year make this a goal. It may take many years to reach this goal, but small steps can make a huge difference. For example, many retirement plans offer an “auto-increase” feature that if elected will increase your contribution to the plan each time you get a raise before you become accustomed to the higher income. 
  1. Monies saved for retirement may represent the largest pool of assets at this age, but do not make the mistake of investing the balances too conservatively. Just as those in their 20s and 30s have the benefit of time, those who are in their 40s and 50s also have the benefit of time. Even if you retire in 20 years, odds are that you will live a few more decades. A big worry for retirees is that they will outlive their money.  
  1. Because the “risk tolerance” for this money is high, consider selecting a target date mutual fund offered by most retirement plans that corresponds to the year you expect to retire. As an example, if you are 45 in 2023 and expect to retire 22 years from now when you are 67, select a mutual fund with “2045” in its name (2023 + 22). Because the time horizon is long, this type of fund will be invested with a large allocation to stocks. The asset allocation of the fund will automatically become more conservative as the retirement date nears by lowering the amount in stocks and adding money to bonds. Knowing this will happen automatically, and knowing that you will not use this money for more than two decades, will allow you to ignore the day-to-day volatility of financial markets. 
  1. Assets you have accumulated by this age need to be protected. Assess the levels of disability and life insurance given the possibility that your current income is much higher than when you first started paying premiums.  

Once all of these goals have been achieved, and if there is extra money to set aside each month, it may be time to consider putting money aside for college. For more information, the column discussing 529 College Savings Plans can be accessed at https://therecordnewspaper.org/cents-sensibility-the-gift-of-a-529-savings-plan/

A final suggestion for those in their 40s and 50s is to search for opportunities to enhance your expertise by attending conferences and continuing education events to enhance your earning power. 

Next month: Financial recommendations for 50-60 year olds. Beth Stegner Peabody is CEO of Stegner Investment Associates and a graduate of Sacred Heart Academy and St. Agnes School.

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