Financial Planning Goals Through the Decades: Your Forties

Keys for your 40’s

  1. Don’t let college costs interfere with retirement savings
.  This is one of the most difficult pieces of financial advice to follow, because for most parents it seems completely backwards. Prioritize my retirement over my child’s education? No way! Although it seems selfish, putting retirement savings before college savings is practical, because the only way to fund retirement is savings; whereas, college can be paid for with scholarships and loans.
One common mistake that parents of college students make is to dip into their 401(k) funds to pay tuition bills. Not only does taking money from your 401(k) result in less money for retirement, it also will likely result in fees for early withdrawal. Remember that your 401(k) account will make up a large portion of your retirement nest egg. If you take money out of your 401(k) account early, you may end up sabotaging your own retirement, which will benefit no one.
One way you can reconcile the conflicting demands of retirement and college savings is to save for both simultaneously in a Roth IRA account. A Roth IRA account is ideal for combined saving, because qualified disbursements to cover education costs are tax free.
  2. Reevaluate your portfolio
.  When you were in your 30’s your risk tolerance was high, because you had the benefit of time on your side. However, as you get closer to retirement and possibly your child going to college, you should begin shifting your portfolio towards lower risk investments. One rule of thumb for managing risk in your portfolio is to take your age and put that percentage of your portfolio in bonds (i.e. if you are 40 years old, 40% of your portfolio should be in bonds). Though this is not a rule that must be strictly followed, it reflects the need to decrease the amount of risk in your portfolio as you get older.
Another important measure you should be taking periodically is to check your asset allocation. It may be necessary for you to sell off some of the investments that have grown in value in order to siphon more money into parts of your portfolio that are underperforming. Balancing risk and strategically allocating assets in your portfolio are complex activities especially if economics is not your strong suit. Enlisting the services of a financial advisor is often the best way to optimize your portfolio.
  3. Get an insurance-needs analysis.  
At this point in your life you are likely well established in a place and a job. This is a good position to be in and you want to protect this lifestyle against any unforeseen circumstances. Insurance is one way to avoid losing your security as a result of bad luck. However, insurance is only effective if you are properly covered. It is all too common for people to think that they are properly covered only to find out after a disaster that they are not. For instance, many people believe that if they have an accident they will be fully covered by their employer’s disability insurance policy. In reality, most companies will only offer you 60% of your salary, meaning you may need to pursue additional insurance.

One way to find out if you have sufficient coverage is to get insurance needs analysis. This process will find any gaps in your auto, home, health and life insurance policies, showing you where your weaknesses lie and allowing you to proceed accordingly. One idea you might consider, especially if your assets top $1 million, is purchasing an umbrella insurance policy, adding an extra layer of protection over your auto and home insurance.

  1. Roth IRA Conversion.  
If you have changed jobs over the years, you likely have money spread out in multiple 401(k) accounts. Many people in this situation make the mistake of taking their money out of these accounts, incurring fees and opening yourself up to taxes. Rather than falling into this trap, consider a Roth IRA conversion. You can roll your money from different accounts into a Roth IRA where it can compound tax-free. Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual, nor intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes.

Withdrawals from qualified retirement plans and Traditional IRAs are subject to income taxes, and if made prior to age 59 1/2, a 10% penalty may apply.

Withdrawals from the Roth IRA account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

Insurance policy guarantees are based on the claims paying ability of the issuing company.