1) Shave Points Off Your Mortgage
According to the Reserve Bank of St. Louis, the average rate on a 30-year fixed-rate mortgage was 10% in 1990, 8% in 2000, 5% in 2010, and just 3% in 2020. Stated another way: mortgage rates have been moving lower for more than three decades, and, as a result, many of our clients have saved hundreds of dollars each month by refinancing. Since your home mortgage is one of the largest expenses in your 40s and 50s, refinancing is something that everyone should have on their radar.
2) Consider Downsizing to Build Wealth
A wise person once said that, “it’s not how much money you make; it’s how much money you keep.” Downsizing your life can be a great way to keep more of the money that you make each month. Getting a more modest home or selling vacation properties are great ways to do this. Not just about dollars and cents, this approach also provides flexibility so that you can visit or plan an extended stay with your friends, family, or adult children.
3) Get Serious About Estate Planning
Many people begin to acquire significant wealth during their 40s and 50s. This might be the result of relatively high earning years and inheritance from the passing of loved ones. Accordingly, your 40s and 50s are the right time to get serious about estate planning if you haven’t done so already.
First, consider how you’d like your health and wealth to be managed if you are unable to provide direction. Then, work with an attorney to create living wills, healthcare directives, trusts, and other documentation that sets your wishes in stone.
4) Keep College Costs Down
After the purchase of a home, paying for a child’s college is one of the largest expenditures for any family. Accordingly, it is helpful to find ways to keep college costs down: focus on local colleges and have children live at home if they go to school nearby.
Just as important, consider how grants, financial aid, and even private loans can be used to pay for college. When it comes to loans, remember that you can’t borrow money for retirement… but you can help pay back a child’s loan once you feel financially secure.
5) Invest Raises and Bonuses
It can be tempting to put raises and bonuses toward those “nice to have items” in life. However, this is money that could grow for the next 10, 20, or 30 years in an investment account.
When you get a bonus in your 40s or 50s, consider if you really need that new boat you’ve been eyeing or if this money should be put to work toward your retirement.
6) Don’t Raid The 401(k)
We know it can be tempting when life throws a curveball, but we always advise against raiding your 401(k) before your full retirement age. We feel this way for two key reasons.
The first issue is the early withdrawal penalty. Any withdrawal from your 401(k) before the age of 59 ½ is subject to a 10% penalty on top of getting taxed as ordinary income. This means for someone in the 20% bracket, they lose 30% of any early withdrawal to taxes. Second, is the reduction in future growth — this is money that could be working for you in your portfolio.
7) Get Strategic with Insurance
When we talk about insurance, most people think about home and auto. However, some of the most important types of insurance protect your future earnings and future care: life insurance in the event of an early passing, disability insurance if you are injured and can no longer work, and long term care insurance should you need help caring for yourself later in life.
These types of insurance help protect everything you've worked hard to build and ensure you get the quality care and assistance you require should the need arise, and, for those reasons, we encourage everyone in their 40s and 50s to think strategically about their insurance needs.
8) Make Catch-Up Contributions If You Feel Behind
If you work with a financial advisor and determine you are a bit behind for retirement — don’t panic.
Instead, put your focus on creating a financial plan of action that will allow you to make catch-up contributions in your remaining working years. It can be unsettling to feel “behind” in saving for retirement, but most people can close the gap with a bit of planning, hard work, and dedication.
Enjoy The Journey
Whatever your 40s and 50s look like, we hope you enjoy the journey. And if working with a fee-only financial advisor would help you do that, we invite you to connect with our team.
If the DIY approach is a better fit for you, check out our Resource Center for ideas and insight when managing your financial life.