Investing in Your 40s (Rewind) (EP.129)

0:28We all need to make smart decisions with our money. but maybe you haven't heard before. So I'd love for you to check it out. And don't forget, if you're enjoying the podcast, the best way to say thank you is to leave a quick review or forward an episode to a friend. Now, let's get into this popular episode from my Investing by Age series.

0:49By the time you're in your 40s, you're probably full-on adulting. You hopefully have established some financial goals, invested in your workplace retirement accounts, and set aside money for a rainy day. It's also more likely you've gotten married, bought a home, and maybe even had a few kids. Next comes the question of whether you've done everything you can for retirement. Because as you move into your peak earning years, it's all about making smart decisions right now. So with that in mind, here are a couple strategies to be putting in place in your 40s to plan for the future. The first is testing the viability of your retirement plan.

1:30It's important to check on the viability of your retirement plan throughout your accumulation years, especially if you haven't hired a financial advisor yet. How much money you need to retire is something I focused on in episode 54, which has been wildly popular and it's only 14 minutes long, so I encourage you to go back and listen. And you can also see some fairly comprehensive retirement readiness benchmark data from that episode in the show notes at thelongterminvestor.com. Savings benchmarks, like those discussed in the episode, they can be a useful starting point for testing the viability of your retirement plan.

2:05And the reason it's important to get a good grip on your retirement readiness in your 40s is that any necessary course corrections are going to be far less painful now than they will be later on. In addition to explaining those benchmarks within that episode, I also go on to explain the more sophisticated process we use at PlanCorp with new clients, because whether you can afford to retire and what kind of spending you can sustain is such an important question that I felt like it's important for you to understand the additional capabilities that a financial advisor brings to the conversation. Okay, so the first one is testing the viability of your retirement plan.

2:45The second thing is optimizing your retirement savings. Now, the first step of optimizing your retirement savings in your 40s is consolidating your investment accounts. It's not uncommon by this age to have investments scattered across old employer 401ks, robo-advisors, brokerage accounts, etc. And now is a good time to do a little housekeeping. By consolidating your accounts, it allows for a more holistic understanding of your full financial picture, which in turn makes it easier to have all your assets working together towards your goals. Consolidation also offers really nice potential for reduced fees and taxes, which I personally feel like is the biggest benefit of consolidation.

3:27However, most people I work with seem to most appreciate consolidation because it means having fewer accounts to juggle, which makes things easier to manage and keep track of. Now, once you've consolidated your assets, the next step in optimizing them is aligning your long-term asset allocation with your retirement plan. Now, in your 40s, you likely still have multiple decades before you'll need to live off those assets, so you theoretically have a pretty high ability to have an aggressive mix of stocks to bonds. Of course, on the other hand, it's not uncommon for some people to have a lower willingness to live with the volatility of a more aggressive portfolio.

4:08But again, consolidating assets allows you to align your investments accordingly. Finding the appropriate mix of stocks and bonds to meet your retirement goal, while also funding the life you want along the way, is probably the most important investment optimization you can make. Beyond that, assuming you consolidate your investment accounts, as I suggested, there are probably some opportunities for tax efficiencies within your portfolio using asset location, which is the process of keeping less tax-efficient investments in tax-deferred accounts and more tax-efficient assets in taxable accounts.

4:45And once all your accounts are under one umbrella, it will also make it easier to be sure that you're using the lowest cost options within your portfolio. Finally, if you have several investment accounts spread out across different providers, there's a decent chance that you'll have some duplicative exposures and opportunities for enhancing your overall diversification. So once you have that right mix of stocks and bonds, along with the ideal mix of assets in your taxable and tax-deferred account, it's important to address any diversification deficiencies, whether that's, for example, having too much U.S.

5:22large cap or not enough international stocks or maybe a lack of global bonds. You may also uncover opportunities to leverage strategies for offsetting the risk of any concentrated positions you've accumulated in individual stocks, whether that's just through purchasing or some sort of equity comp. Once you have your existing retirement investments optimized, the next step is to optimize your future retirement savings. Whenever you have the opportunity to earn compound returns while also enjoying a tax benefit, you should definitely take advantage. So in this instance, I'm thinking about IRAs, HSAs, and your employer-sponsored plan.

6:02Now, when it comes to IRAs, what you choose is largely going to depend on your projected tax bracket in retirement. So those on the lower end often go with the Roth IRA, but traditional IRAs still provide tax-deferred growth and may be tax deductible depending on you or your spouse's workplace retirement plan. Speaking of workplace retirement plans, at some point in your 40s, you might find that it makes sense to shift your contributions to or away from a Roth account. Because these days, most people have both the traditional and the Roth options within their 401k plans or their 403b or 457 plans.

6:42While a Roth account in your employer plan is generally favorable earlier in your career, you're likely approaching, if not already past the point of that bucket really making the most sense for you. Unfortunately, there isn't some simple formula for making this determination, but it mostly comes down to whether your tax rate will be higher or lower in retirement than it is today. It's also important, as best as you can, to understand the potential impact of the different accounts through the lens of both tax savings today as well as tax savings in the future. I've always found a lifetime tax analysis to be useful in making this type of decision.

7:22So the first one, again, as a recap, the first thing is testing the viability of your retirement plan. The second thing is optimizing your retirement savings. The third thing is getting strategic with education savings. Now, aside from planning for retirement, the most common goal for investors with children is saving for their education. And there's a number of different vehicles to do this, but the best is a 529 savings plan. Contributions to a 529 plan grow tax-deferred, and withdrawals are tax-free when used for qualified education costs. And a lot of states even offer a state income tax deduction on the contributions to a state-sponsored plan.

8:02So in your 40s, you should consider setting up automatic contributions to a 529 plan and invest in an age-based investment model. But it's important to remember that you shouldn't prioritize your children's education over your own financial well-being. Think about it, kids can always take out student loans, but you can't really take out a loan to fund your retirement. Plus, if you don't have a sufficient cash reserve or emergency fund in place, then you might find yourself needing to tap the 529 plan for a non-qualified purpose, in which case there's going to be a 10 % penalty, plus earnings are taxed as ordinary income in the year you withdraw them.

8:43But if you're hitting your retirement goals and you have some sort of emergency fund in place, then the overall benefits of a 529 plan really make them a great vehicle to safer education costs. Like everything else in financial planning, there are personal circumstances that result in different 529 strategies for optimizing your education planning. And I think the most interesting strategies come into play if you send your kids to private school for elementary, middle, or high school, which I talk a little bit about in episode 52 if you want to go back and check that out. Other opportunities arise when someone has the capacity after fulfilling all their other savings goals to max out their 529, or maybe they've already accumulated such a sizable balance that they're on pace to fund more than 70 % of their kids' college expenses through that account.

9:35In both instances, optimizing your 529 is a matter of capital allocation and tax minimization strategies that are probably a bit beyond the scope of this episode, but feel free to shoot me an email if this sounds like you and you want to dive into the specifics. The next item to be tackling in your 40s is completing your estate plan. Now, I almost put this in the investing in your 30s episode because I generally feel like anyone who is married or has children ought to have an estate plan in place. But even if you don't plan to get married or have children, you will likely have accumulated enough assets by your 40s that you ought to get an estate plan in place.

10:17And there are five documents that you need. The first is a will, which is the crux of any estate plan because it distributes your property as you wish after death. Without a will, disbursements are made according to state law, which might not align with your priorities. In addition, a will names an executor to manage and settle your estate, as well as a legal guardian for any dependents. Now, since this is a legal document, it is crucial that your will be well written and articulated so that it's properly executed under your state laws. And I know a lot of people go online to try to do this cheaply, but there are a lot of disclaimers on those online document sites that make it very clear that the documents make no guarantee of complying with your specific state laws.

11:03The second document to get in place is a living trust. It's also known as a revocable trust. And these living trusts, they create a separate legal entity to own your property. Now, the primary benefit of a living trust is that your assets avoid probate, which can be very costly and time-consuming. And until the probate process is completed, your assets can't even be distributed to your surviving heirs. Probate can also interfere with the management of a closely held business or stock. And if you're concerned about probate documents, such as your will and statements of assets and property becoming public record, having a trust in place generally prevents public knowledge of your estate.

11:42The third document is a durable power of attorney. This authorizes somebody to act on your behalf should you become physically or mentally incompetent to handle financial matters. So the person you designate in this role can pay bills, file taxes, direct investments, et cetera, on your behalf. Next set of documents is advanced medical directives. And this allows you to specify the medical treatments you desire in the event you can't express your wishes, as well as appoint someone to make decisions for you. Without this document, medical care providers must prolong your life using artificial means, if necessary.

12:17And there are three types of advanced medical directives. There's the living will, a durable power of attorney for health care, and a do not resuscitate order. The final document to get in place is a letter of instruction. This is a non-legal document that will typically accompany your will to express any personal thoughts and directions. Unlike a will, the letter of instruction remains private and its directions are not binding, but a lot of people like to do this. So estate planning, it's going to be a little different for everyone, but getting these five documents in place covers all the essentials.

12:48Now on to the last item for investing in your 40s, and that is hire an advisor. You don't need to overcomplicate your journey to financial success, particularly when you already have a mountain of responsibilities. Between high-pressure jobs, family obligations, managing the day-to-day errands and chores required of being a functioning adult, trying to maintain a social life and hobbies outside of work, they all add up. And it's okay to feel overwhelmed by your finances, but it's not okay to let that stop you from making progress towards your financial goals. And thankfully, you don't have to do this alone.

13:25Working with a financial professional can help you make smart choices about money so that you can achieve your goals and fulfill your values. And even better, a financial professional frees up valuable time for you to spend elsewhere. Of course, not all advisors will put your interests first, so it's important to find someone that always acts as a fiduciary. The most fail-safe way to ensure you work with a fiduciary is to ask your advisor to put that fiduciary commitment in writing. If your advisor isn't willing to do that, then you should probably seek help elsewhere. For all the action items in this episode, a financial advisor can both help minimize mistakes and optimize opportunities.

14:08Now, I'd suggested getting financial advice of some sort in your 30s, whether that's a robo-advisor, a human advisor, or some hybrid advisor. But these items that we're talking about in your 40s, they're complex enough that a human advisor is more likely the right fit. And that'll become more true as you age because the decisions become more complex and the stakes are higher. So hiring an advisor is an investment in yourself that can ensure you stay on the right path. That's all I have for this episode. Again, please visit thelongterminvestor.com to find show notes, past episodes, and a place to submit questions.

14:44Until next time, to long-term investing.

14:52Thanks for listening to the Long-Term Investor Podcast. To access free financial resources and submit questions to be answered on the show, visit thelongterminvestor.com. Peter Lazaroff is an employee of PlanCorp and BrightPlan. All opinions expressed by Peter and any podcast guests are solely their own opinions and do not reflect the opinions of PlanCorp or BrightPlan. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of PlanCorp and BrightPlan may maintain positions in the securities discussed in this podcast.