Your 40s are a great time to stop, take a breath and see how you’re doing. Many people find that they’re finally starting to get some financial traction. For starters, your salary is likely higher than it was in your 30s, and at the same time, you’ll find that the mortgage and the kids aren’t quite as financially demanding as they once were.
Crush your debt
It’s at this point that you’ll probably want to really start focusing on paying off your mortgage and any other debt you may have. If you’ve struggled throughout your 20s and 30s, then you have to really make your 40s count. “If you do nothing else, try to reach age 50 debt-free,” says Jim Otar, a fee-for-service adviser in Thornhill, Ont. “You need those 10 or 15 years before retirement to really boost your savings.”
Resist the monster home
Now that you have a larger income, you could qualify for a larger mortgage — but try to fight the urge. Yes, the housing market has done amazingly well over the past 15 years, but you don’t want to count on a repeat performance over the next 15 years to fund your retirement. So try to focus on paying off your existing mortgage, rather than trading up. “A modest home with a smaller mortgage allows you to keep your flexibility should one of you lose your job or become ill, forcing you to live on less money,” says Malcolm Hamilton, an actuary with Mercer Human Resource Consulting in Toronto. “I know people say they’ll downsize, but that’s very hard for most people to do, and not a good financial strategy.”
Hire a financial adviser
Many find that their savings finally break the $100,000 point in their 40s, so it’s time to get serious about how you invest. If you don’t have the time or interest to manage your money yourself, your late 40s or early 50s may be a good time to consider hiring an adviser. Your adviser can help you set your retirement goals and draw up a step-by-step plan to get there. He or she can also help you set up an investment portfolio using low-cost mutual funds, exchange-traded funds or index funds. Keep an eye on your fees, though, whatever type of investments you choose. The savings you get from paying lower management fees over the years can easily add up to thousands of dollars. Because of that cost savings, after fees, you’ll likely get better long-term performance.
What if I got a late start?
Many people will put their mortgage behind them in their 40s, but those who married late and had kids even later may find that they’re running behind. If that’s you, you may have to do a bit of extra planning. Try to accelerate paying off your home by making biweekly mortgage payments instead of monthly payments. The difference is only a few hundred dollars a year but those few extra dollars will shave almost five years (and tens of thousands of dollars) off your mortgage.
“You don’t need to do everything at once, and the high expenses of a young family during your 40s will undoubtedly put a crimp in your savings to some extent,” says Al Feth, a fee-for-service adviser in Waterloo, Ont. “But don’t deprive yourself by putting every nickel towards the mortgage at this stage. By simply making biweekly payments, you’ll be on track to have your home paid off by age 60 or 65. That’s good enough.”
Use RRSPs to save
Unless you have a particularly high or low income, you should probably stick to RRSPs — rather than Tax-Free Savings Accounts (TFSAs) — for your retirement saving at this point. You’ll get an immediate tax refund that you can reinvest and chances are you’ll be in a lower tax bracket when you retire, so your money will be taxed at a lower rate when you withdraw it. “If you just start saving in an RRSP at any point in your 40s and continue doing it through your 50s, you’ll be fine,” says Mary Prime, a fee-only planner at Prime Consulting in Toronto.
TFSAs, on the other hand, are best reserved for short-term savings — for instance if you’re saving up for a new car. As a general rule, as long as it’s likely that you’ll be in a higher tax bracket when you take the money out than you were when you put it in, a TFSA is a good bet.
The top financial lessons from our 40s — Colin and Cheryl Miller
In 1985, when I was 25 and Cheryl was 22, we bought our current home in the town of Strome for $35,000. We paid it off by the time I was 40. All around us, people were buying larger, more expensive homes and taking on more debt. We pride ourselves on not falling into that trap. We’ve lived in the same 1,400-sq ft bungalow with a nice backyard for 25 years now and have no plans to move.
All the excess money we had from paying down our mortgage early allowed us to help our three kids pay for their post-secondary education without sacrificing our retirement goals. We were a one-income family for many years, so Cheryl and I never contributed to RESPs for the kids, but that hasn’t much mattered. Cheryl went back to work part time when the kids were in middle school and we used her earnings to help pay for their post-secondary education. The kids worked part time as well to cover some of their university expenses but we contributed whenever we could. It worked out very well for all of us.
Now I’m 50 years old, and money’s no problem. We have peace of mind and are even considering early retirement in our mid-fifties. The lesson we learned is that even modest incomes can accomplish big savings goals if your approach to your finances is a disciplined one.