There may be no more volatile time in adulthood than your 20s and 30s. So much changes over those two decades, it can be hard to know what to expect next. Once 40 hits, though, it should be relatively smooth sailing, says Cynthia Kett, a CFP and principal at Stewart & Kett Financial Advisors Inc. It’s in this decade in which salaries tend to climb, monthly bills stabilize and mortgages shrink, if not disappear entirely.
However, there is one pitfall that this cohort risks almost across the board: overspending. According to a 2015 study by the Federal Reserve Bank of New York, most people reach peak earnings in their 40s. As exciting as that may be for people entering that decade, it’s also easy to spend those additional dollars on better vacations, newer cars, nicer restaurants and more. The phenomenon is often referred to as “lifestyle inflation.” Of course, you should treat yourself once and a while, but higher earnings means you can save more, too.
In fact, it’s in your 40s where savings should be ramped up, says Kett. “It’s kind of the sweet spot,” she says. “You’re getting your kids through education, you’re paying down your mortgage and your careers are established.” In theory, you should have less debt and more earnings, which means you can start saving far more than you may have in the past. “It’s a tremendous opportunity to really get ahead and save more aggressively,” she says.
In some ways, investing in your 40s isn’t much different from investing in your 30s. You still have a lengthy time horizon, which means you can still allocate more of your money to equities than fixed income. Depending on how much you’re earning and what you’ve saved, you may even be able to branch out into other types of investments like physical real estate, angel investing or something else that’s not as correlated to stock markets, says Kett.
Your asset mix is also becoming more diverse in that your now stable job likely means you have a regular pension, too. Many companies still have defined contribution plans and they often come with a matching program. If you put in money, your employer will put in some too, and because you’re earning more in your 40s, the company will likely also be investing more on your behalf.
A pension plan, if you can get one, is key to savings, says Kett. It’s easy to grow – money typically comes off each paycheque – and you have a suite of pre-set, low-cost products, such as target-date funds, to choose from. While your risk tolerance will determine what type of funds to buy – products often come in a range from conservative to aggressive – it’s generally a good idea to hold something more balanced that comes with stocks and bonds, she says.
If you don’t have a pension, being invested more heavily in equities is still an appropriate strategy in your 40s, says Paul Wheaton, CFA and investment counsellor with Mawer Investment Management.
While you are getting closer to retirement, you should still have between 15 and 25 years – if not longer – before you stop working and with that kind of time horizon you shouldn’t be overly nervous about owning riskier assets. Asset mix depends on the person, but Wheaton has many 40-something clients with 80%-20% allocations to stocks and bonds – and even has some who have gone all in on equities.
When investing, though, consider putting more money outside of Canada, he says. If you own a pension, it’s likely more of those assets will be in Canadian companies – you may even be highly concentrated in your own company if it has a share matching plan. It’s still a good idea to branch out even if you don’t have a pension.
“Our jobs is here, CPP is here, we own houses here – it’s hard to diversify these types of things,” he says. “You can get diversity in an investment portfolio, and so because of all these things, you should have a lower weighting to Canadian stocks.”
Like with other ages, money needed for short-term goals, like a vacation or a new car, should be saved conservatively in GICs or other fixed income products, he adds. Anything needed beyond five years, though, can be subjected to more risk.
Derailed by divorce
If all goes well, you should be building a nice nest egg by the time you hit 50, but it’s not always a straight line higher in your 40s. It’s also the decade where people start getting divorced and if anything can kill a well thought out plan, it’s a separation, says Kett.
There are lawyers fees, second properties that need to be purchased or rented, savings may have to get split in half and more. “You have to establish two households, which would increase living expenses,” she says. “It almost means starting over again.”
In any case, discipline is crucial to savings in your 40s. Kett suggests creating an investment policy statement, which details how much risk you can handle, what asset classes you’re willing to go in, how much you want to save every month or year, what you want to use the funds for and more.
Spelling things out in this way will keep you focused on savings, she says. Also consider automatically moving money from a chequings account to an investment account, so the savings happen regardless. Don’t forget to up the amount as your salary increases. Otherwise you could end up spending those extra earnings away. “It’s so easy to spend,” Kett says. “Stay focused.”
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