Investing in Your 40s: 4 Financial Goals You Should Prioritize at Mid-Life

In your 40s, your priorities and investing goals become clearer than ever; it’s your mid-life opportunity to get your goals on track.

It’s easy to put off planning for the future when the present is so demanding.

Unlike in your 20s and 30s when your retirement seemed like a distant event, your 40s are when your financial responsibilities become palpable—now and for retirement. You may be earning more income than ever, so you can benefit far more from planning your taxes carefully.

Perhaps you have increased expenses as a result of homeownership. If you have kids, now may also be the time that you’re thinking about or preparing to pay for college tuition.

When all of these elements of your financial life converge, they require some thoughtful planning and strategic investing.

Consider the following roadmap to planning your investments wisely during these rewarding years of your life. Here are four ways to think about goals you might prepare for.

Preparing for Your Next Phase: Four Goals for Your 40s

You may have already made a plan for the future. If so, now is a good time to review it and adjust course if necessary. If you haven’t yet made a plan, it’s not too late to get started.

Set aside some time to think about your situation and long-term goals. If you’re married or in a relationship, it’s best to include your spouse or partner in identifying your goals.

Consider the facts: How much are you making? How much do you spend? Will your spending needs be changing in the near future? (Perhaps you're paying for day carte right now but can plan to redirect that amount towards savings in a few years instead.) How much are you setting aside for savings, investments, and retirement? What will you need in the next five, 10, or 20 years? Work these factors into your short- and long-term financial goals.

1. Pay off high-interest debt.

The average variable-rate credit card charges more than 16% a year in interest, so paying off any high-interest credit card debt can boost your financial security more than almost any other financial move you make related to savings or investing.

Student loans may also be a high-cost form of debt, especially if you borrowed money when rates were higher. For instance, even federally subsidized loans taken out in the 1990s may carry interest rates as high as 8.25%.

If you have a high-interest-rate student loan (say more than 5%), or if you have multiple loans that you’d like to consolidate, you may want to consider refinancing your student debt. These days, lenders offer many options to refinance higher-rate student loans.

There’s one form of debt that you don’t necessarily need to repay early, however: your mortgage. This is because mortgage rates are lower than most credit cards and may offer you a tax break. If you itemize deductions, you may be able to subtract mortgage interest from your taxable income. Many people file using the standard deduction, however, so check with your tax professional about what deductions may apply to your situation come tax time.

2. Check that you’re saving enough for retirement.

If you’ve had several jobs—which means you might have several retirement or 401(k) plans—now is a good time to organize and check how all of your investments have performed.

Betterment can help you accomplish this by allowing you to connect and review your outside accounts. Connecting external accounts allows you to see your wealth in one place and align different accounts to your financial goals. Connecting your accounts in Betterment can also help you see higher investment management fees you might be paying, grab opportunities to invest idle cash, and determine how your portfolios are allocated when we are able to pull that data from other institutions. There could also be several potential benefits of consolidating your various retirement accounts into low-fee IRA accounts at Betterment.

Because it’s much easier to get on track in your 40s than in your 50s since you have more time to invest, you should also check in on the advice personalized for you in a Betterment retirement goal.

Creating a Retirement goal at Betterment allows you to build a customized retirement plan to help you understand how much you’ll need to save for retirement based on when and where you plan on retiring.

The plan also considers current and future income—including Social Security income—as well as your 401(k) accounts and other savings. Your plan updates regularly, and when you connect all of your outside accounts, it provides even more personalized retirement guidance.

3. Optimize your taxes.

In your 40s, you’re likely to be earning more than earlier in your career–which may put you in a higher tax bracket. Review your tax situation to help make sure you are keeping as much of your hard-earned income as you can.

Determine if you should be investing in a Roth (after-tax contribution) or traditional (pre-tax contribution) employer plan option, or an IRA.

These days, more than half of employer-sponsored plans like 401(k)s offer a Roth option, and unlike Roth IRAs, it’s not limited by a maximum income threshold. The optimal choice usually depends on your current income versus your expected income in retirement. If your income is higher now than you expect it to be in retirement, it’s generally better to use a traditional 401(k) and take the tax deduction. If your income is similar or less than what you expect in retirement, you should consider choosing a Roth if available.

Those without employer plans can generally take traditional IRA deductions no matter what their taxable income is (as long as your spouse doesn’t have one, either). You can use Betterment’s 401(k) vs. IRA calculator to help decide which one you should be contributing to, or if you’re a Betterment customer, consult your Retirement Goal’s “How To Save” section, after ensuring that you have connected any external retirement accounts.

You’ll also want to make sure you take advantage of all the tax credits and deductions that may be available to you.

For instance, if you work and pay for childcare, you may be eligible for a dependent care tax credit. Depending on your income, this credit may be worth anywhere from 20% to 35% of what you spend on childcare, and the expenses are capped at $3,000 for one qualifying individual, and $6,000 for two qualifying individuals.

Check also to see whether your company offers tax-free transportation benefits—including subway or bus passes or commuter parking. The value of these benefits isn’t included in your taxable income, so you can save money. You can also save money on a pre-tax basis by contributing to a Health Savings Account (HSA) or Flexible Spending Account (FSA). You might not think using these accounts is worth the time, but for a couple making $100k in taxable income per year, you should receive a 29.65% return on investment in the federal/social security/medicare income tax break.1 

  • You may not have that much in expenses, but even if you only pay $200 a month for commuter parking and/or transportation passes and only contribute $500 annually to your FSA, paying those costs pre-tax is the equivalent to paying yourself over $850 in tax savings - it’s worth the time it takes to sign up! 

Health Saving Accounts (HSA)

Health savings accounts (HSAs) are like personal savings accounts, but the money in them is used to pay for health care expenses. Only you—not your employer or insurance company—own and control the money in your HSA.

The money you deposit into the account is not taxed. To be eligible to open an HSA, you must have a special type of health insurance called a high-deductible plan.

Your 401(k) may be tied to your employer, however your HSA is not. As long as your health plan meets the deductible requirement and permits you to open an HSA, and you’re not receiving Medicare benefits or claimed as a dependent on someone else’s tax return, you can open one with various HSA “administrators” or “custodians” such as banks, credit unions, insurance companies, and other financial institutions. You can withdraw the funds tax-free at any time for qualified medical expenses.

Flexible Spending Accounts (FSA)

A Flexible Spending Account (FSA) is a special account that can be used to save for certain out-of-pocket health care costs. You don’t pay taxes on this money—this is a tax-favored program that some employers offer to their employees.

If you have an FSA, remember that in most cases your spending allowance does not carry over from year-to-year. It’s important to find out whether your employer offers a grace period into the next year (typically through mid-March) to spend down your account.

Before you waste your tax-free savings on eyeglasses, check what you can buy with FSA money—with and without a prescription. Any unused funds will be forfeited, so it’s a good idea to use up what you can. If you find yourself with more than you can spend, then you might want to adjust how much you’re allocating to your FSA.

4. If you have children, start saving for college—just don’t shortchange your retirement to do it.

If you have children, you may already be paying for their college tuition, or at least preparing to pay for it.

For 2020-2021, the average annual costs of college tuition and fees in the United States were $10,560 for in-state public colleges, $27,020 for out-of-state public colleges, and $37,650 for private education, according to the College Board.

This doesn’t include the cost of room and board, so you can see why paying for college is something many people have to plan strategically for. Kids grow up fast, so if you haven’t started thinking about college costs, here’s some information to get started.

According to the College Board’s College Cost Calculator, today’s fifth grader today will need approximately $268,8832 to graduate from an average four-year private college by the year 2033.

Scholarships, grants and federal loans can help, but many parents feel it is up to them to make sure that their kids can get the education they deserve. It is a mistake to save for your kids’ college costs while neglecting your own financial security.

Plenty of parents submit a final tuition payment only to realize that they’ve saved nothing for retirement—without any time left to save more. It is a mistake to save for your kids’ college costs while neglecting your own financial security.

So, first things first, make sure you’re saving enough for your own retirement. Then if you have money left over, think about tax-deferred college savings plans, such as 529 plans.

A 529—named for the section of the tax code that allows for them—can be a great way to save for college because earnings are tax-free if used for qualified education expenses.

Some states even allow you to deduct contributions from your state income tax, if you use your state’s plan. (While each state has its own plan, you can use any state’s plan, no matter where your child will go to college.)

An alternative is to put money away in your own taxable savings accounts. Some investors prefer this method since it gives them more control over the money if things change, and may be more beneficial for financial aid.

Your 40s are all about taking stock of how far you’ve come, re-adjusting your priorities, and getting ready for the next phase of life.

By working on your financial goals now, you can gain peace of mind that allows you to concentrate on important things like family, friends, work, and the way you want to spend this rewarding decade of your life.

Get a better handle on your 40s with Betterment.

Betterment handles your investments so you don’t have to.

We make it easy to roll over your retirement accounts (or get new accounts set up), and much of what we do is designed to help you save money on taxes. Our customer support team is available to answer questions, and we have licensed experts available to help you plan. Get started today.

1 Assuming taxable income of 100k, married filing jointly, the tax bracket of 22% applying to the 2021 taxable income Bracket of 22% for $81,051 to $172,750, 1.45% medicare tax (2.9% split evenly by employees/employers), and 6.2% Social Security tax (12.4% split evenly by employees/employers).

2 Assuming 8 years remain until college, 4 years of attendance, 5% education inflation, average 4-year private college as of June 2021 ($42,224), full tuition covered by savings.

The information in this article is provided solely for marketing and educational purposes. It does not address the details of your personal situation and is not intended to be an individualized recommendation that you take any particular action, including rolling over an existing account. When deciding whether to roll over a retirement account, you should carefully consider your personal situation and preferences. Specific factors that may be relevant to you include: available investment options, fees and expenses, services, withdrawal penalties, protections from creditors and legal judgments, required minimum distributions, and treatment of employer stock. Before deciding to roll over, you should research the details of your current retirement account, consult tax and other advisors with any questions about your personal situation, and review our Form CRS relationship summary and other disclosures.

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