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Investing in Your 40s: 4 Financial Goals You Should Fund 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.

Articles by Alex Benke, CFP®
By Alex Benke, CFP® VP of Advice and Investing, Betterment Published Jan. 06, 2019
Published Jan. 06, 2019
7 min read
  • In your 40s, you should aim to reduce debt, invest for retirement, and optimize tax savings.

  • If you have children, start saving for your child’s college tuition and take advantage of childcare tax credits.

  • Look out for tax-deferred savings options, such as your 401(k) plan, or an IRA or HSA.

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 a far ways off, 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? 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.

Pursue your goals.

1. Pay off high-interest debt.

The average variable-rate credit card charges more than 15% 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. 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 sync and review your outside accounts. Syncing external accounts allows you to see you all your wealth in one place and align different accounts to your financial goals. Betterment also helps you see higher investment management fees you’re paying, grab opportunities to invest idle cash, and determine how your portfolios are allocated.

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.

Every 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 constantly, and when you sync 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.

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 is 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).

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 be already be paying for their college tuition, or at least preparing to pay for it.

For 2017-2018, the average annual college tuition costs in the United States were $9,970 for public, in-state schooling, and $34,740 for private education, according to the College Board.

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 more than $267,0001 to graduate from an average four-year private college by the year 2024.

Scholarships, grants and federal loans can help, but it’s up to you to make sure that your 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.

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. Learn more about saving for your child’s tuition costs.

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 8 years remain until college, 4 years of attendance, 5% education inflation, average 4 year private college as of December 2018 (42,224/year), full tuition covered by savings.

This article is part of
Original content by Betterment

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