Your Money, Your Life: Put you first – those in their 40s need to focus on

Your Money, Your Life: Put you first – those in their 40s need to focus on

2 May, 2007

This is part two of a four-part series focusing on where people in different stages of their lives should be focusing their financial efforts. Future issues will address individuals in their 50s and 60s and beyond.

When do you plan to retire? Whether it’s in 15 years or not for another 30, a primary focus for people in their 40s should be on funding their retirement.

“A working person in their 40’s should focus their financial efforts on ensuring they are on track to meet retirement needs,” said Trista Acker, CPA, CFP, manager, Dublin office. “That includes paying off substantial debt by retirement age.”

Income will usually decrease by about half during retirement; therefore, your living expenses may need to decrease as well. Usually, this is can be achieved by no longer having a mortgage obligation during retirement. “To meet this goal, you many want to refinance now for a shorter mortgage term, such as a 15 or 20 year term,” Acker added.

While your focus should always be on keeping debt to a minimum, it’s even more important to start funding your retirement, especially if you have not yet done so. Before you know it, you will be looking to retire and the assets may not be there. If you did not plan in advance, it will simply be too late to save the money required to fund the retirement you desire. Minimally, you should be putting away enough into your 401(k) account to receive any matching dollars your employer may provide.

“People often underestimate the power of compounding,” said Frank Festi, CPA, CFP, shareholder, Medina office. “Studies show that the return on investment for stocks averaged at least a 10 percent rate of return during any 20 year period between 1927 and 1997. When compounded, your initial investment will grow substantially.”

If you were to invest $5,000 today, you would have over $100,000 in 30 years. That assumes you didn’t contribute any additional dollars and that a 10 percent rate of return, compounded daily, was received. If you invested $5,000 annually, you would have $1 million in 30 years. At that time, if you convert to a 5 percent interest bearing account, you could withdraw nearly $65,000 each year for the next 30 years of your retirement, Festi explained.

“The instinct for many people is to start saving for their children’s education,” Festi said, “but you need to put your retirement first. Those kids with college potential almost always get to attend with the help of scholarships, grants and loans.”

Assuming you are married and have children, you also want to make sure you have adequate life and disability insurance coverage.

“You want to make sure your family is taken care of if you aren’t there to do it,” said Wendy Shick,
CPA, CFP, principal, Mentor office. “However, it’s more likely that you will become disabled, so disability insurance is equally important.”

For those 40-somethings that have accumulated assets, you want to make sure you have a coordinated asset allocation plan to determine where investments are made in your various “pots”
(i.e., 401K, individual investments and IRAs), Shick added.

“And, if you have not already done so, make sure all estate documents are updated,” she said. “This includes wills, trusts and beneficiary designations for life insurance and retirement assets.”

Retirement will be here before you know it and you need to make sure you are ready. Put your future first.