Key financial priorities for investors in the peak earnings years of their 40s and 50s.
Investment advice abounds for people just starting out in their careers, as well as for those who are getting ready to retire.
But for midcareer investors, people in their 40s and 50s? Not so much. Workers at this life stage may be at their peak earnings level, and therefore may have more-complex financial needs than their younger counterparts. Moreover, midcareer investors frequently are juggling the competing financial demands of college for their kids and retirement savings for themselves. That’s no small task, especially when you stop to consider the big price tags associated with each, as well as the complexities of calibrating two separate pots of money with two different time horizons.
Even so, you tend to see less information about how midcareer accumulators should invest and manage their finances differently than their younger and older counterparts. Like 20- and 30-somethings, midcareer accumulators still have a decent amount of human capital, or earnings power. And with a runway of 15 or 20 years until retirement—and perhaps 25 or 30 more years in retirement—they can usually afford to take plenty of equity risk with their investment portfolios. At the same time, people at this life stage may face serious life—and in turn financial—setbacks from which they never fully recover: a debilitating health condition that limits work, for example, or time away from work to care for aging parents.
Here are some key priorities to keep in mind if you’re a midcareer accumulator looking to make sure you’re on the right track with your financial and investing life.
- Nurture your human capital.
- Balance college funding with other goals.
- Protect what you have.
- Combat lifestyle creep and step up your savings.
- Employ additional accounts for retirement savings.
- Begin to derisk your portfolio.
- Don’t assume a larger portfolio means more complexity.
- Rightsize your advice.
Nurture Your Human Capital
Investing in human capital—via additional education or training—is close to a slam-dunk for early career accumulators. If you can increase your earnings power with such an investment, you have a long time until retirement to benefit from it. The calculus isn’t as simple as you get older, which helps explain why medical schools and high-priced MBA programs aren’t jam-packed with people in their 40s and older. Higher lifetime earnings may not offset the outlay of money and time for costly training later in life.
Yet midcareer accumulators should still make an ongoing investment in their own human capital—taking advantage of continuing education programs and conferences to enhance their skills, networking, and simply staying current on the latest news and developments in their fields. And no matter your field, staying current on the latest major technology developments, both on and off the job, is a crucial way to ensure that you stay relevant.
Balance College Funding With Other Goals
Balancing college funding against saving for retirement is arguably the biggest financial challenge facing many midcareer accumulators. Many parents naturally feel the tug of shouldering at least a portion of their children’s college costs, but paying for college is a heavy lift. Meanwhile, with the ratio of years worked to years retired declining, prudent retirement savers today will need to plan for at least a 25- to 30-year time horizon in retirement, necessitating a large nest egg. Morningstar Investment Management’s David Blanchett has suggested that retirement savers target a retirement savings pool that’s 25 times or more their desired initial retirement income.
How to reconcile these competing financial goals? I’d advise putting retirement readiness front and center on your financial dashboard. The simple reason is that if retirement is drawing close and you have a shortfall in your retirement savings, you’ll have fewer levers available to you than is the case if your child gets close to matriculation and you haven’t socked away the tuition and fees. Your child might consider community college for the first two years, for example, an option embraced by an increasing number of families since the global financial crisis.
Use online calculators like the T. Rowe Price Retirement Income Calculator and perhaps one-on-one guidance from a financial advisor to gauge the viability of your current savings rate. If it appears that you’re comfortably on track and have room in your budget to spare, you can then consider steering a portion of your savings to college funding as well. 529 college-savings plans offer the most generous tax benefits and allow for larger contributions than other college-savings vehicles. Check to see how good your home state’s plan is and how generous its tax breaks are; Morningstar’s 529 Plan Center can help you identify the plans that are best of breed.
Protect What You Have
The more assets you amass, the more important it is to protect what you have. The same basic insurance types that were valuable in your 20s and 30s—health, disability, property and casualty, and life insurance if you have minor children—remain every bit as essential as you head into your 40s and 50s. Homeowners should also consider a personal liability policy to cover them in case an accident or other incident should occur on their property, as well as additional insurance protection for valuables. Finally, the 50s are a good life stage to assess whether a long-term care insurance policy makes sense in your situation. While such coverage isn’t for everyone, the longer you wait, the higher your insurance costs are apt to rise, and the more likely you are to encounter a health condition that could disqualify you from purchasing the insurance.
In addition to reviewing your insurance needs, be sure to take stock of your emergency fund. Whereas young accumulators might reasonably stick with the usual rule of thumb of three to six months’ worth of living expenses in cash, midcareer accumulators, especially higher-income folks, should target a year’s worth of cash. That’s because the higher your income and the more specialized your career path, the longer it could take to replace your job if you lost it.
Combat Lifestyle Creep and Step Up Your Savings
The 40s and 50s are often considered the peak earnings years. But with higher earnings, it’s easy to let “lifestyle creep” gobble up every bit of your extra income. Before you know it, you’re driving a luxury car with a high monthly payment and shelling out for dog walkers and house cleaners.
One way to help ensure that your savings steps up with your income is by switching on the auto-increase feature of your company retirement plan. If your plan offers this feature and you’ve elected it, your 401(k) contributions will increase each time you get a raise and you won’t have a chance to get accustomed to the higher income.
