LIFE BEGINS AT 40: Avoiding a midlife financial crisis

May 10, 2018
Posted in Blog
May 10, 2018 Mduduzi Luthuli

Many people in their 40s are facing an uncomfortable fact: They simply aren’t where they’d hoped to be financially. Fortunately, all their life experience can help correct for past mistakes. There are different trigger moment for everybody, but regardless of when it comes, people find themselves looking down the barrel of a gun as they consider juggling lifestyle inflation costs and a looming retirement. It’s a great challenge to advise people in their 40’s. It’s impossible to advise them based on a tidy “life stage” demographics. Some are just starting families, while others are sending offspring to tertiary. They’re married, single, divorced, and just about everything in between. For those still grappling with financial instability, it’s best to 1st acknowledge what you’ve done right. It could be one great decision sandwiched in between some fails, or just a single good habit that can mitigate the impact of a host of wrongs. Here are our tips for financial planning in your 40s.

Have an Estate Plan

The first step is clear, have a written financial plan, period. Because that plan will dictate what you must do to be successful for the entirety of your life. The financial plan is your road map. In it will be your portfolio requirements, your savings goals, and your insurance-related needs. Married or not, the absence of estate planning documents is a mistake. If someone needed to make a medical or financial decision on your behalf, do you want to let the government choose who that is? I sure as hell don’t.

What about the legacy you want to leave? Shouldn’t you decide where your stuff goes? Oh, and your minor children are technically your stuff too, so it’s imperative that the right guardians are assigned if you kick the bucket. Speak to Trudy Luthuli, our estate-planning expert. She will help you draft a will (where your stuff goes when you die), power of attorney (who can make financial decisions for you), and medical directives (who can make a medical decision for you). These legal documents are what I call an estate planning starter kit and if they aren’t in your fireproof lock-box, it’s best you schedule that consultation today.

Ask for a Raise

Have you been an asset to your company? If so, now is a good time to ask for a raise. Maximizing earnings should be a focus in your 40s. This includes negotiating salaries, asking for raises or finding additional income. Depending on when you plan to retire, getting a raise now, and banking it for the next 10 to 20 years, could really help you increase your nest egg. Do the research. If you aren’t earning what you’re worth, ask for a raise or promotion, or consider looking for another job.

Beef up Retirement investing

The 40s decade is a critical time for retirement savings, as it is likely when a person will reach their peak income and can make a dent in their long-term goals if they haven’t yet begun to do so. For a 40-year-old with nothing saved for retirement, putting away a bare minimum of 15% of their gross salary becomes a need, not a luxury. I repeat, saving for retirement is the priority! Contribute the maximum realistically sustainable amount to your workplace or personal retirement plan, instead of putting that money toward lifestyle inflation.

Now that you’re upping your retirement account contributions, it’s a good time to also evaluate your retirement account/s. Do you have access to the investments that fit your needs? How high are the fees you’re paying? What kind of yield do you get? Regardless of what decision you make, saving as much as you can will be important. I have never heard someone who said ‘I wish I hadn’t saved so much.

Education Investing

The cost of tertiary education continues to climb, leaving many families unprepared for what is likely the most expensive investment of their child’s life. Covering every cent isn’t realistic for most parents but planning ahead can help mitigate future financial pressure. If you haven’t saved enough, or at all, start by setting a more achievable goal, like aiming to cover a quarter of your child’s tertiary bill. That’s the amount paid on average globally by parents through savings and income. Loans, taken on by students as well as parents, account for another 27%, and scholarships and grants cover the rest.

Saving is just one step of the process, however. Talking openly with your child about the cost of university, and how you plan to pay for it, may lead to more careful decision making about where to go, and how to make the most of their years of studying. Plus, it gives them insight into how they might want to manage their own money after graduation.

For many, the hardest part can be learning to put your own long-term future first—sometimes for the first time in your life. We see people focusing on their kids’ education savings, and not enough on retirement or an emergency fund for themselves. You can borrow for education costs if necessary, but no one can borrow for retirement.

We all like the idea of helping our children. And, while it would be nice to help your kids, don’t sacrifice your future to do it. You can’t replace the lost earning potential when you withdraw your capital and use it to pay for an education. Unless you are ABSOLUTELY SURE that your kids are going to support you in retirement, raiding your retirement account to pay for education costs is a bad idea, especially now that you need to be in high gear.

Get a handle on debt

Debt can be a huge distraction from savings goals, and many may view it as a reason to not save anything for retirement. It’s possible to simultaneously pay down debt while saving for retirement by creating a plan and sticking to it. Often, only a minimal sacrifice is needed to help meet your short-and long-term goals. Start with a budget that manages debt and daily expenses, so you can find the money to save for the long term.

Retiring mortgage-free is a worthy goal. You’ll eliminate one of your largest expenses, which means you won’t be forced to take large withdrawals from your retirement savings during market downturns to pay the bills. But at this point in your life, there may be better uses for your money, especially if you have a mortgage with a low interest rate. Focus on paying off debt with higher interest rates, such as credit card balances and personal loans, first.

Grow your emergency fund

Another thing that can quickly derail your efforts to save for retirement is an emergency. Say your roof springs a leak, your geyser suddenly bursts, or you’re retrenched and will be without an income for the coming months. You must face these problems, and that won’t be cheap. That’s where an emergency fund comes in. As the name suggests, this type of fund is filled with money that you only tap when an unexpected financial emergency pops up.

By having a well-stocked emergency fund, you won’t have to resort to credit cards to pay for unexpected home or auto repairs, or even a surprise medical bill. I recommend that you have enough in your emergency fund to cover at least six months to a year’s worth of daily living expenses. That might seem daunting, but even starting an emergency fund with small payments every month can build up.

Lacking Life Insurance

Like it or not, the odds of you dropping dead are much greater today than they were yesterday. Moreover, responsibilities, as well as liabilities, are at an all-time high. Leaving your loved ones without the financial resources to move on is just not cool. It’s downright irresponsible. Luckily, there’s a solution for that…it’s called Life Insurance!

It’s 100 percent not too late to buy life insurance. Sure, it might be more expensive than it would’ve been had you bought it years ago, but there’s a policy out there for everyone. Think of how well you will sleep at night knowing that, god forbid, something happens to you that your loved ones will be okay.

Conclusion

Above all else, love yourself and your family. There’s a reason why they say life begins at 40. It is at this stage of your life that you should know thyself, what your priorities and values are, and have the financial and mental capability to achieve your aspirations. Your financial health and your quality of life are connected. It’s hard to be financially secure if you’re not well emotionally and physically. Just as being happy can contribute to productivity, as can achieving work-life balance. If you work all the time without a sufficient break, you’ll burn out and be a lot less effective at work. Burnout means more mistakes and could lead to being reprimanded or fired. Protect your financial future by getting enough rest, eating a balanced diet, and taking vacations. In short, spend time with your loved ones, those that give life meaning.