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The Best Investing and Retirement Advice for Your 40s

By Motley Fool Staff – May 7, 2017 at 9:00AM

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This is when your career and your income are approaching their peak, so take advantage of that as much as you can.

In this segment from Motley Fool Answers, Alison Southwick and Robert Brokamp break down a proper investing and retirement strategy by decade. It's time to talk about our 40s -- the kids are growing up, and you're in your peak earning years now. So financially speaking, Brokamp says there are a few things you should be focused on at this time: saving hard for retirement, planning for college expenses, and updating your estate plan. Tune in to learn more.

A full transcript follows the video.

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This podcast was recorded on April 18, 2017.

Southwick: Your 40s are an exciting time. Your kids are so busy with school and their friends that it gives you time to get to know you again. You'll do things like start a Styx cover band with your neighbors, and you'll lie to yourself and your friends that it's actually cool to drive a minivan. And it's practical, too, because of all those guitars and amps you'll have to haul around to open mic nights one day. Does that sound like your 40s, guys? Rush! Sorry. It's a Rush cover band.

Brokamp: No, Styx. Actually I was a big Styx fan before I was a big Rush fan.

Rick Engdahl: I just don't have time to practice my guitars.

Brokamp: Both of those work. Because Easter is coming up, at this point [my wife and I] we get the kids more little gifts than candy, and I got Styx' "Mr. Roboto" in eighth grade. My Easter basket. I still remember this many years later.

Southwick: Because it was the coolest thing ever.

Brokamp: Because it was the coolest thing ever. So 40s, three priorities. You want to be super saving for your retirement. And most people hit their peak earning years in their late 40s, early 50s. From the point from your 20s to your 40s, your income probably went up pretty significantly because you were climbing the corporate ladder. It starts to level off once you reach your late 40s, early 50s. You're about at where you're going to be, so you want to take advantage of that as much as possible. That's number one.

Number two is start planning for how you'll pay for college for the kids, and that means, of course, saving, but also arranging your finances to a certain degree for financial aid. You don't want to wait until the year before they go to college. You want to start doing that a good three years [in advance]. So if your kid is a sophomore in high school, you need to start thinking about arranging your finances for financial aid. And actually, even a freshman in high school is a better way to do that.

And then number three is to update your estate plan, which includes your life insurance. If you got your will and your life insurance back in your 30s when you first had kids and had your first house and all that stuff, a lot has changed since then. You might have had more kids. You've accumulated more assets. You probably own things that are not incorporated into your will. You're also earning more money, so you might need more life insurance. Now's the time of life to do that.

Southwick: And how much should you have saved for retirement in your 40s?

Brokamp: By the time you reach 40, ideally two to three times your household income. By your mid-40s you'll want to be around four times.

Southwick: Whoa!

Brokamp: Yes.

Southwick: Things accelerate.

Brokamp: And of course there's a lot of variation on this. It depends on your own situation. It depends on your income. It depends on whether you'll get a traditional pension or not. So these are rough guidelines, but they're good road signs along the way of whether you're roughly on track or not.

Southwick: And what's a big mistake to avoid in your 40s?

Brokamp: I would say actually spending too much on kids, as we've talked about. There was a good article in The Wall Street Journal last year about mistakes to avoid and it quoted a financial planner at Compass Planning Associates in Boston. Her name is Jennifer Lane. She recommends that parents pay no more than 10% of income on expenses related to kids. I'd never heard that guideline before, but I liked it. She also said that giving kids allowances actually helps keep costs down. Her quote was: "They'll choose not to spend when it's their money versus your money," which I thought was pretty good.

So it's very difficult. You want to give your kids all that they want. You want to send them to camps. You want to get them whatever when it comes to clothes, and toys, or even college (the situation I'm in with my kids right now). We've looked at two colleges so far this year. One was UVA as a Virginia resident. One was Duke. There's about a $40,000 a year difference between those two schools.

Southwick: Yeah, so I know where you're leaning.

Brokamp: Right. But you just have to put it in the context of your own finances. You don't want to compromise your own financial security because if you don't take care of your own financial security, if you don't take care of your own retirement, it's going to fall back on your kids at some point.

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