Your 40s can be a fabulous time of life. You've made it through your early working years and may have reached a level where you're doing work you really enjoy. You can also see retirement on the horizon, though you still have plenty of time to prepare yourself financially. Here are some money moves you should consider making in your 40s so you can sail smoothly into retirement.
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1. Max out your defined contribution (DCP) plan and IRA contributions
If you haven't been maxing out your DCP or IRA contributions, now is the time to start. Many employers offer a DCP -- like a 401(k), 403(b), 457, or Thrift Savings Plan -- that allows employees to make tax-advantaged contributions to retirement accounts. Some employers even offer matching contributions. You probably have over 20 years before you'll begin withdrawing your retirement money, which means you have time to let your investments compound. There's also still plenty of time to invest aggressively, as you have time to recover from any market slumps.
For 2017, you may contribute $18,000 toward your DCP and $5,500 toward your IRA. If your company offers matching funds for your DCP, contribute at least enough to get the full match; otherwise you're giving up free money. If you haven't been investing, set a goal to kick in at least 5% of your income toward these retirement vehicles and increase your contribution each year, with the eventual goal of maximizing the amount allowed in these accounts.
Although workers in their 40s tend to have a lot of expenses, it's important to prioritize your retirement savings, especially if you're behind. The good news is that in your 50s you'll be able to make additional catch-up contributions into these accounts (another $6,000 in most DCPs and another $1,000 in IRAs). Aim to max out your contributions now and then save even more in your 50s.
2. Examine your insurance needs
Do you have adequate insurance to protect yourself and your loved ones? If you bought insurance a decade or more ago and left the policy on auto-pilot, review the policy to see if it still meets your needs? Your 40s are a good time to check the provisions of your policies and make sure they still offer the right coverage and duration. It's also a time to consider some additional types of insurance you may need.
Life insurance
If you have kids or others who depend on your income, you need life insurance. A term policy can be a relatively inexpensive way to get insurance. If you have insurance that you purchased a while ago, review your policy to be sure it meets your needs.
If your life situation has changed since you obtained the policy, your coverage needs may have changed, too. One option to add more coverage is to "ladder" your term policies -- i.e., purchase multiple policies with varying terms so that as you age and have less need for life insurance, policies will expire one by one, and your insurance premiums will drop off.
Disability insurance
According to the Social Security Administration, one in four 20-year-old Americans will incur some type of disability before retirement. Disability insurance helps you pay the bills in case you're unable to work for a time due to an injury, illness, psychological disorder, or other impairing condition.
This is especially important if you are one of the many Americans who haven't saved six to 12 months' worth of your salary in an emergency fund as recommended by most financial counselors. Many employers offer disability insurance policies, and if you work part-time you may be able to obtain a policy through a professional association.
Long-term care insurance
Now is the time to start planning for any long-term care you may require as you age. According to research at the Department of Health and Human Services, 70% of Americans may need some long-term care, but only 8% have purchased some type of long-term care policy. These policies are expensive and can be unaffordable if you wait too long to buy one. That said, paying for long-term care out of pocket can be financially ruinous, so long-term care insurance is generally worth it.
While you don't need to buy a policy just yet, it's time to do the research and make a plan for how you will cover any long-term care expenses. It's unlikely that your health insurance plan will cover long-term care, and there are limitations on what Medicare will cover. Consider the different options that you may use to cover long-term care, including a long-term care policy, family caregiver assistance, an annuity to cover costs, self-insurance through substantial retirement savings accounts, or home equity.
Annuity
You may consider adding an annuity to your portfolio. An annuity is an insurance product that can provide a steady stream of payments (typically monthly) in retirement or fund future long-term care if needed.
Annuities can be fixed or variable. Fixed annuities pay a benefit at a fixed rate and can either start paying you immediately or be deferred for a larger stream of payments in the future. Variable annuities have an investment component, and the benefit depends on how well the investment performs. They're somewhat complicated products, so do your homework before you even consider buying one.
Annuities have a reputation for being expensive and having high fees, but depending on your objective, they can serve a purpose in your portfolio. It's important to evaluate your goals and objectives when determining if an annuity is a good fit.
3. Save for retirement before helping your kid with college
We all want the best for our kids, and it's parental nature to do all we can to help them succeed. As the costs of college skyrocket and graduates are buried in student loan debt, you may feel obliged to pay your child's college expenses. However, unless you're on track with your retirement savings, you should resist that urge.
In a nutshell, your kid can get a loan for college, but you can't get a loan for retirement. When your kid applies for college and completes the Free Application for Federal Student Aid (FAFSA), you must list your assets to determine your Expected Family Contribution (EFC) toward the cost of college.
The funds in your retirement accounts will not be among the financial resources included in the FAFSA's evaluation of your assets. Therefore, contributing to your retirement accounts can increase your child's eligibility for need-based financial aid. Contributions to 529 plans, Coverdell plans, and prepaid tuition plans are counted as assets on the FAFSA, so shelter some of your assets by fully investing in retirement plans before saving for college.
In particular, you should fully fund a Roth IRA before contributing to a 529 plan. If you invest in a Roth IRA, you can withdraw your contributions for qualified education expenses tax-free and penalty-free. This gives you the flexibility to make withdrawals for education expenses as needed, but if your kid gets a full scholarship, you can keep that money stashed for retirement. A warning, though: If you withdraw Roth IRA funds to pay for your kid's college expenses, that money will count as income on the next year's FAFSA, reducing your kid's eligibility for aid that year.
4. Discuss plans for your parents
If you're in your 40s and are fortunate to have living parents, they're probably near or in retirement. Just as it's important to start considering your own plans for future long-term care, it's important to talk to your parents about their thoughts and preferences regarding long-term care.
If they haven't purchased long-term care insurance, ask about their plans for handling such expenses. If they plan to move into your spare room when they eventually need additional support, it's better to know this now. One in five middle-aged adults have provided some type of financial support to a parent aged 65 or older, so it's important to plan ahead if you might someday help your parents pay the bills.
Between work, family life, and other obligations, the life of a 40-something is busy. But your 40s are a great time to re-evaluate your financial situation and your retirement plan, kick your savings up a notch, make sure you're adequately insured, and have some important conversations with your kids and parents.
