Much like your 30s, your 40s are often busy and filled with competing financial priorities. By now, you likely have your financial basics covered, so you can refine your plan and focus on your most important goals. This is also the time to build your wealth as you get ready for retirement.

Here are some key areas to pay attention to in your 40s.

1. Focus on Retirement

Now is a perfect time to start thinking about what you want your retirement to look like and to figure out your “work optional” number. Many people earn more in their 40s, but expenses can rise too. Knowing your savings goals and how much you need will help you stay on track for the long term. A couple of common retirement savings benchmarks for this decade:

• 3X salary by age 40
• 6X salary by age 50

Everyone’s retirement number is different and depends on several factors. Still, these guidelines are a helpful starting point as you plan for your own retirement. If you’re not at the age 40 benchmark, make a savings plan to catch up by age 50. Your annual spending and the age you want to retire are the main factors in your retirement, or “work optional,” number. For many, the goal is not to stop working forever, but to have the freedom to step away when they choose.

2. Know Your Lifestyle

As mentioned earlier, understanding your yearly spending is important for figuring out your retirement number. Many people aren’t sure what it really costs to support their lifestyle, so this is a good place to start.

In the last ten years, tracking expenses has become much easier thanks to apps and software (like PlanFirst!, Quicken or Monarch) that automatically download and sort your spending. We suggest using these tools early, as they can help you manage your finances and make the move to retirement smoother when the time comes.

3. Avoid Lifestyle Creep

Expenses often go up in your 40s. Teenagers may start driving, you might upgrade your home, and college costs could be coming soon. Work responsibilities can also increase, which sometimes leads to more spending on vacations or conveniences. All of these changes can make your spending climb quickly.

Lifestyle creep happens when your expenses slowly increase over time without you noticing. It’s normal for spending to rise as your income grows, but setting up ways to save some of that extra money can help you reach your long-term goals. If you are behind on savings, consider the 60/40 rule with raises or bonuses: use 60% for savings and 40% for lifestyle spending.

4. Diversify your Savings

Your 40s are a good time to diversify your wealth beyond your main home and employer retirement plan. If you haven’t opened a taxable brokerage account yet, consider starting one with a small monthly deposit. Use this account for your raises and bonuses. It can add flexibility and increased tax diversification in retirement, making it a strong part of your overall plan.

Also, look at other tax-qualified accounts you are not taking advantage of. If eligible, an HSA can be a great account for additional tax deferral with potential for tax free growth (if used for medical expenses). The powerful feature of an HSA is that it does not need to be used in the current year, so the account can grow tax free for years and be used for medical expenses when needed most.

Roth accounts, whether through your employer or as a Roth IRA, are still a smart choice in your 40s. It’s best to start them early, but even if you begin now, there’s still plenty of time for tax-free growth. If they fit your tax situation, Roth accounts can be a valuable part of your wealth-building plan.

Update Your Estate and Insurance

By your 40s, you’ve likely built up some wealth, so it’s important to make sure it’s well protected. As your children grow, your estate planning wishes may change, so updates are often needed. For example, the guardian named in your will might be too old now, or you may have lost contact with your trustee. Because of that, it’s a good idea to review your estate documents every five years to make sure they still reflect your wishes. Young adult children may also need their own basic estate documents.

Your insurance needs may have changed as well. As your income grows, make sure you still have enough disability and life insurance to stay fully protected. In addition, review your property and casualty insurance for new risks, like teen drivers, that may need extra attention. As your net worth rises, check that you have enough umbrella liability coverage.

Final Thoughts

Your 40s are a time to keep building wealth and protect what you’ve already achieved. The decisions and savings you make now can lay the groundwork for a solid retirement plan. This is your chance to think about your future and take steps to make it happen.

Mary McCraw, CFP®
Vice President

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