Four financial mistakes to watch out for in your 40s7 min read . Updated: 16 Oct 2019, 11:02 PM IST
Focus on stability and take the help of a financial planner if you don’t already have it
The 40s mark a pivotal point in an individual’s financial journey. Like every stage in a financial life-cycle, it comes with its own opportunities and challenges. The 40s are when most people reach a sweet spot in their personal finances with their incomes going up and expenses stabilizing. It is a time when people look at giving a decisive push to their saving and investment plan to meet many of the big-ticket goals which are not that far away.
This stage of money life is also one where the ability to rectify mistakes is restricted because there is only limited time available to make amends. It is, therefore, the time to secure your financial health and pave the way to a better future. To be able to do that you should recognize some common errors that show up in your financial situation in the 40s that you should watch out for and rectify as soon as possible.
Not investing right
Having too little equity: A portfolio of investments that is too safe may be a disadvantage as you enter the stage of high income and savings growth. Goals such as retirement have many years before they have to be met and they can benefit from growth assets such as equity. Even goals like education of children have enough years ahead to benefit from equity investments. If your savings are not working hard enough and earning better returns, then that will affect the amount you are able to accumulate for the goals and may even fall short of what you need. This may mean that your contributions to the goals have to go up and take away savings assigned for other goals.
One way to prevent this is to adjust your investment plan as your financial security increases in your 30s. Take greater allocation to growth assets so that you have a base on which you can build in the 40s. “If the goals have at least six to seven years to go then equity is an important part of asset allocation in the early 40s," said Deepali Sen, certified financial planner and founder partner of Srujan Financial Advisers LLP.
Having too much real estate: Another common portfolio error that can be difficult to deal with in the 40s is one that is skewed towards real estate. Owning a self-occupied home is a goal many work towards but beyond that, at this stage in life, real estate is an illiquid asset that does not help meet goals. “Many people in this stage of life have asset allocation skewed towards real estate. Being an illiquid asset, it does not help meet goals when funds are needed," said Dilshad Billimoria, director, Dilzer Consultants Pvt. Ltd.
“We have clients who have 90% of their assets in real estate but are able to meet only 20% goals through them," she added, pointing to the risk of a disconnect between goals and one’s portfolio.
If your money is tied up in real estate, you may have to borrow to meet goals. The interest and repayment obligations will take away from the available income and limit how much you can invest and benefit for growth at this stage.
High consumer loan or credit card debt can hold you back in the 40s. The repayment is a drain on savings and takes away from the investments that you could otherwise make. Have a plan in place to pay down debt quickly. Focus on high-cost debt and consider tax benefits available on some debt such as mortgages while deciding which loan to tackle first.
“Most people in their 40s will be servicing mortgages and it is important to bring debt down quickly so that the savings can be channelized towards goals," said Sen. A tight budget to find additional savings and allocating them between debt and investments is what she recommends. One way to determine if you are on track on reducing debt is to check if the proportion of income that is going towards servicing debt is coming down steadily.
This is also the age where you may be tempted to keep up with the Joneses and spend more on lifestyle. This can either lead you into debt or eat into the savings that would otherwise have gone into important goals like retirement. Sen sees this more in people with high incomes.
By this stage, you need to have a clear strategy for your retirement plan and your saving for the goal can’t be ad hoc. A quick way to ensure that you are making the best use of the peak earning years in the 40s is to keep track of your savings rate. The savings rate is the proportion of income that is being saved. A rising savings ratio in the 40s indicates that you are better placed to take care of your goals.
Not prioritizing goals
“Retirement may be the last in terms of time sequencing of goals but it is the most important at this stage," said Sen. “People in the early 40s can straddle both goals—retirement and children’s education. In cases where funds are scarce and the person is on the wrong side of 40s and retirement is not that far away, then I am clear that retirement stands taller than higher education," she added. Maximize your retirement contributions to mandatory schemes where you may have employer contributions and tax benefits but don’t assume that’s enough. Check the corpus you would need and see if your retirement savings and investments are adequate to get you there. If not, this is the time to supercharge savings to take advantage of the time still available to retirement and invest in growth assets like equity.
The education of children is another important goal that has to typically be met in this decade. Ideally, you should start investing for this goal when children are young. If you have fallen back on this goal, then prioritize catching up in this phase of life when income is high, but not at the cost of retirement. Billimoria points to the trend of sending children abroad for undergraduate education as against post graduate education earlier. “Very often they end up using investments earmarked for other long-term goals and this is not the right thing to do," she said, talking about the consequences.
Find ways to increase savings by cutting back on lifestyle and other expenses. Also, avoid the temptation to raid your retirement accounts, which by now would have a healthy balance, to meet immediate needs, including paying for education or repaying debt. Even if the intent is to catch up with retirement later on, the retirement corpus will be hit by the loss of the compounding benefits. Moreover, the investments made closer to retirement will be in safer assets and that affects the earning potential of the savings.
Unlike retirement, education is a goal that can be funded by an education loan which gives tax benefits; also, the responsibility of repayment can be shared by the children.
“An emergency fund, medical insurance and medical corpus are required for protection of income, along with life insurance. Not having an emergency back-up can have serious consequences at that age, especially if it is a single-income household," said Billimoria. Otherwise, you may end up using your long-term investments during times of emergency and derail other goals, said Sen.
Insurance is another important protection against the unexpected at this stage. Adequate life insurance and emergency fund that reflects current income and level of expenses, goals and liabilities is important. The insurance cover provided by the employer or policies taken when you were younger may not be enough now, with your needs changing with age. Review the existing cover and update it as required. It is best to opt for protection plans that give the cover required at the best price.
Providing for health emergencies with health insurance is also important. This is one expense that will keep increasing over your lifetime. Assess if the cover you already have is enough, particularly if it is provided by the employer. This is a protection that you should take as early as possible to protect your income and savings from being spent on health expenses.
The focus of financial planning when you are in your 40s should be on stability. Get help at this stage if you don’t already have it. It will help you look at the linkages between the different aspects of your financial life and make the most of your income and savings at this critical mid-way point in your earning life.