Financial strategies for your 40s

You’re in your 40s, which means you’re probably busier than ever. You’re working hard, raising a family and still managing to keep up with everyone’s schedule. While you might be thriving, earning more money than you have before and moving up the professional ladder, it’s important to plan now for your own future needs and those of the people you care about.

Your children, for instance, are closer to college-age so you’ll want to make sure you’re ready if you’re planning to pay for it. Your parents, on the other hand, are getting older and their health may be deteriorating. They may need you to help to take care of them or even pay for some of their caregiving needs, which can have a serious impact on your own finances and retirement readiness. In fact, 42% of American adults with living parents worry their parents will become financially dependent on them, according to a study in which Edward Jones teamed with Age Wave, a thought leader on aging and longevity.

Covering all the bases can be daunting, but we’ve put together some suggestions to help. While we’ve organized the Financial Strategies section of this site by age, keep in mind that everyone moves through life stages at a different pace. Depending on where you are, you may want to check out some of the suggestions for other age groups.

Taking care of your financial needs

When planning for retirement, think about your ideal retirement lifestyle and then be realistic about what it might cost. Once you have a financial goal in mind, you can work with your financial advisor to help develop a strategy to get there.

Evaluate income and expenses

Using a budget to identify where your money comes from and control where it’s going will help ensure you’re living a lifestyle you can afford and are on track to meet your savings goals. Understanding your current spending needs can also help you better estimate your spending needs in retirement.

Once you’ve completed or updated your budget, be conscientious about what you do with any money that remains after covering your expenses. If you already have a rainy-day fund, make sure it’s large enough to cover three to six months of expenses, which are probably quite a bit higher in your 40s than those when you were younger. You'll also want to make sure you're saving enough to meet your financial goals such as retirement, paying for your children’s education or helping provide health care for aging parents. 

Max out your retirement contributions

Retirement may still seem like a lifetime away — but it’s closer than you think. While you may have a good 20 to 25 years of work left, the cost of living can double during that time, assuming a 3% inflation rate. During periods of high inflation, such as the U.S. faced in the 1970s and again in 2022, it can increase even more sharply.

Now that your income is likely higher, make sure you’re taking full advantage of it. While everyone's needs are different, a good general rule of thumb is to save 10%-15% of your income for retirement. You may even want to max out your annual contributions. The IRS is allowing up to $22,500 in contributions to 401(k) plans in 2023, while the limit for individual retirement accounts (IRAs) and Roth IRAs is $6,500. 

If you have a plan through your employer, you can generally contribute to both your employer plan as well as an IRA, but the portion of your IRA contribution that’s deductible from your income taxes may be affected by participation in your workplace plan. There may also be other products and strategies that will allow you to contribute additional amounts on a tax-deferred basis.

Develop a smart investment strategy

Investing is a pivotal piece of your financial strategy. When developing your investment strategy, you'll want to consider your goals, when you'll need to access your money, and your comfort with risk. 

For short-term goals, such as saving for your dream vacation, you'll generally want to hold cash and short-term fixed-income investments. For long-term goals, such as retirement, you have the leeway to invest more in high-growth securities — which often carry a higher risk of loss but can also offer higher returns. 

As your time horizon shortens, you’ll want to begin adjusting the balance between higher-growth and lower-growth assets since there will be progressively less time to rebuild any investment money you lose. An Edward Jones financial advisor can help you decide on the balance between risk and growth that’s right for you.

Prepare for the unexpected

Make sure your strategy includes contingency plans that prepare you for the unexpected. For example, what would happen to your family if you were suddenly unable to provide for them? How would they replace your income or handle the things you do for them daily? Life and disability insurance can provide protection. Your financial advisor can discuss options with you so you get the coverage that’s right for you.

Taking care of your kids

Did you know that it costs an average of $235,610 to raise a child to age 17?* That’s a lot of food, clothing and shelter. But what often comes at age 18? College — and the many expenses associated with it.

If you plan to pay for some or all your kids’ college education, you’ll need to be prepared for the costs. Your options include:

1. Pursuing scholarships, which can be competitive 
2. Taking out loans, which charge interest
3. Using your personal savings

The third choice might save you money in the long run, because as the more you save now, the less you’ll need to borrow later. 

A 529 savings plan is a good option for setting aside cash for education, since it offers a tax break at the same time. These plans can take contributions from anyone and are under the control of the account owner, not the beneficiary, so if the intended beneficiary opts not to go to college, the account owner can usually choose another person. Once you start a 529 plan, an easy way to increase your savings is to funnel money into it from services for children such as daycare or preschool once you no longer need them. Since you’re accustomed to not having that money anyway, it’s less likely to be missed.

Talk to your Edward Jones financial advisor about what works best for you and your family.

Fine-tuning plans for your children’s educational needs as they enter their teens offers an excellent opportunity to teach them good financial habits. What they learn now can help them understand the value of saving and investing early. It can also prevent costly mistakes later, such as taking out large loans for degrees that may not yield jobs with high enough salaries for them to repay what they borrow.

Taking care of your parents

As your parents get older, you may need to care for them. If your parents are healthy and active, now is a great time to sit down with them and have some important conversations about this. For example, if you were suddenly put in charge of making decisions for them, would you know who to contact? Their doctors, lawyers, financial advisors — these are all good names to keep handy. 

What about their insurance policies, bills and other important papers, such as a will or health care directive? If your parents come to you someday for help, you’ll want to have this information on file.

If there is a possibility you or your spouse will have to leave the workforce to care for an aging parent, make sure you factor that into your retirement planning. You’ll also want to plan for any financial assistance they need: One study conducted by Edward Jones and Age Wave shows that 42% of American adults (PDF) with living parents worry that their parents will become financially dependent on them.

The bottom line

You can make your money count for today and work toward tomorrow. Your financial advisor can help you create a strategy that helps you get where you want to be. Contact your Edward Jones financial advisor today.

* Source: USDA https://www.usda.gov/media/blog/2017/01/13/cost-raising-child