Guide to Financial Planning in Your 40s
Now that you’re on good financial footing, it’s time to make sure your plan is growing with you.
By the time you’ve reached your 40s, you have hit your stride — at least from a financial perspective. You likely spent your 20s and 30s laying the groundwork to reach key financial goals including establishing an emergency fund, managing your debt and starting to build your retirement savings.
Establishing these good money habits means you laid down a good financial foundation. In the short term, you may be thinking about how you’ll start paying for your kids’ college and paying down your mortgage (if you have one). And while retirement is still a way off, it’s getting closer.
As you move through your 40s, additional priorities are likely to surface. So now is a great time to check in on the plans you’ve put in place and get more strategic about how to meet your short-, mid- and long-term financial goals.
To make sure you’re on track to meet your financial goals, we’ll guide you through the important steps to help you make strategic decisions about how to manage financial planning in your 40s.
How to Manage Your Money in Your 40s
Section 01 Step 1: Make sure your goals still match your priorities
Take a look at the goals you set in your 30s. Are these still priorities for you? Do you have a strategy to save for them? Revisit your goals and categorize them into short-term, mid-term and long-term goals. And if you didn’t set goals in your 30s, there’s no time like the present to do it.
Short-term goals (0-5 years away) may include a home renovation, a large family trip you’re planning in the next few years or even paying for college. Short-term savings are best grown in a savings account or money market account. That way, the money is easy to access and poses little risk of losing value.
Mid-term goals (5-10 years away) might include saving for a down payment on a vacation home or college tuition for your kids. While investments can be volatile in the short term (which is why they don’t make sense if you will need your money soon), an investment account has the potential to grow more than other types of accounts over a longer period of time.
Long-term goals (10 or more years away) might include things like weddings for your children, family trips with the grandkids and retirement savings. Investments can be a great way to grow wealth for these goals over time. But there are also alternative options to help you grow your wealth and provide a legacy — like permanent life insurance — that can complement your investments over time.
Developing — and updating — your financial goals is a great exercise in your 40s, since you may have different plans for how you want to spend your money than you did 10 years ago. Do you want to start that business you’ve been dreaming about, or is buying a summer cottage more appealing? Now is the time to recalibrate your plan based on where you are.
Section 02 Step 2: Check in on your financial situation
Revisit your monthly budget
Whether you set a strict budget or just make sure you’re not overspending each month, by the time you hit your 40s, your month-to-month spending is probably fairly predictable. But over the years, it can be easy for expenses to shift. It’s a good idea to regularly revisit your spending along with your goals. Are you still using your dollars for the things that are most important to you? Or are you paying for dozens of subscription services that you barely use anymore?
When you go through this exercise, it’s not uncommon to find that you’re spending money on things that aren’t that important to you. That’s great; now you can free that money up for whatever is important. Maybe that’s a current need, or maybe it will help you save for one of the future goals.
Maintain and replenish your emergency fund
It’s a good idea to keep about six months of expenses in an emergency fund. If you’ve had to dip into this account or your expenses have grown, now is a good time to make sure it’s fully funded again. If it’s fully funded, check this one off the list.
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Manage your debt
Though you have likely prioritized paying down any bad debt you may have accumulated in your younger years, you have probably taken on new debt, too. That’s OK. Debt can be a strong financial tool. But it’s important to have a plan to manage your debt. Here are a few resources to consider:
Update your estate plan
If you created an estate plan in your 30s, make sure it is up to date. Major life changes — both personal (getting married or divorced, having children, adding assets, losing family members or receiving an inheritance) or professional (starting a business) — can influence decisions for the future of your estate. Review your will or trust to make sure the terms still reflect your situation, and confirm that you’ve designated the right beneficiaries for your life insurance policies and financial accounts, as these trump what’s in a will. In addition, look at your financial and health care powers of attorney to make sure you’re still happy with the person you’ve named in those documents. If you haven’t yet developed an estate plan, now is a great time to get those plans in order.
Section 03 Step 3: Reevaluate your insurance coverage
As your income has grown, maybe your family has grown, too. Now it’s more important than ever to make sure that you’ve put plans in place to support them if you’re unable to work or you’re no longer around.
- Disability income insurance: If your income has grown, the coverage that you had in place may no longer be enough. While coverage through your workplace is typically based on a percentage of your salary (and would grow with your income), any private coverage that you have in place may not keep pace with substantial promotions. It’s a good idea to weigh whether your coverage would meet your family’s needs. If not, it could be time to consider adding to your coverage.
- Life insurance: You may already have a life insurance policy, but is it still the right fit for you and your family? Now’s a good time to assess your coverage (as with disability income insurance). Has your life changed since you got your policy? Any number of changes could be reasons to update your coverage. In addition, if you have term life insurance, you may want to consider converting some of your coverage to a permanent policy to take advantage of the additional benefits it offers compared to term insurance.
Here are the key differences between term life insurance and permanent life insurance:
Term life insurance offers a death benefit only for the term of the policy. Your beneficiaries will receive the death benefit if you die within that time frame. If you want to extend your coverage outside that set number of years, you may be able to convert some or all of your policy to permanent life insurance.
Permanent life insurance will cover you for life. It also has the added benefit of accumulating cash value1 that you can access at any time during your life if you need to. Regardless of when you die, your beneficiaries will receive the death benefit.
Your 40s can also be a good time to start considering how you might deal with a long-term care event. Long-term care refers to needing assistance with daily living — like household chores, bathing and getting dressed. While you may think you’ll never be in that situation, the reality is that many of us will experience a time when we may need such help. It’s a good idea to talk with your financial advisor about financial options in case you ever need to pay for such care.
Section 04 Step 4: Check in on your children’s college savings
You’re probably very aware now how quickly a decade goes by. Your kids will likely be going off to college before you’re 50. According to the College Board, the average cost of tuition, fees, and room and board for the 2021 to 2022 school year was $55,800 at private colleges. If your child is pursuing a four-year degree, the total would be $223,200 (and that’s before inflation). If you want to help pay for your children’s college, it’s a good time to check in on your savings — or get started. There are multiple types of college savings plans, each with their pros and cons, worth considering:
- 529 College Savings Plan
- 529 Prepaid Tuition Plan
- Coverdell Education Savings Account
- Uniform Gifts to Minors Act (UGMA) Account
- Uniform Transfers to Minors Act (UTMA) Account
Section 05 Step 5: Shore up your retirement savings
Whether you’ve already had a focus on saving for retirement or not, your 40s is when it’s time to make sure your savings are on track. You’ve likely established a stable budget (60 percent on fixed expenses, 20 percent on goal contributions and 20 percent on discretionary expenses), but as retirement gets closer, it’s important to take a look at how you’re contributing to your retirement.
Pay yourself first
The term “pay yourself first” refers to prioritizing your retirement savings. One of the best ways to save for retirement is to automate what you’re setting aside. The goal is for your contributions to get siphoned off as you get paid so you won’t even notice the money is gone.
How much should you have saved?
By this point you’re likely making contributions to a retirement account like a 401(k) and are building a healthy nest egg. That’s great. But are you saving enough? Ultimately, everyone’s “number” will be different based on the lifestyle they want in retirement. There are several general rules for retirement savings. A good starting point is the 4 percent rule, which says you can withdraw 4 percent of your savings each year in retirement (with increases for inflation). The opposite of this is to simply multiply the amount of income you want by 25. So, if you want your savings to generate $100,000 a year in retirement, you need to have $2.5 million saved by the time you retire (100,000 x 25 = $2.5 million). However, it’s important to remember that this is just a general rule. A financial advisor can help you hone in on a number based on your situation.
If you’re feeling a little behind on your goal, that’s OK; you have plenty of time to catch up on retirement savings. And if you’re in a good spot, that’s great. It should free you to spend more on the things you want today.
Diversify your assets
Saving for retirement is great, but how and where you save can be just as important as how much you save. Just as you want to diversify your investments with different types of stocks, bonds and other assets, diversifying the location of your retirement savings is also an important retirement planning strategy. This typically includes having some assets that are invested in the markets and others that aren’t affected by market swings. It’s also important to consider how different retirement assets are taxed. Here are some of the key financial tools people often use for retirement sources beyond traditional IRAs and 401(k)s:
A Roth IRA or Roth 401(k). Contributions will be taxed today, but your funds generally grow tax free and typically aren’t taxed when you take money out in retirement.
An income annuity can help you create guaranteed income that won’t be affected by market swings. More importantly, this income will last as long as you live — helping to protect your income in case you live longer than you expect.
Social Security is another source of guaranteed income. The amount of your monthly benefit will be based on how much you earned (and for how long your earned it) during your working years and when you start receiving payments. You can access Social Security as early as age 62. But waiting allows your monthly benefits to grow (up to age 70).
If your employment benefit package includes a pension, this can also be a source of guaranteed income for life.
Cash value from a permanent life insurance policy is one of the most overlooked assets that you can use in retirement. Because cash value typically isn’t impacted by market swings, this can be a source of funds that you can access during market downturns, which can allow you to let your investments recover from a downturn before you tap them1 .
Using these tools together to generate income in retirement can give you flexibility to navigate market swings, manage your taxes and avoid other common risks to your retirement savings.
Section 06 Step 6: Don’t let the future limit the here and now
While it’s good to be focused on the future, financial planning is all about balancing your future goals with life today. Just as spending everything you have today puts your future at risk, saving too much means you’re missing out on the things you enjoy now. Financial planning is not just about making sacrifices and living on a tight budget; it also means defining what is important to you and making sure you enjoy your life.
If you have a family, your 40s are likely to be a busy time. And it’s time you won’t get back, so it’s important to make decisions that allow you to enjoy this time today — the way you want to — while also making sure you’re planning for the future.
It can feel overwhelming to juggle all of these priorities, but you don’t have to tackle it all on your own. A financial professional can help you think through your priorities and look at your whole financial picture to help you develop a plan to get where you want to be.
Section 07 Conversation starters with an advisor
How do I ensure that my financial plan will enable me to achieve my goals?
Should I contribute to a traditional or Roth retirement account?
How should I allocate my investments when I’m in my 40s?
What strategy should I use to manage my debts?
Should I refinance my house?
How can I tell if I have the right type of life insurance?
Here’s how to manage your finances in your 40s.
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1Utilizing the cash values through policy loans, surrenders of dividend values or cash withdrawals will or could: reduce the death benefit; necessitate greater outlay than anticipated; or result in an unexpected taxable event.
This article is not intended as legal or tax advice. Northwestern Mutual and its financial representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent legal, accounting or tax adviser. Tax and other planning developments after the original date of publication may affect these discussions.
No investment strategy can guarantee a profit or protect against loss. All investing carries some risk, including loss of principal invested.
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