Financial planning in your 40s

Some say your life begins at 40. Older, wiser, but with much of the vigour of youth remaining, it’s a time to enjoy life while becoming more settled. Your 40s are also typically when you start to move into your peak earning years, and with more money coming in you can have more options – which is why in financial planning, the ages of 40-49 are known as a time for growth. However, you’re now often responsible for mortgages payments, childcare or education fees, and on top of that thoughts start to turn to ensuring your retirement plans are on track.

So, how does financial planning in your 40s work - and how should you balance the needs of today versus tomorrow? There is no one-size-fits-all answer because situations and objectives vary, but there is a general hierarchy to consider.

Tips for financial planning in your 40s

1. Build your base

Finances in your 40s, just like a house, have to be built on firm foundations. Hopefully by now you’ll have paid off expensive debt such as loans and credit cards, leaving just ‘good debt’ in the form of a mortgage where monthly payments are under control. With the recent rise in interest rates that’s no longer a given, so if you are facing very high monthly costs then paying off a chunk is certainly a consideration if you have the means to do this.

On top of an emergency fund of readily available cash, say three to six months’ income, other building blocks to your family’s security should be in place to protect you and them from the consequences of death, ill health or loss of income. If you are employed, you may have some often essential policies, such as life insurance and critical illness cover, provided for you as part of a benefits package. However, you should check the details of each policy and the level of cover provided to make sure they will give enough support for your circumstances.

If you don’t have them through work these insurance policies might seem like a monthly expense you could do without, but provided you are healthy they can often be very cost effective, especially if you start them when you are relatively young and in good health, and give you peace of mind that the family will be provided for in a worst-case scenario.

You should also make sure you make a will so your money and possessions can be distributed according to your wishes if you die. In particular, it is worth noting that unmarried partners and partners who have not registered a civil partnership cannot inherit from each other unless there is a will, so the death of one partner may create serious financial problems for the remaining one. A will is also important to plan for children if either one or both parents die.

2. Consider how much you need to save for retirement

Your peak earnings years are not only a good opportunity to enjoy your hard-earned money but to ramp up your savings and investments too. Your retirement can get an extra boost from pension tax relief on payments into a personal pension, which can have a considerable impact on the size of your investment pot and the retirement income you can achieve.

This is particularly relevant if you are paying higher rates of income tax. The government will automatically top up your contribution with 20% basic rate tax relief. Higher-rate and additional-rate taxpayers may claim up to a further 20% and 25% respectively back through their tax return. That means a £1,000 contribution can cost as little as £550. You should prioritise your workplace pension for receiving valuable employer contributions, but for extra savings consider a Self-Invested Personal Pension (SIPP) for extra pension freedom and the ability to select from a very wide range of investments.

To check if you are on track to meet your retirement income goals you can use a pension calculator. It takes into account your existing funds and you can experiment with different retirement dates. You can also see the effect of adding various one-off contributions to your existing pot. There are lots of things to weigh up here, so take a look at my previous article on nine tips for a comfortable retirement for more on this topic.

3. Weigh up investing vs paying down the mortgage

Managing money in your 40s can often involve mortgage responsibilities. If you fall into this group, you’re likely to face an ongoing choice: pay down debt or invest any excess cash instead. It’s a simple question, but the answer can be complicated. It depends on personal circumstances: age and job status, the loan terms, interest rate, and, very importantly, your approach to risk. It can also hinge on the method of investing, and for higher earners in particular an extra leg-up from pension tax relief can tip the balance.

Reducing mortgage debt can give you peace of mind and put your finances on a sound footing. However, if you are happy taking risks, compounding investment returns over long periods and investing as much extra money as possible can be a hugely powerful force – provided your investment strategy is sound, and you have a long enough runway ahead to deal with the inevitable volatility markets throw at you. For more on this subject see my article: Should you overpay your mortgage or invest?

4. Set your goals and work towards them

Your 40s are frequently a decade of multiple competing needs. Some might be looking to buy a home, others to purchase a larger one, and if you have children they won’t typically be nearing financial independence just yet.

To save and invest for the future in a methodical and efficient way it's important to set goals for different ‘pots’ of money and consider whether they are short-term or long-term in nature.

Shorter-term needs are generally considered to be less than five years, perhaps putting money aside for a new car or for a house purchase for example. Longer-term goals include getting ready for retirement or preparing for school or education fees likely to be incurred in at least five years’ time. Short-term needs are best addressed through saving cash and long-term ones through investing. Unlike cash, riskier assets do not offer security of capital, but over the long term, they tend to do better and therefore they build wealth more effectively.

Your goals not only inform you how you should invest, but also the appropriate type of account. Don’t forget to use appropriate tax ‘wrappers’ for your investing goals such as a pension for retirement, ISAs for earlier access and Junior ISAs for children’s longer term investing. By placing your money in pension or ISA wrappers you can save tax and make your investments work harder for you.

Give your finances a health check

Financial planning in your 40s is a challenge, but with some careful preparation and budgeting you can set yourself up for a secure financial future. You also don’t have to tackle it on your own.

Having a conversation with a financial professional can help you to take control of your finances, giving you freedom and peace of mind. With a Charles Stanley Direct Financial Plan, you’ll get a consultation with a Financial Planner and a clear action plan to take home with you. Having a conversation with an expert can help you to take control of your finances, helping you find freedom and peace of mind.

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