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Financial Guidelines For People In Their Forties

by Rachna Bijlani, CFP®

September 11, 2019

There are no absolutes in personal financial planning because every individual is unique and so is their financial situation, as are their financial goals. Having said that, a set of individuals can fit into similar profiles, based on demographics such as age. Being  40-something myself and having worked with several clients in their forties, I have seen that to an extent, people in this age group tend to have similar financial risks and some variation of similar financial goals. If you are in this 40-something phase of your life and have wondered if you’re on the right financial track or whether you’ve made enough progress towards your financial goals, I have put together a list of areas that you should focus on, in the most glorious decade of your life. (Pardon me, I am biased!)

1. Focus on Tax Optimization

You are now probably at a stage in your life where you’ve seen a surge in your income and net worth, which also means that you are now paying higher taxes than ever before. Now is the time to review your tax situation and focus on tax optimization strategies. Besides filing taxes efficiently and utilizing all available tax credits and deductions, it is also important to invest in a tax efficient way. Be aware of strategies like tax loss harvesting, offsetting up to $3000 of investment losses against active income, and long-term vs short-term tax rate on capital gains. Make sure you’re holding the right investments in the right kind of account to minimize taxes. Your asset allocation strategy should be driven by your financial goals, risk tolerance, liquidity needs, and time horizons. Once you have selected your investments, you should then decide how to split these investments between your taxable and tax deferred accounts in a way that can minimize your taxes. For example, if you are in a high tax bracket currently, it might make sense to hold your high yield investments such as bonds and REITs in a tax deferred account and tax-free municipal bonds, equities and other exchange traded funds in a taxable account. Consult with your portfolio manager to make sure  you're taking advantage of these tax optimization strategies.


Tax deferred retirement savings accounts such as 401(k)s and IRAs offer current tax deductions, if eligible, and also defer taxes on growth. ROTH IRAs can be a powerful tool for tax free growth. Contributions to ROTH IRAs are not tax deductible, but if certain conditions are met, the growth on the investments and the subsequent withdrawals are tax-free. They are also not subject to required minimum distributions (RMDs), unlike traditional IRAs and 401(k)s, thus making them effective tools for estate planning. Discuss ROTH conversion strategies with your portfolio manager to see if you could benefit from it. Health Savings Accounts (HSAs) offer tax deduction on current contributions and also offer tax free growth and withdrawals, if used for qualified medical expenses in retirement.

2. Know your Financial Ratios

Two critical ratios that can help you assess your progress towards achieving your long-term financial goals are the savings rate and the investment assets to gross pay ratio .


Savings Rate = Total Annual Savings/Gross Annual Pay


This ratio should be used in conjunction with your retirement and portfolio numbers and should depend on your individual long-term goals. Some benchmarks suggest that if your only long-term goal is retirement and you plan on working until full retirement age and you started saving in your mid twenties, then a 10-13% savings rate should be adequate. This ratio could go upwards of 20% if you started saving only in your forties, have more than one long term goal, a lower work life expectancy, or a low rate of return on your investments. Make sure your savings rate is adequate to achieve your specific long-term goals.


Investment Assets to Gross Pay = (Investment Assets + Cash & Cash equivalents)/Gross Pay


This ratio when used in combination with the savings rate, gives a better evaluation of your progress towards your financial goals. For this purpose, your primary residence and any kind of collectibles or personal use assets should not be included in this calculation. The benchmark ratio for someone who is 45 years old is between 3-4 times gross pay. This means that a 45 year old person drawing an annual income of $400,000 should ideally have between $1,200,000-$1,600,000 in investment assets. This ratio should be used in context with other financial ratios and not as a stand alone test. For instance, someone who is totally debt free and has an investment assets to gross pay ratio that his low for his age might not necessarily be in trouble. Similarly, someone with an adequate investment assets to gross pay ratio but low savings rate might be in the red.


These benchmarks are meant to provide a general guideline and may not be applicable in every situation, so it is always advisable to assess your individual situation based on your specific financial goals.


3. Know your Retirement Numbers

Adequate retirement planning requires an understanding of the factors that affect retirement and the interrelationship between these factors. It is imperative that you're able to fully comprehend these factors while you are in your forties and still have time to fix any inadequacies. Some significant factors that affect retirement planning are the remaining work life expectancy (RWLE), the retirement life expectancy (RLE), the savings rate, the annual income needed during retirement, your sources of retirement income, inflation expectations, and investment returns.


Your remaining work life expectancy (RWLE) at any point in time is the number of years remaining until your retirement. For example, a 45 year old person who plans on retiring at age 55 has a RWLE of 10 years. Your retirement life expectancy (RLE) is the period beginning at retirement and extending until death. This number is obviously not predictable, but it is wise to plan on the higher side to mitigate the risk of running out of money in retirement. Considering that there are finite number of years between life and death, these periods change inversely with each other. If your RWLE decreases, it will increase your RLE thus giving you a shorter period of time to save for a now longer period of retirement and vice-versa. Careful analysis is required to determine if you need to make adjustments to your RWLE to improve your odds of having sufficient savings to meet your income needs in retirement.


Once you have figured out your RWLE and RLE for computational purposes, the next step is to estimate your expected annual expenses during retirement. Reduce this number by the expected social security benefit, or if you wish to be conservative, don’t factor in social security. Inflate this number to the retirement age by the expected inflation rate to determine your actual income need in your first year of retirement. Calculate the total capital needed at retirement by using an inflation adjusted earnings rate over the entire RLE. Knowing these numbers will help you determine if your current savings rate and your investment assets are sufficient to carry you through retirement. If the numbers don’t add up, then you need to decide what adjustments to make while there is still time so you can achieve your retirement goal. Don’t let this overwhelm you. If you are unable to do this yourself, seek professional help, but do it before it’s too late to make any changes.

4. Get Proactive about Estate Planning

Some might argue that it's too early to think about mortality when you are only mid-way in your life cycle, but not having a proper plan in case of death might be unfair to your loved ones and also to you. The goal of estate planning is to ensure that your healthcare decisions, guardian selection for your minor child, and property transfer wishes are carried out as per your instructions in a tax efficient and cost efficient way in case of your death. It is advisable to consult with an estate planning lawyer and get started with a basic estate plan in your forties. Failing to plan for an estate transfer could be catastrophic for your heirs and family.

5. Prioritize Risk Management

It is important to identify, evaluate, and mange risk exposures that upon occurrence, can lead to severe financial hardship. If you have dependents who rely on your income, make sure you have adequate life insurance. Besides your basic health, disability, auto, and home insurance, it is also advisable to get a personal liability umbrella policy (PLUP) to protect your financial resources. Risk exposures can change over time, so it is important to periodically evaluate and review your risk management plan.

6. Consider Starting a 529 Savings Plan for your Child’s Education

Besides retirement, funding their children’s college education is a top financial goal for many families. 529 savings plans allow families to save for education expenses on a tax-deferred basis. Although you don’t receive a tax deduction on your contributions to 529 plans, the growth and withdrawals are tax-free as long as they are used to pay for qualified education expenses. Consult with your financial advisor to see if a 529 plan is a good option for you.


They say “40 is the new 20” and I say, “they” don’t know what they’re talking about! 40 is simply 40 and it’s awesome, so flaunt your age and your wisdom because you’ve earned your stripes, your white picket fence, your experience, your vacations, and your financial security and stability! I hope these guidelines have answered some of your questions and clarified your doubts relating to personal finance. It is always a good idea to seek a CERTIFIED FINANCIAL PLANNER™ and have her analyze your specific financial situation and get a tailor-made plan for achieving your financial goals. Finally, to answer your most important questions- Yes, it is okay to still worship Kurt Cobain, reminisce about tv shows like Fresh Prince of Bel-Air, Mad about You, and Everybody Loves Raymond, use proper grammar and spelling when texting, and most importantly, it is okay to count the years until your youngest child leaves for college with anticipation, or as a friend of mine likes to call it, “years until freedom”!

To schedule a complimentary 30 minute initial consultation, email me at

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