There is an old cliché that life begins at 40. The reality now is that life gets complicated in your 40’s. While every decade is a milestone of sorts, turning 40 should come with a special, financial warning.
If you’re turning 40 soon, statistically speaking it’s likely that both your parents are approaching retirement—and your children could be a stone’s throw away from college.
A successful financial plan is no longer solely about what you have saved. It’s about stress testing that plan in the face of changing life events. Your parents, your kids—even your own spouse or partner—have impending financial needs that likely will impact you.
We know we can’t control all of the unknowns, so let’s focus on the things we can do: a solid evaluation of your own financial situation; frank conversations with loved ones; and assembling an educated best guess of future challenges.
Here is the information you need to nail down before 40:
- Your current retirement savings rate and what you have saved to date
Yes, there’s been good news on retirement savings rates in recent years. But the fact remains that most Irish people have saved less—often far less—than they should have. Among many 40 year-olds, a solid majority have saved less than €50,000. Where do you stand?
The standard default savings rate set by your employer is probably between 3-5%. As you take stock of your contributions it could take you a while to get to 12%—the savings rate that’s more likely to provide a secure retirement. And if you’re the primary or sole provider for your family, you should aim higher than that, since you’re saving for two or more.
What can you do? If you think back to secondary school physics (or Angry Birds): you may remember that just as a small upward tilt can dramatically change the trajectory of an object, the same applies to your retirement savings. Even a 1% increase in your savings rate each year can add hundreds of thousands of euro to your fund by the time you retire.
- How much you can expect from the state pension
The Social Welfare and Pensions Act 2011 made a number of changes to the qualifying age for State Pensions. The qualifying age rises to 67 in 2021 and 68 in 2028. So for those of us who were born on or after 1 January 1961 the minimum qualifying State pension age will be 68.
There are also a number of social insurance conditions you must satisfy to qualify for State pension
To qualify you will need to have paid at least 520 full rate social insurance contributions by the time you reach 68 assuming it is still universally payable by then as it has its own looming funding crisis.
- Whether you are on track to have enough when you retire
How much money you need by the time you retire is the subject of much debate. Let’s keep it simple. What you really need to know right now is whether you’re on track to generate, say, 2/3rds of your current income when you retire. It’s a reasonable target for the moment; you can always revise it later.
How much will I need to save for retirement?
I don’t wish to over simplify things too much but as a basic rule of thumb you could do a quick back-of-napkin calculation: Let’s say you’d like to live on €40,000 in retirement; multiply that by 25 to get €1 million. That amount is based on the idea that you should probably withdraw no more than about 4% of your retirement fund per year when you retire: €1 million X 0.04 = €40,000. The 4% rule, as it’s called, isn’t set in stone. But again, it’s a place to start.
Now, what if your calculations show that you’re only on track to save €500,000—about half your goal? That €500,000 would generate about €20,000 annually. Let’s say that the State Pension will supply another €1,011 per month, or €12,131 per year. Now you’re up to around €32,000—a €8,000 annual shortfall. So you can either save a little more to close the gap, or consider living on less.
The good news about doing your calculations now is that you have time to celebrate—or course-correct.
- How many retirement accounts you have
By age 40, there’s a good chance you’ve changed jobs once or twice—or maybe more, given that the average worker holds about a dozen jobs by age 48.
The hazard of multiple employers is that you can end up with jumble of retirement benefits, and this is one area where more is definitely less.
Dealing with old employers and switching accounts can be sometimes unpleasant and time-consuming, but there are several benefits when you streamline: you can save on both account and investment fees; you can eliminate investments that are overly similar or redundant and you will enjoy a greater sense of control (and less paperwork).
- How risky your investment portfolio is
Your asset allocation is basically the balance of equities versus bonds and cash in your portfolio. It’s important to know the percentage of each in your portfolio, because that balance ratio determines how much investment risk you are taking on.
equities can certainly offer more growth over the long term—however; they add more risk to your portfolio. So what’s the ideal asset allocation?
One rule-of-thumb is to invest your age in bonds. If you’re 35, that would mean putting 35% of your portfolio in bonds, 65% in stocks (or stock and bond mutual funds, which is what most people have in their retirement accounts). Some people quibble with that ratio, and recommend investing more aggressively, especially while you’re younger.
Putting, say, another 10% into equities (a 75-25 split) would get you the potential for more growth (i.e. higher returns), but also expose you to more risk (a.k.a. the risk of losing a bit more of your money if there’s a downturn.)
On the other hand, if you have 25 years or more until you retire, that gives your money time to recover from a market drop. Either way, make sure you revisit your asset allocation yearly. As the market shifts, your target mix can get out of whack. Rebalancing once a year insures that you keep your portfolio mix right where you want it.
- The basics about your spouse/partner’s finances
If you’re like most couples, you probably think you and your spouse/partner are in sync about money—that’s what 72% of couples believe. But dig a little deeper and most couples are at odds about important money issues, like when to retire or how much they’ve saved (43% don’t even know what their spouse/partner earns.)
Here’s a practical tip: Given that money discussions can cause tension, don’t try to explore everything about your spouse/partner’s money habits, history, belief system right now. No soul-baring “money dates”. Just review your basic financial plans together. At minimum, you should know this about each other:
How much you’re each saving for retirement, and how much you’ve each saved thus far.
Where your accounts, logins and passwords are located (sharing info can save headaches later).
A general idea of the lifestyle you might like to have in the future.
It might take a couple of sit-downs to cover that ground, so bring a spirit of collaboration rather than criticism. After all, you’re in this together.
- The basics about your parents’ finances
If talking to your spouse/partner about money is challenging, you won’t be shocked to hear that the same applies to parents. Indeed, 75% of adult children over 30 and their parents agree that frank discussions about long term health care and retirement expenses are key—yet 40% say they haven’t had detailed conversations about those issues.
Avoiding money topics now puts you at risk of being blindsided by caregiving expenses later. Nearly half of family caregivers are spending over €5,000 per year, out of their own pockets, to help pay for prescriptions, in-home care and more.
I recommend breaking the ice by talking about your own plans (having gone through steps 1 through 6, you should have plenty to say). There are also some other ways to navigate these new waters:
Avoid talking directly about monetary amounts first; try to learn more about your parents overall thinking and general plan.
Your parents may feel relieved that you’ve broached the topic—but don’t get frustrated if they seem dismissive. This is a long-term conversation, not a single discussion.
If there’s too much tension around this issue, consider working with a financial planner. A trained professional may have skills and information that will benefit both you and your folks.
- How to save for college expenses
You’ve probably heard that you must prioritise your own retirement savings over college (the standard logic is that you can get loans for college, not so much for retirement). But that doesn’t mean you can afford to ignore looming college bills given that the average cost of sending a child to college in Ireland these days is around €10,000 a year and rising.
You don’t have to know everything—like where your child is likely to go—but by the time you’re 40, you should at least get started
- The basics of your estate plan
“Estate plan” sounds like a fancy term, but think of it as a broad one: Your estate includes your physical and your financial wellbeing, and you need a plan for both.
In time your estate plan may expand to include trusts and charitable giving—your legacy, if you will. But for now it’s important to cover two bases: your will and an enduring power of attorney.
A will determines who will take care of your children; who will get your property; and who will wrap up your estate (i.e. the executor) in the event of your death.
An enduring power of attorney will name a person who can make financial and health care decisions on your behalf if you’re incapacitated.
Setting up these documents takes time and thought, but they’re not typically expensive. Remember, these provisions aren’t for you: They will make life easier for the people you love when you’re not around.
- Your vision for the future
So where is all this planning and calculating going to take you? While you’re still a couple of decades away from those supposed golden years, it’s hard to know what’s going to make them shine.
Do you want to plan for a second act, career-wise? Become a devoted grandparent? Travel the world?
Ask yourself (and your spouse or partner) quality-of-life questions like these. Rather than viewing this sort of self-exploration as an abstract exercise, think of it as an investment in your future—a different sort of portfolio.
The answers to the questions of what you want and what makes you happy, will, over time, come to shape many of the financial choices above. Like your actual investment portfolio, these inner guidelines will help you reach the future you want.
Working with a Certified Financial Planner to help guide you through all of these steps will certainly benefit your long term financial well-being and ensure your goals remain on track.