Tick tock, tick tock: Financial planning in your 40s

In your 40s your long-term commitments, like a home and family, are likely to be dominating your life. Making the right financial plans now will ensure a happy future.

Life in your 40s can be hectic. Every way you turn, someone’s asking for something and you still need to find the time to unwind with friends and family. You have to think about your mortgage, your kids’ welfare and education, and contributing towards your own retirement fund. And you might have the added pressure of coming to terms with the fact that your chosen job or business isn’t what you hoped it would be.   

First, the good news

Frugal is the new black. The lower your water or electricity bill, the better you feel. Now that you’re wiser, you’re ready to embrace minimalism with confidence. It’s liberating to be able to pay off debts, to save for your kids’ education, to plan for retirement and – most significantly – to invest in life experience. 

Mortgages: Love ’em or loathe ’em? 

If you’re on an even financial keel, one of the biggest decisions you face is whether or not to pay off your mortgage, either in its entirety (if you’ve had a big business win or an excellent bonus), or by bumping up your monthly repayments. Before you call your bank manager, you need to decide whether your mortgage is your friend or your foe. 

Your mortgage is your friend if:

• You’re an impulsive spender who’s more likely to buy a new set of golf clubs than to invest in a unit trust-linked retirement annuity; or to splurge on a pair of Manolo Blahniks than to stash the funds safely in a unit trust portfolio.
• The property is an investment for rental income and you’re able to use the monthly mortgage repayments as a deductible expense.
• You’re one of the lucky few who has a fixed interest rate – meaning your bank has to bear all inflation rate risks – or you have managed to get a very low interest rate that’s below, or in line with, the returns you can expect to earn from an investment over the medium-term.
• You have an access bond which can be dipped into should an unforeseen, emergency expense arise.

Your mortgage is your foe if:

• You’re not a fan of debt, and it causes you distress.
• You’re a disciplined and relatively aggressive investor who would prefer to make monthly contributions towards a high-equity long-term investment portfolio with greater expected returns than the bank’s interest rate.
• You value the tax deductibility of retirement annuity contributions.
• You don’t have much spare capital and you’re overexposed to property.
• It won't be paid off by the time you retire.

Teach a man to fish

There are no short-cuts when it comes to your children’s education. To save for their life experience, it’s probably a good idea to consider making monthly contributions into a lower-risk investment like a money market or bond unit trust. Even a balanced unit trust with exposure to a diversified blend of higher- and lower-risk assets is a worthwhile option if your children are young and you have a bit more time to play with.

Golden years

Reviewing your retirement plan is an ongoing essential: not only in terms of the amount you’re contributing per month but also regarding the precise allocation of assets. Considering your age, you probably still have between 10 and 15 working years in which to generate income and invest towards a happy and carefree retirement. Sit down with your financial adviser and do the math. It may be necessary to increase your monthly contributions and/or to change your asset allocation to suit a new set of circumstances.  And remember: minimalism is the new cool, so there’s no need to expand your lifestyle. 

Be prepared

In your 40s there’s a very real possiblity that you’ll have to expand your emergency fund.  Think of events such as weddings, additional family cars (for when your little babies turn 18!), overseas school trips and, sadly, even funerals. 

Get your ducks in a row

Chances are you’ve been through a few life changes over the years. You may have remarried, need a special trust for a vulnerable family member, or possibly be supporting a parent. It’s crucial that you review the beneficiaries of your life policy and your retirement fund from time to time. Should your nomination(s) no longer be relevant, your hard-earned savings may get tied up in your estate instead of going to those who really need them.   

The times they are a changin’

Now that you’re in your fourth decade, you’re possibly coming to the realization that careers are tougher than anticipated and you may wish to change tack in the future. Statistics indicate that the average person changes job ten to fifteen times in their lives!    

Even if you’re happy with your job, you need to keep abreast of technology, including computer software, smartphones and payment methods. Soon you’ll need to embrace artificial intelligence and the way it affects our daily life experience. 

And then there’s the need to acquire new skills.  These new-found talents may assist you to provide financially for you and your family – but even if they don’t make you money they’ll definitely enrich your life and expand your horizons. The new skills may even enable you to spend your twilight years working in a completely different field, thus supplementing your retirement earnings and keeping your mind active. 

The last word

Whatever you do, try not to sweat the small stuff and rather focus on the bigger picture. At least once a year, take a step back and evaluate your financial strategy – you won’t regret it.

Be sure to contact your financial adviser to assess your latest financial plan. To find out more about Prudential funds contact our Client Services Team on 0860 105 775 or at query@prudential.co.za