Financial Planning Essentials For Your Forties
Once you hit your forties, you usually start to take your own and your family’s financial future more seriously. You may be more settled in your career and at, or near, your earnings peak. In recent years the cost of housing and general living expenses have risen faster than wages, leaving many households spending all or most of what they earn. This can make it difficult to achieve financial objectives, such as reducing your mortgage and saving for retirement.
Your forties is a crucial time to reflect on what you have achieved, and set some long term financial goals. At this stage in life people are also thinking about changing careers, starting their own businesses, taking a sabbatical – often with the objective of achieving greater work life balance… Retirement planning, if this has not been a focus until now, it is not too late. It will require more effort, but will help to ensure you enjoy a more comfortable lifestyle in retirement.
Plan for the worst and expect the best
The first thing you should do is protect your position. You need a fallback in case you or your partner loses their job, becomes ill or unexpectedly passes away.
Your number one priority should be to ensure that you have cash set aside for emergencies. A general rule of thumb would be between three and six months worth of salary.
It is sensible to have some form of income protection in place. After all, you most likely have at least another twenty years of ‘work’ ahead of you before retirement. It is often said that your ability to work is your greatest asset.
Once you have this security in place, then you can look to invest and take higher levels of risk with your monies.
Review your cashflow position to find ways to save
You probably still have a large mortgage and a young family who cost most (or all) of your earnings. Additional costs such as private school fees can consume a large proportion of your after-tax income.
As your earnings have increased over recent years your expenditure may have grown and absorbed these increases. Now is the time to bring back a savings mindset and reassess your overall budget.
There are some ‘easy’ savings that you should look at initially – switching utilities, insurance, banking, internet, pay TV subscriptions and other household services. If you want to maintain a similar lifestyle in retirement, you need to be saving a significant chunk of your salary now to pay for it.
Make the most of pay rises and bonuses to boost your savings, rather than simply increasing your expenditure each time.
Once you have brought your spending back under control, and you are in a position to set aside money every month, you can focus on saving for your future security.
Focus on the repayment of your debt
Focus on the repayment of your non-deductible debt (such as your home loan, personal loans, car loans etc) as this is not tax-effective debt. Prioritise repayment of those debts with the highest interest rates, such as credit cards and personal loans. Try and repay these debts in full, one at a time.
Consider refinancing all of your debts into your home loan which should have a much lower interest rate.
Speak with your lender to see if they can offer you a better interest rate (sometimes all it takes is one phone call). Or perhaps engage with a mortgage broker who can help you shop around for a good deal.
Start saving for your future financial security
Firstly, now is the time to invest for growth. Once your current financial position is secure, assuming that you are still at least 15 to 20 years away from retirement, you should be able to afford to take a reasonably high level of risk with your investments. The short term ups and downs of the stock market should be smoothed out by the passage of time.
You need to decide how best to split your savings between superannuation and assets outside of superannuation.
Investing outside of superannuation provides you with the greatest flexibility as you can access the assets now, however superannuation can be a more tax-effective investment vehicle. Recent changes to superannuation legislation further limiting the amounts that can be contributed into super will most likely mean that you will need to adopt a savings strategy that invests both within and outside of superannuation.
What investments are best for 20 year growth? Most financial planners would recommend a diversified investment portfolio comprised of Australian and international equities. Then, over time as you approach retirement, they may look to include other asset classes to reduce risk and increase income. If you are managing your portfolio you need to ensure you review this regularly and make changes as required.
Start thinking about your estate planning and the legacy you want to leave
You need to start thinking about your own mortality. You need to decide how you want your assets to be distributed amongst your family and friends. You may need to think about guardianship issues for your children, special care for children with disabilities, or specific asset protection requirements…
Is giving back to society important to you? Do you want to put in place a formal charitable giving strategy? This could be effective immediately or be incorporated as part of your estate planning. This may involve time and effort and/or a financial contribution.
Now is the time to starting taking action to secure your financial future. Do it for yourself and your family.
