Providing your clients a perspective on their savings timeline
by Dr. Daniel CrosbyDr. Daniel Crosby is a psychologist and behavioral finance expert who helps organizations understand the intersection of minds and markets. He was named as one of “12 Thinkers to Watch” in the world of organizational psychology by Monster.com and a “Financial Blogger You Should Be Reading” by AARP. He is an independent contractor and is not an employee of Guardian Life Insurance Company of America or any of its affiliates.
Your 40th birthday used to mean black balloons and an assortment of senior citizen gag gifts. Today, forty-year olds are just starting to hit their stride.
For many of you, by the time you reach your 40s, you’ve established your household. You have established strong relationships and strong connections within your community. Many of you have achieved a degree of career distinction . . . or may even be ready to embark on a second career in a new industry altogether.
Generally, you stand at the halfway point in your career with a 20 to 25 year horizon before retiring. Planning for retirement in your 40s is all about charting a strategic course and doing everything you can to stay on point. Now, more than ever, your retirement savings plan is in your hands.
Calculating Your Needs
During your 40s, your retirement savings plan may take a strategic shift from ‘saving as much as possible’ to saving for a specific retirement savings target. While you don’t have the thirty-year investment horizon you had in your 30s, you do have an opportunity to set measurable retirement savings goals and establish a strategic retirement income plan.
As your current lifestyle becomes more stable, you should be in a better position to calculate your retirement income replacement ratio – the amount of income you’ll need to maintain your current standard of living throughout retirement. In 2015, the Social Security Administration reported that Social Security benefits will generally account for about 40% of an average wage earner’s income after retiring.
Unless you’re one of the few with a pension plan, the gap between your projected Social Security benefit and the size of your workplace and individual savings (including 401(k) retirement savings) should be a meaningful driver for your retirement savings plan.
Balancing Your Investment Portfolio
Throughout your 40s, it’s important to evaluate your retirement investment strategy to make sure it has the level of risk that’s right for you. A twenty-year time horizon gives you the opportunity to consider growth-oriented investments while keeping an eye towards preserving the capital in your account.
Savvy investors will take a hands-on approach throughout their 40s. A yearly check-up with your financial advisor can give you the opportunity to re-evaluate and potentially rebalance your portfolio. Rebalancing your investment portfolio on a regular basis may help you ensure that your current asset classes are the right mix for your individual situation.
Balancing Your Life Commitments
The demands on your time and attention are increasing . . . and so are the demands on your assets. Throughout your 40s you’ll face decisions about paying your mortgage, paying down debt and paying for college. If possible, resist the urge to tap into tomorrow’s retirement savings to meet the financial demands of today.
Early distribution penalties from IRAs and other qualified retirement savings vehicles typically include a 10% tax on distributions taken prior to age 59 ½. While there are some exceptions to penalties (medical expenses, death benefits), you’ll want to avoid touching these assets. Your financial wisdom will benefit your family in more ways than one. Talk to your children about your financial situation and the importance of saving.
Young children should be exposed to the concept of long-term savings, and teens can begin to learn how to budget and to use different saving accounts.
Protecting Your Position
Your 40s is the time for making financial decisions based in large part on responsibilities and duties to your spouse, your family and yourself. A life insurance policy gives you the confidence that your family will be provided for if you’re not there. Disability insurance provides monthly income if you are in a situation where you cannot work.
While your employer may provide options for short-term disability coverage, a customized private policy can help you meet your specific needs for income replacement, cost of living adjustments and duration. An investment in disability insurance can help you avoid tapping into your retirement savings. In both cases, a trusted financial professional can help you select the policies that meet your budget and provide the level of coverage you need.
As you enter your 40s, you may become the primary caregiver for three generations: your children, your aging parents and yourself. As you direct large amounts of your time and attention towards others, be sure to continue to invest in your own future. Make saving for your retirement a priority, and find a financial professional who understands your needs. The right financial professional can help you maximize every step in your retirement savings journey.
This material is intended to potentially assist you in planning for your future. The Guardian Life Insurance Company of America (Guardian) and its affiliates, subsidiaries, employees, agents, and outside contributors, are not authorized to provide legal, tax, or investment advice in the materials of this website including but not limited to any blogs. The information provided does not constitute a solicitation of an offer to buy or an offer to sell financial or insurance products. Please note that individual situations can vary, and you should consult your tax, investment or legal advisor for guidance and information specific to your situation. Guardian is not responsible for the consequences of any decisions or actions taken in reliance upon or as a result of the information provided by this material. To learn more about Guardian, visit GuardianLife.com.