What difference can 10 years make? They can have a major impact on your wealth.
The average net worth for American adults who are in their late 40s is $750,000. The average for those who are in their 50s can be over seven figures.
No number of years makes it too late to increase your net worth. You don’t have to be a bright-eyed 20-year-old college graduate to start increasing your wealth.
Read on to learn how to build wealth in your 40s.
Develop Retirement Savings
19% of Americans 65 or older were still working in 2023. That’s double the amount who were working at that age 35 years ago.
If you want to retire before this age, you need to start planning as early as possible. 40 is a great time to start considering your retirement planning options.
Start by maxing out contributions to your 401(k) or other retirement plans through your employer. For most plans, the limit in 2024 is $23,000 for those under 50. Over 50, you have a catch-up provision for an additional $7,500. That means the over 50 crowd, can add up to $30,500 a year.
You may also have other retirement and investment options that can build upon those savings. They include:
- HSAs
- IRAs
- Roth IRAs
- Brokerage accounts
Use and put as much into these options as you can. These items can help you get the most out of your retirement. Keep in mind there are contribution limits and qualifications for many of these accounts. A good financial advisor should be able to help you get this right.
Diversify Your Investments
Your 20s are a great time to begin investing, but your 40s are ideal for diversifying your portfolio. You’ll likely have more knowledge and capital to use.
Consider using a variety of investments, which may include:
- Stocks
- Bonds
- Index funds
- Mutual Funds
- ETFs
Diversification is key for investment risk mitigation. If one investment fails or the markets change, this diversification can help you weather the storm.
It can also help you manage your tax bracket. Having a variety of tax-deferred and tax-free investments can help you reduce your tax bill from the IRS.
There are several investment options that could help you reduce your taxes. They include:
- Employment retirement plans
- IRA contributions
- Health savings accounts
- Charitable giving
- Donations to scholarship-granting organizations
- 529 college savings (limited to some state taxes only)
Learn New Skills
They say you can’t teach an old dog new tricks, but the idea that 40 is too old to learn a new skill is a common misconception.
Learning a new skill to make money is known as upskilling. It’s an investment in yourself that can really pay off when done correctly.
Try learning a new language or taking online courses. It can keep you competitive in the job market and potentially give you greater job security and financial stability.
Every skill you learn is a feather in your cap when negotiating for better pay or higher positions. You can even turn some newly formed skills into a profitable side business.
Reduce Debt
73% of Americans die in debt. They average $62,000 in the red.
The sooner you start planning for this, the lower your number can be. Focus on high-interest debt first, such as:
- Credit cards
- Personal loans
- Lines of credit
Try consolidating your payments. Negotiate with your creditors to see if you can reduce your interest rates or fees.
Settle your mortgage as early as possible by making extra payments towards the principal or refinancing. It’ll reduce the amount you pay over the long term.
It is always wise to consult a financial professional when attacking debt. Especially mortgage debt. These pros can help organize and prioritize, as well as advise on the best funds to use in the debt reduction plan.
Control Your Spending
Create a budget to help control your spending. Find out how much you can afford to spend in every area of your life. THEN STICK TO IT!
Recording your expenses can also help you cut unnecessary costs. Did you spend too much this month on eating out? Do you have unnecessary subscriptions? Noticing these problems early reduces their impact on your net worth and helps you form sustainable habits that can build wealth over time.
Protect Your Wealth
Your 40s are a fitting time to reevaluate if you have the right amount of insurance coverage.
The first thing to think about is which policies to get. You should have a life, disability, health, and property/casualty policy. You may want to consider long-term care insurance as well.
Most 40-somethings should focus on term life, not whole life plans. Careful planning with a financial professional such as a CFP® can help you determine the type and amount needed for your unique situation.
The next is the amount of coverage you have. Your coverage should change with your pay. Adjust your homeowner’s insurance when your home’s value changes. Life changes such as illnesses or children may also require insurance adjustments.
Build an emergency fund that can cover three to six months of your average expenses. Keep it in a separate account so you aren’t tempted to spend it on personal expenses. The question isn’t if you’ll need it, but when. Having it ready keeps emergencies from derailing your financial plans.
Begin Family and Estate Planning
By 40, you may have children who are planning on going to college. Saving for college is important, but using a 529 is even better than just putting money aside in a checking or savings account. 529 plans can be used tax-free when your child needs it as long as it is used for education expenses.
One of the most uncomfortable parts of building wealth after 40 is planning for what will happen to your assets and debts after you’re gone. Estate planning becomes more important the more you earn, but it is essential for everyone.
Develop a clear estate plan that details your wishes for yourself and everything you own. Include documents such as the following:
- Last will and testament
- Revocable living trust
- Power of attorney
- Health care directives
Have a discussion with your family to create a plan that works for everyone. Consider who will be the executor, who controls the money should you be disabled, and your beneficiaries of all of your insurance policies and assets.
Hire an Advisor
Let a professional help you determine how to build wealth in your 40s. Their personalized advice can help you create a plan for whatever you want to achieve and, more importantly, a road map to get there.
They can offer a range of financial planning services. These involve short-term financial goals. They may also include how to save for your retirement or pay down your debt.
They’ll also offer wealth management. These services help you make the most out of your money and build wealth.
They can identify the best investment opportunities for you. This diversifies and increases the worth of your portfolio. They can even help with estate planning decisions.
It’s Not Too Late to Build Wealth in Your 40s
Discovering how to build wealth in your 40s involves investing in your retirement, diversifying your investments, potentially learning new skills, protecting your wealth, creating a budget, controlling spending, starting family and estate planning, and hiring an advisor.
Lefavi Wealth Management has been serving the community since 1980. As an independent fee only firm, we have the freedom to give you the best financial advice for your needs.
We’re focused on people, not transactions. Contact us to work with our team today.
