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Age Based Financial Planning: 40s and 50s - The Prime Earning Years

What should I be focused on?   A look at financial planning milestones at various decades of a person’s life.

As we age our relationship with finances changes.  From the early years of doing chores for an allowance to late stage estate planning our goals for finances will be impacted greatly by our age and where we are in life.   So with that I wanted to lay out some financial planning milestones tied to where individuals are in life.

40s and 50s: Prime Earning Years.   This is the stage of life where most people are entering their prime earning years.  They have had families and will hopefully use this time to grow their earnings and accumulate wealth.  Here are some of the key financial planning points for this age group.

  • Peak earning years.  This should be the time in your life where a person’s commitment to their profession really begins to pay off with elevated earnings.  As this happens, it is critical for individuals to decide what to do with their new found wealth.  Continuing on the lessons of cash flow planning learned in someone’s 20s and 30s a plan should be created with what to do with additional income.  This should include boosting investing for retirement, creating savings vehicles for education expenses for children, and creating additional savings accounts for other expenses that may crop up while avoiding too much lifestyle creep.
  • Peak expenditure years.  In addition to the increased income during this time, it is likely that this period may be the highest spending years as well.  Some lifestyle creep, the act of using increased income to increase lifestyle with nicer cars, larger houses, nicer vacations will happen.  As an advisor I am not against this at all, if someone works hard for their money they should enjoy it.  But it is important to do this in moderation.  I like to tie additional expenses to someone’s values to ensure they are spending to their own personal values, and not trying to “keep up with the Jones’s.”  Creating a spending plan and allocating dollars is important.
  • Education funding for children.  This is likely the age where children will potentially go on to some form of secondary education.  This could include college, a trade school, community college, or just entering the workforce.  Having a plan with money set aside to help children make this transition is a goal of many.
  • Continue to gain investing experience and knowledge.  As income increases it should allow for individuals to begin to increase the amount they are investing for the future.  This is a great time to start to learn about the different types of investment accounts such as 401(k)’s, IRA’s, Roth IRA’s and Brokerage investment accounts.  Gaining and understanding of the tax rules of each of these accounts will prove beneficial as you age.
  • Diversify investments.  As your asset base grows larger diversifying your investments becomes more important.   In addition to growing wealth this is the time to start to diversify in order to maintain wealth.  The diversification can also include using different types of accounts with different tax rules.
  • Get your estate in order.  Check beneficiaries on all of your accounts to ensure that if something happens to you, the money will go where you want.  Take the time and get a Will, Power of Attorney, and Health Care Proxy in place in the event something unexpected happens.
  • Know your benefits.  This is a great time to really get to understand the employer benefits you have available to you.  This can include retirement plan benefits, profit sharing plans, health insurance plans and more.  

The 40s and 50s for most people will be their peak earning years.  If planned properly, these years can set someone up for success in retirement.