You’re nearing your 40s – have you invested wisely?

Have you ever said to yourself: “I save what I can, but I don’t have a proper financial plan in place. When should I start focusing on this?” Or: “I’m nearing 40 and I’m not sure if I’ve invested wisely. How can I tell?”  

By the time people reach their 40s, three out of four of them have saved something towards their retirement. And so they should: they are hitting their peak earning years and they should be well on their way to reaching their long-term savings goals.  

However, life has a habit of getting in the way – sometimes making it challenging to continue saving and reach one’s investment and financial goals.

A dilemma faced by those in their 40s is that they typically need to save for university tuition for their children, while also saving towards their retirement and perhaps even building a house as well.  

Your 40s may seem like the ideal time to switch into overdrive, but many 40-somethings are instead puttering along in first gear. They save what they can, do their best and figure that they’ll sort out their finances later.  

But, not having a financial plan is actually the same as having a really bad plan.  

Every financial plan should be specific to an individual’s particular needs and lifestyle requirements. For your own plan, you should look at your net income and assess your current level of debt. Then you need to set priorities for paying off that debt and saving for your different needs.

The quicker that debt can be paid off, the more you can save for retirement. You want to have all debt paid off by the time you retire – the last thing a retiree needs is to be paying off debt without the benefit of a salary.  

When deciding how much to save and whether or not you have built sufficient capital, consider the following:

1. Have an emergency fund, such as a money market fund. Ideally, this should equal about three months’ worth of salary. It will provide a cushion in the event of a financial blow.

2. Start saving towards your children’s educational expenses as soon as you can.

3. Pay off your debt with your excess monthly income. As a guideline use one third to settle debt and two thirds towards your retirement.

4. Maximise your company’s retirement fund contribution up to the allowable limit.

5. Consider investing in a retirement annuity to maximise the reduction of your taxable income.

6. Do an insurance needs analysis for your family. For a healthy person in their 40s the cost of life cover is not exorbitant.

7. Check your disability cover – many companies will only pay up to 75% of your gross monthly income.

8. Consider your household and car insurance needs.

As a general rule of thumb, if you started saving in your 20s you can get away with saving approximately 12% of your take-home pay. If you are in your 40s the general rule of thumb is that you need to increase your savings rate to about 20% of your net income.

If you have not been saving enough before now, it’s time to up the rate.  

It seems that too few people have taken the necessary steps to prepare themselves to be financially secure in retirement but it is important to realise that it is never too late to start. 

Wendy Foley is an advisory partner at Citadel.

This article originally appeared in the 23 March edition of finweek. Buy and download the magazine here.