You’re entering your 40s and your children are beginning to rely on you less to fulfill their every need. This is great news, as it gives you a bit more freedom, but at the back of your mind you know you’re far from finished with your child-rearing responsibilities. The cost of college looms, as well as the ever-growing need to contribute to your own retirement fund. So how do you prioritize your financial moves in your 40s?
Following are a few tips that could help reduce the stress as you store up ample funds for your kids’ education, as well your own golden years:
1. Ditch Debt
This is the time to concentrate hard on eliminating credit card debt and other loans. Start with the debts that carry the highest interest rates, and work your way down.
After you’ve paid off high-interest debts, think about how freeing would it be to retire without a mortgage. Your mortgage is likely the biggest check you write each month, and the absence of that bill could free up some much-needed funds during retirement, especially during an economic downturn.
If you have a 30-year mortgage loan, one option would be to refinance to a 15-year mortgage, where you’ll be making higher monthly payments but will pay less interest over time. You could also simply make additional payments on your currently mortgage. Even if you just make one extra payment at the end of each year, it could result in reducing the term of your 30-year mortgage loan by about four years.
2. Prioritize Retirement Savings Over Your Kids’ College Fund
This may sound a little harsh, right? After all, you want to provide your children with the best possible education. Well, think about it this way: While your children can take out a loan or receive scholarship money for college, you don’t have the same options for retirement. If you put your retirement savings on the back burner while providing college funds for your kids, it may be difficult to catch up when it matters most. Working longer may not be an option, either, if you have health issues or your company experiences a corporate downsizing.
My advice: put a priority on contributing to your retirement savings during your 40s and let your kids take out low interest student loans if need be. You can always help them pay them off down the road if you have extra money in retirement. In the meantime, your kids will be contributing to the cost of their own education, which definitely isn’t a bad thing.
3. Increase your investment contributions
If you haven’t already, make sure you max out your contributions to your workplace retirement plan. In 2016, you can contribute up to $18,000 to a 401(k) or similar employer-provided savings plan (or $24,000 if you’re 50 or older). Remember these funds will be taxed at your ordinary income tax rate when they’re withdrawn, however, so you may consider also making some contributions to a Roth IRA.
Contributions to this type of investment vehicle are after-tax, but withdrawals are tax- and penalty-free as long as you’re at least 59½ and have owned the Roth for at least five years.
In 2016, you and your spouse can each contribute up to $5,500 in a Roth ($6,500 if you’re 50 or older) if your adjusted gross income is $184,000 or less; if your AGI is between $184,000 and $194,000, you can contribute a reduced amount.
Taxable savings accounts can also help reduce your tax bills in retirement. While most investors pay 15% on long-term capital gains and dividends, investors in the 10% and 15% tax brackets don’t pay anything.
The bottom line: Your 40s are important years to really prioritize your retirement savings. If you have questions about any of the above information, meet with a financial professional. He or she can help you review your investment portfolio and make sure it’s still working in your favor. Financial experts can help insure your portfolio is diverse, with a healthy share of stocks and stock mutual funds that will allow you to build a nest egg that will last three decades or more.