12 Expert Tips for Building Wealth for 40 Somethings

It’s not easy being 40-something. Hovering somewhere between the Baby Boomers and the Millennials, we defy tidy categorization. (Who wants to be pigeonholed into some lame label, anyway?) We’re also walking a tightrope with our wealth, deciding how to maximize earnings, minimize debts, prioritize desires and duties … and leave time for some fun along the way.

One thing is for sure. Nobody should go it alone as you work on building wealth. That’s why I’ve put together a simple one-page checklist with my best tips for building wealth:

Get Your Wealth Building Checklist

I’ve also reached out to a number of my fellow, most respected financial bloggers, to ask them:

What is your best tip on building wealth for busy 40-something families?

I was blown away by the quality and quantity of the replies. For all the bad news about Wall Street, the response reinforced my faith in how many hardworking advisers are out there as well, with thoughtful insights to offer those who will heed them. Even legendary Vanguard founder John Bogle weighed in with his reply to my request!

Here are a dozen ideas to help you with building wealth in your forties. The advice is optimal for us 40-somethings, but applicable to anyone.

 

Tip 1

Avoid the junk; and there’s heaps if it.

Most mutual fund companies spew more toxic waste into the investment environment than a third-world refinery.

 

William J. Bernstein, PhD, MD, Efficient Frontier

 

Tip 2

Ignore the short-term distractions of the market.

I was thrilled when John Bogle replied to my query, rock star that he is to us fans of sensible investing and wealth building. He proposed that I share an excerpt of my choice from one of his many books. One of my favorites, for its simple, timeless financial wisdom, is “The Little Book of Commonsense Investing,” in which he offers this advice about participating in the market:

The stock market is a giant distraction that causes investors to focus on transitory and volatile investment expectations rather than on what is really important–the gradual accumulation of the returns earned by corporate business.

My advice to investors is to ignore the short-term noise of the emotions reflected in our financial markets and focus on the productive long-term economics of our corporate businesses.

 

John C. Bogle, Founder, The Vanguard Group

 

Tip 3

Mi$takes happen. Let them go.

My best advice for people in their forties is pretty simple…let go of the past. Given what has happened in the last 20 years of your adult lives, chances are some mistakes have been made with money…let them go. Commit to having a no-shame, no-blame rule when it comes to money, and extend the same favor to your spouse or partner.

 

Carl Richards, CFP® Behavior Gap “Sketch Guy”

Author, The One-Page Financial Plan: A Simple Way to Be Smart About Your Money

Director of Investor Education, The BAM ALLIANCE

 

Tip 4

There is good news and bad news.

For individual investors you could make the case that it’s the best of times and the worst of times. It’s the best of times as medical science continues to advance and average life expectancy continues to rise. That means those approaching retirement can actually look forward to actually spending a long time in retirement.

The worst of times is that with current equity valuations much higher than historical averages and bond yields much lower than historical averages, expected returns are now much lower than historical averages.

That means that what was once considered a safe withdrawal rate of 4%, is now 3%, for the 65-year old retiree. That means that instead of needing a portfolio that is 25x your spending need when you retire, the multiple is now 33x. For many it will mean that they will have to work longer than planned or lower the goal. And for many there will be some painful choices.

But facing reality is a lot better than ignoring it, as being alive without sufficient assets to meet a minimally acceptable lifestyle is an outcome that is painful to contemplate.

 

Larry Swedroe, Principal and Director of Research, BAM Advisor Services

 

Tip 5

Get a philosophy and stay the course.

In your forties, figure out your investment philosophy if you haven’t already done so. Philosophy is a core belief that drives all your investment thinking. It differs from a strategy and ultimately shapes your strategy.

For example, I believe the markets provide a good return and that most attempts to outperform result in lower returns. As such, I believe I have the highest probability of reaching my goals by being in the markets rather than trying to beat the markets. This leads to a portfolio strategy of index funds and index tracking ETFs, and a fixed location to asset classes based on my long-term goals.

Philosophy is a state of mind that governs strategy and provides discipline in good times and bad. If you don’t have a philosophy, you’ll wander aimlessly in a jungle of carnivores. Get a philosophy, create a strategy for your needs, and stay the course.

 

Rick Ferri, CFA, Managing Partner, Portfolio Solutions | Blogger, www.rickferri.com/blog/

 

Tip 6

Save 50% of every raise to avert 100% lifestyle creep.

As you reach your 40s, for many the promotions and job opportunities as they approach the peak of their career leads to some significant increases in compensation. Be cautious. Allowing your lifestyle to ‘creep’ higher with each big raise limits your ability to save, and makes you accustomed to a lifestyle that is even more expensive to fund.

As a strategy to manage through times of big income growth, ‘JUST spend 50% of every raise’. That might actually seem generous – in fact, that’s the point – but doing so helps to ensure you DON’T increase your lifestyle by 100% of your raise, and make your retirement even further away.

Obviously, if you can save even more, all the better, but by committing to ONLY spend half of each raise, and save the rest, you can rapidly build a big savings cushion and start bridging the gap to retirement. (Source)

 

Michael Kitces, MSFS, MTAX, CFP®, CLU, ChFC, RHU, REBC, CASL

Blogger, Nerd’s Eye View

Publisher, The Kitces Report

Partner, Director of Research, Pinnacle Advisory Group

 

Tip 7

Talk to your spouse about money. Don’t assume.

First get together with your partner and actually talk about what your monthly household savings goals actually are.  I’m always amazed how this one simple step can change everything. In today’s go-go-24/7 world it’s easy to just assume you are on the same page but the power that comes from confirming that as a household unit you are both working towards a unified goal is incredible.

Once you have that number, try to automate as much of it as possible – through maxing out workplace retirement plans and setting up automated contributions to IRAs, and taxable brokerage accounts (or emergency fund if that’s not fully funded yet).

 

Manisha Thakor, CFA

Author, GET FINANCIALLY NAKED: how to talk money with you honey

Blogger, MoneyZen

 

Tip 8

Take advantage of your highest earning potential years.

Position yourself to get the largest raises possible. Your highest earning potential in your career comes from your mid-40s to your late 50s. Despite how much focus the financial media loves to give to investing and chasing returns, the reality is that how much you save is a MUCH bigger component of what you’re going to wind up with than how much you get on your investments.

Let’s look at two people who are age 40. They both started out working at age 25, earned $50,000 a year, saved 15%, and got a 7% return on their investments. They’ve had raises of 3% to this point. That means that they both have about $250,000 saved up at age 40 and they’re making $77,898 per year.

The first person keeps on keepin’ on and keeps the 3% raise. The second person does some online courses, really digs into corporate strategy, brings in work, and makes herself more valuable, earning a 5% raise each year.

How much difference does that little 2% increase make in how much money they have when they turn 66?

Just under a quarter of a million dollars. Here’s the chart.

 

Jason Hull, Owner, Hull Financial Planning

 

Tip 9

Segment your savings.

Set up savings accounts for each of your goals: emergencies, travel, gifts, down payment, etc. That way you’re saving for your goals each month but not dipping into the emergency savings to pay for travel.

 

Sophia Bera, CFP®, Founder, Gen Y Planning

 

Tip 10

Start small. Make it automatic.

Even when other financial goals take priority start a 529 account for your child and begin automatic contributions of $25 per month. Your account statements will be a good reminder that college is getting closer and you’ll think about increasing your contributions.

Joe Hurley, Founder, Savingforcollege.com

 

Tip 11

Let the magic of compounding work for you.

Invest, don’t spend, those one-time or once-a-year ‘windfalls’ like bonuses, vesting of company stock, inheritances and/or tax refunds.

Compound interest is a powerful force, so use it to your advantage, as soon and as often as you have the opportunities. (‘There’s an urban legend that Albert Einstein once said compounding [interest] is the most powerful force in the universe.’)

Sheri Iannetta Cupo, CFP®, Principal, SageBroadview

 

Tip 12

Ignore the Joneses (and their new Tesla).

Stop trying to impress others with big purchases and you’ll see your bank account start to fill up in a big way!

 

Ted Jenkin, CFP®, AWMA®, CRPC®, AAMS®, CMFC®, CRPS®

Co-CEO, oXYGen Financial

 

There you have it. 12 powerful tips for building wealth that you can use right now to make smart money decisions, build your wealth and have a secure retirement.

For more tips on how to build wealth, download my simple, one-page checklist packed with actionable advice and links to useful apps:

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