Investing in your 40s

Your 40s can be a time when you find yourself coming up on some big financial changes. Your kids might be approaching adulthood, your parents are getting older, and you’re likely about halfway between your first day of full-time work and your first day of full-time retirement.

Plus, at this stage of your life, you’ve likely made a few career advancements and, statistically speaking, are probably making more than you did in your 20s and 30s. This extra security, coupled with the aforementioned changes, can make a perfect storm of opportunity.

While nobody knows exactly what the future holds, there’s no harm in planning ahead to make the most of this period in your life.

Your 40s could be full of milestones for your family, all of which could have an impact on your finances. If you had kids in your 20s, they’re likely getting ready to be more independent: leaving for school, moving out, or finding a job and financially contributing to your household. Depending on your situation, this could mean either more or less financial obligation: you may not need to financially support them as much, but you might also want to contribute to their post-secondary education if they don’t have an RESP. Similarly, if your family tradition is to pay for your childrens’ weddings, there’s a chance that expense could be on the horizon. Even if your kids are younger and these milestones are a few more years off, you may want to take some of the more expensive events into account for your long-term financial planning.

There’s also a strong likelihood that your own parents are at or approaching retirement age. Depending on their health and the status of their retirement, they might start requiring a little assistance or care as well. Alternately, your parents may end up chipping in to help cover their grandchildren’s education or wedding expenses, or planning to assist in the future by preparing their estates and helping you to secure your family finances when they pass.

Whatever changes your family is going through, it’s best to be prepared and plan accordingly.

Adapting to a changing household

Each of the above changes can have an impact on your wallet and potential savings, sometimes in an indirect way.

If you have kids moving out:

• You may want to undertake some renovations to convert the newly-vacated spaces into a workshop, an office, a rec room, a home gym, etc. In this case, you may want to start setting aside some funds in lower-risk, easily-accessible investments that will be ready to get started whenever you are.
• You may want to renovate your house to turn part of your now-vacant space into a rental apartment. In this case, you will likely have some significant upfront costs, but will also have a new source of income moving forward.
• You may not even want to stay in your current home once your kids move out. Depending on the state of the housing market, you may want to consider selling your current home and moving to a smaller space, then pocketing (or investing) the difference.
  

If you have elderly parents moving in:

• They may offer to help contribute to the additional household expenses, which could effectively grant your household extra income while they stay with you.
• If they have physical limitations, you may need to do some renovations to make your house more accessible, which would require some upfront funds. In this case, you may be eligible for some provincial grants depending on where you live.
• You might want to make some additional renovations to give them more privacy or independence, possibly even renovating a space into a separate apartment unit.

Since many of these adaptations can involve expensive renovations, it would likely be beneficial to start planning ahead and saving early to make sure that you’re ready to shoulder the cost when the time comes.

They say that you should ideally have 3x your annual income saved by your 40s, but the world is far from ideal. In fact, studies have found that 32% of Canadians between the ages of 45 and 64 have nothing saved for retirement at all. Being around the midpoint of your career can be a scary thought if your retirement savings aren’t where you want them to be, but it’s important to remember that there’s plenty of time to get things back on track for a comfortable retirement.

Whether you’re on target or behind your goals, your 40s are an extremely important period in your retirement planning. After all, you’re likely further in your career, and making more money, than you were in your 20s or 30s. This additional income could give you a little extra leeway to invest more heavily in your retirement so that you can make up for lost ground and secure the future you want.

Additionally, if you haven’t been maxing out your RRSP and TFSA limits, you’ve likely got quite a bit of contribution space available to you. Every year, your TFSA contribution limit rises by a fixed amount and your RRSP contribution room raises based on your reported income, and the contribution room for both of those carry forward year-to-year. 

Plus, remember that RRSP contributions are tax-deductible, providing you with an opportunity to save for your future while also trimming your taxes in the present..

You can check your available contribution limits by logging into CRA My Account.

To get started on your retirement planning, see our retirement planning page.

Whether you’re looking to catch up on your retirement savings or just free up a little extra spending money, these tips can help you get a handle on your finances:

• Always consider your debts. When you’re working out a saving plan, it’s important to remember that compound interest is a two-way street. If you have outstanding debts that are accumulating more in interest than you expect to earn from investments, you may want to pay them off first so that you have more to invest down the road.
• Consider your options. RRSP and TFSA accounts both have their own limits and benefits, and each can be helpful for tax-advantaged investing.
• Nail down a budget. A little budgeting can go a long way in freeing up some extra money, whether to save towards a major goal or to spend on a little luxury. By figuring out exactly how much you’re spending and what you’re spending it on, you may be able to find some minor changes that can have a major impact on your bottom line.

Nobody wants to think about death, but at this stage of your life, you should definitely have a plan in place just to cover your bases. After all, you’ve had quite a bit of time to accumulate some wealth: likely some retirement savings, perhaps a house with a partly-paid-down mortgage, plus you might have life insurance through either work benefits or a provider. 

Estates can be messy things if you don’t have a valid, up-to-date estate plan. If there is any question as to who gets what when you pass, your entire estate could be caught up in litigation for years. Even if there’s no arguments among your beneficiaries, an unplanned estate can still incur some heavy legal fees as it’s formally sorted out and disbursed.

You can learn how to set up your accounts to be passed to your loved ones in our estates overview article, and it’s generally recommended that you consult with an estates attorney to make arrangements for your other high-value assets.

Note: The information in this blog is for information purposes only and should not be used or construed as financial, investment, or tax advice by any individual. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied is made by Questrade, Inc., its affiliates or any other person to its accuracy.