Building Wealth Across the Decades: Financial Planning Priorities for Your Forties

As you enter your 40s, your financial situation often becomes more complex. It’s likely that you have children who are nearing college age, your earning potential has increased, and with it, there are several financial obligations to consider. Here are some factors to take into account during your 40s:

Shifting Priorities

In your 20s, it’s important to prioritize building an emergency fund and paying off any high-interest debt. In your 30s, many Canadians shift their focus to building their savings, buying a home, and paying down their mortgage. In your 40s, priorities may shift again towards saving for your children’s education and maximizing your retirement savings.

Education Savings

If you have, or plan on having children, it is advisable to start saving for your children’s education as early as possible. The Registered Education Savings Plan is a wonderful tool to facilitate this saving. At this stage, you should be doing everything you can to maximize this account.  I find the best approach is determine the amount you can afford each month and simply start an automatic withdrawal program for this amount. You can re-evaluate your amount annually. The key is to start young and be consistent.

Retirement Investments

Although retirement may still be a few decades away, it’s wise to start taking steps to maximize your retirement savings once you are in your 40s. This should include contributing the maximum   you can afford to a Registered Retirement Savings Plan (RRSP) or an employer-sponsored pension plan. The statutory maximum you can contribute to an RRSP is dependent on your income level and your involvement in a pension plan. You can generally find your RRSP limit on your annual Assessment Notice from CRA.

Depending on your situation, and the stage at which you started saving for your retirement (your 40s) you have a shorter time horizon for your retirement savings to grow. The funds available and the time horizon available will dictate the level of risk you may need to take to generate the pool of retirement funds you need. Your rate of return requirement will depend on your situation, and when you started saving for your retirement. If you were to begin saving in your 40s instead of your 20s, you have a shorter time horizon for your retirement savings to grow. As such, you may want to consider investing in medium or higher risk plans to build enough funds to reach your retirement goals.

Managing Debt

Striking a balance between saving for retirement and managing debt is crucial in your 40s. While it’s essential to save for your retirement and the education of your children, it’s also crucial to pay down high-interest debt, such as credit card debt or personal loans . This can be a real balancing act that is often dependent on the tax situation you are in and the related interest costs associated with the debt and the rate of return on your savings. The current spike in interest rates provides a good reminder to review these components as part of your plan.

Estate Planning

At each stage it is important to have a valid and up-to-date will. Creating a bona fide estate plan becomes more important in your 40s, especially if you have children. You should consider updating your will, naming a power of attorney, and establishing a process to protect your assets and your future earning capacity. This will ensure that your family is provided for in the event of your death.

In conclusion, as you enter your 40s you face a unique set of financial challenges and priorities. While the focus on retirement savings remains, this must be balanced with paying for your children’s education and managing your debt. Additionally, estate planning also becomes increasingly important at this stage of life. By creating a personalized financial plan and seeking advice from a financial advisor, you can ensure you are on track to achieve your financial goals.

Next in this Series – Building Wealth Across the Decades: Key Financial Priorities for your Fifties

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