Guide to Financial Planning in Your 40s

Take a look at the goals you set in your 30s. Are these still priorities for you? Do you have a strategy to save for them? Revisit your goals and categorize them into short-term, mid-term and long-term goals. And if you didn’t set goals in your 30s, there’s no time like the present to do it.

Developing — and updating — your financial goals is a great exercise in your 40s, since you may have different plans for how you want to spend your money than you did 10 years ago. Do you want to start that business you’ve been dreaming about, or is buying a summer cottage more appealing? Now is the time to recalibrate your plan based on where you are.

Revisit your monthly budget

Whether you set a strict budget or just make sure you’re not overspending each month, by the time you hit your 40s, your month-to-month spending is probably fairly predictable. But over the years, it can be easy for expenses to shift. It’s a good idea to regularly revisit your spending along with your goals. Are you still using your dollars for the things that are most important to you? Or are you paying for dozens of subscription services that you barely use anymore?

When you go through this exercise, it’s not uncommon to find that you’re spending money on things that aren’t that important to you. That’s great; now you can free that money up for whatever is important. Maybe that’s a current need, or maybe it will help you save for one of the future goals.

Maintain and replenish your emergency fund

It’s a good idea to keep about six months of expenses in an emergency fund. If you’ve had to dip into this account or your expenses have grown, now is a good time to make sure it’s fully funded again. If it’s fully funded, check this one off the list.

Manage your debt

Though you have likely prioritized paying down any bad debt you may have accumulated in your younger years, you have probably taken on new debt, too. That’s OK. Debt can be a strong financial tool. But it’s important to have a plan to manage your debt. Here are a few resources to consider:

Update your estate plan

If you created an estate plan in your 30s, make sure it is up to date. Major life changes — both personal (getting married or divorced, having children, adding assets, losing family members or receiving an inheritance) or professional (starting a business) — can influence decisions for the future of your estate. Review your will or trust to make sure the terms still reflect your situation, and confirm that you’ve designated the right beneficiaries for your life insurance policies and financial accounts, as these trump what’s in a will. In addition, look at your financial and health care powers of attorney to make sure you’re still happy with the person you’ve named in those documents. If you haven’t yet developed an estate plan, now is a great time to get those plans in order.

As your income has grown, maybe your family has grown, too. Now it’s more important than ever to make sure that you’ve put plans in place to support them if you’re unable to work or you’re no longer around.

• Disability income insurance: If your income has grown, the coverage that you had in place may no longer be enough. While coverage through your workplace is typically based on a percentage of your salary (and would grow with your income), any private coverage that you have in place may not keep pace with substantial promotions. It’s a good idea to weigh whether your coverage would meet your family’s needs. If not, it could be time to consider adding to your coverage.

• Life insurance: You may already have a life insurance policy, but is it still the right fit for you and your family? Now’s a good time to assess your coverage (as with disability income insurance). Has your life changed since you got your policy? Any number of changes could be reasons to update your coverage. In addition, if you have term life insurance, you may want to consider converting some of your coverage to a permanent policy to take advantage of the additional benefits it offers compared to term insurance.

Here are the key differences between term life insurance and permanent life insurance:

You’re probably very aware now how quickly a decade goes by. Your kids will likely be going off to college before you’re 50. According to the College Board, the average cost of tuition, fees, and room and board for the 2021 to 2022 school year was $55,800 at private colleges. If your child is pursuing a four-year degree, the total would be $223,200 (and that’s before inflation). If you want to help pay for your children’s college, it’s a good time to check in on your savings — or get started. There are multiple types of college savings plans, each with their pros and cons, worth considering:

• 529 College Savings Plan
• 529 Prepaid Tuition Plan
• Coverdell Education Savings Account
• Uniform Gifts to Minors Act (UGMA) Account
• Uniform Transfers to Minors Act (UTMA) Account

Whether you’ve already had a focus on saving for retirement or not, your 40s is when it’s time to make sure your savings are on track. You’ve likely established a stable budget (60 percent on fixed expenses, 20 percent on goal contributions and 20 percent on discretionary expenses), but as retirement gets closer, it’s important to take a look at how you’re contributing to your retirement.

Pay yourself first

The term “pay yourself first” refers to prioritizing your retirement savings. One of the best ways to save for retirement is to automate what you’re setting aside. The goal is for your contributions to get siphoned off as you get paid so you won’t even notice the money is gone.

How much should you have saved?

By this point you’re likely making contributions to a retirement account like a 401(k) and are building a healthy nest egg. That’s great. But are you saving enough? Ultimately, everyone’s “number” will be different based on the lifestyle they want in retirement. There are several general rules for retirement savings. A good starting point is the 4 percent rule, which says you can withdraw 4 percent of your savings each year in retirement (with increases for inflation). The opposite of this is to simply multiply the amount of income you want by 25. So, if you want your savings to generate $100,000 a year in retirement, you need to have $2.5 million saved by the time you retire (100,000 x 25 = $2.5 million). However, it’s important to remember that this is just a general rule. A financial advisor can help you hone in on a number based on your situation.

If you’re feeling a little behind on your goal, that’s OK; you have plenty of time to catch up on retirement savings. And if you’re in a good spot, that’s great. It should free you to spend more on the things you want today.

Diversify your assets

Saving for retirement is great, but how and where you save can be just as important as how much you save. Just as you want to diversify your investments with different types of stocks, bonds and other assets, diversifying the location of your retirement savings is also an important retirement planning strategy. This typically includes having some assets that are invested in the markets and others that aren’t affected by market swings. It’s also important to consider how different retirement assets are taxed. Here are some of the key financial tools people often use for retirement sources beyond traditional IRAs and 401(k)s:

Using these tools together to generate income in retirement can give you flexibility to navigate market swings, manage your taxes and avoid other common risks to your retirement savings.

While it’s good to be focused on the future, financial planning is all about balancing your future goals with life today. Just as spending everything you have today puts your future at risk, saving too much means you’re missing out on the things you enjoy now. Financial planning is not just about making sacrifices and living on a tight budget; it also means defining what is important to you and making sure you enjoy your life.

If you have a family, your 40s are likely to be a busy time. And it’s time you won’t get back, so it’s important to make decisions that allow you to enjoy this time today — the way you want to — while also making sure you’re planning for the future.

It can feel overwhelming to juggle all of these priorities, but you don’t have to tackle it all on your own. A financial professional can help you think through your priorities and look at your whole financial picture to help you develop a plan to get where you want to be.

¹Utilizing the cash values through policy loans, surrenders of dividend values or cash withdrawals will or could: reduce the death benefit; necessitate greater outlay than anticipated; or result in an unexpected taxable event.

This article is not intended as legal or tax advice. Northwestern Mutual and its financial representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent legal, accounting or tax adviser. Tax and other planning developments after the original date of publication may affect these discussions.

No investment strategy can guarantee a profit or protect against loss. All investing carries some risk, including loss of principal invested.

To be used with form ICC16.TT.DI.IIB.(0916), ICC16.TT.DI.FIB.(0916), ICC16.TT.DI.CAT.(0916), ICC16.TT.NCDI.(0916), ICC16.TT.GRDI.(0916), ICC16.TT.DI.PDB.(0916), ICC16.TT.DI.PDBO.(0916) or state equivalent. Not all contracts and optional benefits are available in all states. Disability insurance policies contain some features and benefits that may not be available in all states. The ability to perform the substantial and material duties of your occupation is only one of the factors that determine eligibility for disability benefits. These policies also contain exclusions, limitations and reduction-of-benefits provisions. Eligibility for disability income insurance, additional policy benefits, and qualification for benefits, is determined on a case-by-case basis. For costs and complete details of coverage, contact your Northwestern Mutual Financial Representative.



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