Financial planning in your 40s

While financial planning is important at any age, it’s particularly important in your 40s. At this age, you’re at a pivotal point in the financial life-cycle, and the moves you make can have a profound impact on your wealth in retirement.

Of course, your 40s can be an extremely busy period, and financial planning may not seem like a priority. However, by spending some time on your finances now, and making sure that you’re on track to achieve your goals, you’ll give yourself a better chance of achieving financial security in the future. With that in mind, here’s a look at a number of smart financial planning strategies to consider in your 40s.

Start with a budget

In your 40s, you’re likely to be earning more than you were in your 20s and 30s, which is an advantage financially. It’s important to put that extra income to good use, though. All too often, people make the mistake of spending more as their income rises, and they end up with little in the way of savings.

One of the easiest ways to develop good spending habits is to establish a budget. A budget helps you determine where your money is going, and enables you to allocate cash flow more effectively. This can bring clarity to your financial situation, and help you achieve your financial goals.

Build an emergency fund

One thing you can be sure of in your 40s is that at some stage, life is likely to throw up a financial ‘surprise.’ Whether it’s an unexpected medical bill, an emergency house repair, or the loss of your job, it’s highly likely that you’ll need access to extra savings at some stage.

It is, therefore, a smart idea to create an emergency fund. This is a sum of money in a savings account that is easily accessible and can provide a financial buffer in the event of a large, unexpected expense, or a short-term loss of income. Aim to have enough money in your emergency fund to cover at least three to six months’ worth of expenses.

Pay off debt

Your 40s is also a good time to focus on paying off debt. At this age, it’s common to have a large amount of debt, including mortgages, car loans, education loans, and credit card debt.

Developing a step-by-step plan to eliminate debt is a sensible approach. High-interest-rate debt such as credit card debt should be tackled first. Then, you can potentially look at paying down other loans such as mortgages. Having a robust budget will help with this aspect of financial planning.

Focus on your pension in your 40s

With retirement only a few decades away, it’s important to give some thought towards your pension in your 40s. Now is a good time to check that you’re on track to retire comfortably.

If you’ve accumulated a number of pension pots over the years, you may want to consider consolidating these into one account. This will give you more visibility over your overall pension savings and make it easier to manage your money.

If your pension savings are a little on the low side, it could be a good idea to make additional contributions. You can do this by making extra contributions to your workplace pension, or alternatively, making contributions into a Self-Invested Personal Pension (SIPP). The advantage of this strategy is that you’ll receive tax relief on contributions.

Basic-rate taxpayers receive 20% tax relief, meaning an £800 contribution gets topped up to £1,000 by the government, while higher-rate taxpayers and additional-rate taxpayers can claim an extra 20% and 25% tax relief respectively through their tax returns. For 2021/2022, the annual pension contribution limit for tax relief purposes is 100% of your salary or £40,000, whichever is lower. However, you may be able to take advantage of carry forward rules and make use of unused annual allowances from the previous three tax years if you meet the eligibility criteria.

Invest tax-efficiently outside your pension

It’s also a good idea to build up some investments outside your pension. Pension rules are constantly changing, so it’s important to diversify your wealth across a number of investment vehicles. Having investments outside your pension will give you more financial flexibility.

One of the most tax-efficient ways to invest in your 40s is through a Stocks & Shares ISA. This is a flexible investment account where all capital gains and income are tax-free. Each individual can contribute £20,000 per year into this form of ISA.

Put insurance in place

In your 40s, risk management is an important component of financial planning. You want to ensure that your family will be protected in the event of a tragedy. One sensible risk management strategy is to put life insurance in place. Life insurance will provide financial protection for your family should you pass away within the policy term. Income protection insurance is another form of insurance to consider. This type of insurance pays out if you become too ill to work by paying a percentage of your earnings after a pre-agreed waiting period.

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Develop an estate plan

Putting an estate plan  in place can also be a smart move in your 40s. This is the process of developing a clear plan that explains exactly how you would like your wealth distributed in the event of your death. Having an estate plan in place will provide peace of mind that those you care about the most will be looked after should you pass away. Key aspects of the estate planning process include writing a will and making a Lasting Power of Attorney (LPA).

Speak to a financial adviser

Finally, your 40s is a great time to speak to a financial adviser, if you haven’t already done so. Whether you’re looking for advice in relation to saving for retirement, asset allocation, protection, or estate planning, a financial adviser will be able to offer expert advice and help you make the right financial decisions for your own unique situation and goals.

To find out more or if you have any questions in relation to financial planning, don’t hesitate to request a call back. 

Capital at risk. Any tax benefits depend on your individual circumstances and tax rules are subject to change.