This article is part of a three-section guide that provides financial planning to-do lists for people in their 40s, 50s, and 60s. In addition, we flag each decade’s “pressure points”—those financial products likely to be pushed at you most aggressively—and suggest how you should respond.
It’s often said that life begins at 40. Certainly, seriously assessing the state of your financial health does. Life is no longer a dress rehearsal. With 20 to 25 years until you’re eligible to collect Social Security, this decade is a pivotal point in retirement planning. The earlier you inculcate good savings habits and the more you put aside now, the less likely you’ll have to make painful adjustments later on.
• Write an annual statement of your net worth. Think of this as the financial version of your annual physical checkup, only instead of cholesterol counts and blood pressure measurements, you’re keeping track of your assets and liabilities. This is the first step in taking control of your spending—and strengthening your savings. Update your statement every year, to have a record of your progress as your assets overtake your liabilities and to analyze your financial strengths and identify your financial weaknesses. Tip: Because we measure what matters, the more detailed your statement, the better—but it can also be as simple as jotting down a list on a piece of paper.
• Eliminate credit-card debt. The average household with at least one credit card holds more than $8,000 in credit-card debt. At an average rate of over 14 percent, that means you are paying about $1,120 per year in interest—money that could instead boost a retirement account or an emergency fund, help pay off a mortgage or car, or even be used toward the reward of a guilt-free vacation. Tip: If you’re carrying debt on multiple credit cards, pay off the one with the highest interest first.
• Open an IRA for your spouse. Even if your spouse isn’t working, she—or he—can and should have a retirement account. “The Roth IRA can be a very powerful savings tool for an at-home spouse,” Marcia Mantell, an independent retirement business consultant in Needham, Mass., said. As long as you and your spouse file a joint tax return and your combined household income is less than $181,000, then you may each contribute $5,500 to a Roth IRA—more if you’re over 50 and less if your combined income is between $181,000 and $191,000. (Anything more than $191,000 disqualifies you for a Roth.)
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• Leverage fractions. When you’re looking at a long-term time line, minor adjustments can have major repercussions. For that reason, every time you get a raise at work, bump up your contribution to your 401(k), even if it’s by just a fraction, to maximize tax-advantaged savings. Or if the interest on your mortgage payment is higher than the returns on your 401(k), allocate any extra cash to prepaying the principal. Tip: “Just a few extra payments per year can dramatically reduce the years you have to pay on your mortgage,” Sean Ciemiewicz, a financial adviser in San Diego, said.
• Run a retirement calculator. Research from the Employee Benefit Research Institute shows that in 2013, half of all workers were either not too confident or not at all confident about having enough money for retirement. Find out whether you are on track by checking an online retirement calculator (T. Rowe Price’s Retirement Income Calculator is the most complete—and is free for everyone). If you’re not, you still have time to adjust your savings percentage. One option: the retirement savings version of an extreme diet. Try living on half of your income for a month—or even three—to boost your savings, curtail your spending, and reinforce sound financial habits.
Pressure point: Life insurance
What’s the best type of life insurance for you? The answer boils down to a decision between the two major types of life insurance. Term life insurance provides a death benefit if you die within a set number of years (you can choose the length of the term) and, usually, not a penny if you live longer; it’s a good way to ensure the kids’ college tuition will be covered if you die prematurely, for example. Permanent life insurance—also known as whole, universal, and variable life policies—is a mix of term life insurance and an investment account that pays a benefit when you die, or pays the built-up cash value if you liquidate it before your death. The idea of a policy that turns into a piggy bank when you’re alive is tempting, but permanent life insurance costs a lot more than term; furthermore, the investments are out of your control and are rarely transparent. Our recommendation: Opt for term insurance and work with a fee-only financial planner—not one who earns commissions from selling you a particular type or brand of insurance—to estimate how much coverage you need and how much you can afford.
This article appeared in the June 2014 issue of Consumer Reports Money Adviser.
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