10 Things to Know About Money Before You're 40

Every decade is a milestone of sorts, but turning 40 should come with a special, financial heads up. Warning: This is when life gets complicated.

If you’re turning 40 soon, statistically speaking it’s likely that both your parents are approaching retirement—and your kids could be a stone’s throw away from college.

A successful plan is no longer solely about what you’ve saved. It’s about pressure-testing that plan in the face of converging life dynamics. Your parents, your kids—even your own spouse or partner—have impending financial needs that likely will impact you.

You can’t control all the unknowns of course, so let’s focus on the doable: a solid evaluation of your own financial picture; frank conversations with loved ones; and assembling an educated guessitmate of future challenges.

Here’s the information you need to nail down before 40:

1. Your current savings rate and what you’ve saved thus far

Yes, there’s been good news on savings rates in recent years. But the fact remains that most Americans have saved less—often far less—than they should have. Among 25-45 year-olds, a solid majority have saved less than $10,000. Where do you stand?

As you take stock of how much you have, and how much you’re contributing, think outside the 401(k) box. The standard default savings rate set by your employer is probably 3%, according to a PSCA study. Many plans automatically increase the rate over time, but it could take a while to get to 10%—the savings rate that’s more likely to provide a secure retirement. And if you’re the primary or sole provider for your family, you should aim higher than that, since you’re saving for two or more.

What to do? Flash back to high school physics (or Angry Birds): just as a small upward tilt can dramatically change the trajectory of an object, the same applies to your savings. Even a 1% increase in your savings rate each year can add hundreds of thousands of dollars to your nest egg by the time you retire.

2. How much you can expect from Social Security

A Gallup poll earlier this year found that 48% of people who hadn’t retired yet expected Social Security to be a minor source of income, while 36% said it would be a major source of income. And a shocking 60% of couples don’t know what their benefit will be.

If you aren’t sure, it’s time to find out. Fortunately, keeping track of your projected benefits has gotten easier with my Social Security, a free service provided by the Social Security Administration (SSA). Still, the whole benefits system is so complex, as economist Lawrence Kotlikoff is fond of noting, it’s wise to master some basics now—so you can spend the next two decades unraveling the particulars.

A crucial point: the older you are when you claim benefits the higher your monthly paycheck will be. While you can claim as early as age 62, if you wait until full retirement age (65 or 67, depending on when you were born), you’d get more per month. Hold out until age 70, and your benefit would be almost 80% higher than at age 62.

Case in point: Imagine three people, at those different ages, who file for benefits this year. The maximum monthly payout for the 62-year-old would be $2,025. A 65-year-old would receive $2,663. The 70-year-old’s maximum benefit would be $3,501.

Knowing both the amount and the timing of when you might claim Social Security can help clarify an important piece of your retirement income puzzle.

3. Whether you’re on track to have enough when you retire

How much money you need by the time you retire is the subject of much debate. Let’s keep it simple. What you really need to know right now is whether you’re on track to generate, say, your current income when you retire. It’s a reasonable target for the moment; you can always revise it later.

Plug in the numbers you’ve just dug up (your current nest egg, savings rate, expected Social Security benefit), plus a couple of others (your expected investment return, a pension payout), into this calculator:

How much will I need to save for retirement?

Or do a quick back-of-laptop calculation: Let’s say you’d like to live on $65,000 in retirement; multiply that by 25 to get $1.625 million. That amount is based on the idea that you should probably withdraw about 4% of your nest egg per year when you retire: $1.625 million X 0.04 = $65,000. The 4% rule, as it’s called, isn’t set in stone. But again, it’s a place to start.

Now, what if your calculations show that you’re only on track to save $800,000—about half your goal? That $800,000 would generate about $32,000 annually. Let’s say Social Security will supply another $2,000 per month, or $24,000 per year. Now you’re up to almost $56,000—a $9,000 annual shortfall. So you can either save a little more to close the gap, or consider living on less.

The good news about doing the math now is that you have time to celebrate—or course-correct.

4. How many retirement accounts you have

By age 40, there’s a good chance you’ve changed jobs once or twice—or maybe more, given that the average worker holds about a dozen jobs by age 48, according to the Bureau of Labor Statistics.

The hazard of multiple employers is that you can end up with jumble of 401(k)s and IRAs, and this is one area where more is definitely less.

Yes, dealing with rollovers and switching accounts can be time-consuming, but there are several benefits when you streamline: you can save on both account and investment fees; you can eliminate investments that are overly similar or redundant; you’ll enjoy a greater sense of control (and less paperwork).

5. How risky your portfolio is

Your asset allocation is basically the balance of stocks versus bonds and cash (also called fixed income) in your portfolio. It’s important to know the percentage of each in your portfolio, because that balance ratio determines how much investment risk you’re taking on.

Stocks can offer more growth—and more risk. Fixed income is meant to counterbalance that. So what’s the ideal asset allocation?

One rule-of-thumb is to invest your age in bonds. If you’re 35, that would mean putting 35% of your portfolio in bonds, 65% in stocks (or stock and bond mutual funds, which is what most people have in their retirement accounts). Some people quibble with that ratio, and recommend investing more aggressively, especially while you’re younger.

If your money is in a target date fund—an all-in-one retirement fund that dials back on stocks over time to be more conservative—you can choose one with a higher or lower stock allocation.

Putting, say, another 10% into stocks (a 75-25 split) would get you the potential for more growth (i.e. higher returns), but also expose you to more risk (a.k.a. the risk of losing a bit more of your money if there’s a downturn.)

On the other hand, if you have 25 years or more until you retire, that gives your money time to recover from a market drop. Either way, make sure you revisit your asset allocation yearly. As the market shifts, your target mix can get out of whack. Rebalancing once a year insures that you keep your portfolio mix right where you want it.

6. The basics about your partner’s finances

If you’re like most couples, you probably think you and your mate are in sync about money—that’s what 72% of couples believe. But dig a little deeper and most couples are at odds about important money issues, like when to retire or how much they’ve saved (43% don’t even know what their mate earns.)

Here’s a thought: Given that money discussions can cause tension, don’t try to explore everything about your partner’s money habits, history, belief system right now. No soul-baring “money dates”. Just review your basic financial plans together. At minimum, you should know this about each other:

How much you’re each saving for retirement, and how much you’ve each saved thus far.
Where your accounts, logins and passwords are located (sharing info can save headaches later).
A general idea of the lifestyle you might like to have in the future.

It might take a couple of sit-downs to cover that ground, so bring a spirit of collaboration rather than criticism. After all, you’re in this together.

7. The basics about your parents’ finances

If talking to your mate about money is challenging, you won’t be shocked to hear that the same applies to Mom and Dad. Indeed, 75% of adult children over 30 and their parents agree that frank discussions about health care and retirement expenses are key—yet 40% say they haven’t had detailed conversations about those issues.

Avoiding money topics now puts you at risk of being blindsided by caregiving expenses later. Nearly half of family caregivers are spending over $5,000 per year, out of their own pockets, to help pay for prescriptions, in-home care and more.

Mari Adam, a financial planner in Boca Raton, Fla., recommends breaking the ice by talking about your own plan (having gone through steps 1 through 7, you should have plenty to say). Some other ways to navigate these new waters:

Avoid talking dollars and cents at first; try to learn more about your parents overall thinking and general plan.
Your parents may feel relieved that you’ve broached the topic—but don’t get frustrated if they seem dismissive. This is a long-term conversation, not a single discussion.
If there’s too much tension around this issue, consider working with a financial planner or a care manager. A trained professional may have skills and information that will benefit both you and your folks.

8. How to save for college

You’ve probably heard that you must prioritize your own retirement savings over college (the standard logic is that you can get loans for college, not so much for retirement). But that doesn’t mean you can afford to ignore looming college bills, which are stretching into the six figures these days.

It might help to recap the mechanics of college savings: Not surprisingly, parents with a college plan tend to save more than those with no plan—46% more.

The most common savings vehicle, the 529 plan, allows you to save and invest money that you then withdraw tax free for qualified expenses. Also, 34 states offer a tax deduction for the amount you contribute.

Unlike other types of college savings plans, 529 plans don’t come with age limits or yearly contribution caps (although there’s a lifetime contribution cap that varies from state to state). Even better, as long as you keep the account in your name, those assets aren’t a big factor in influencing your financial aid package.

You don’t have to know everything—like how much tuition you’ll need or where your child is likely to go—but by the time you’re 40, you should get started. Even if you don’t have kids yet. (Kidding! Sort of.)

9. The basics of your estate plan

“Estate plan” sounds like a fancy term, but think of it as a broad one: Your estate includes your physical and your financial well being, and you need a plan for both.

In time your estate plan may expand to include trusts and charitable giving plans—your legacy, if you will—but for now it’s important to cover two bases: your will and your health care directive, says Betsy Simmons Hannibal, a legal editor at Nolo.

A will determines who will take care of your children; who will get your property; and who will wrap up your estate (i.e. the executor).

Your health care directive will name a person who can make health care decisions for you if you’re incapacitated, and state what kinds of health care you want to receive (or not).

Setting up these documents takes time and thought, but they’re not typically expensive. Remember, these provisions aren’t for you: They’ll make life easier for the people you love when you’re not around.

10. Your vision for the future

So where is all this planning and calculating going to take you? While you’re still a couple of decades away from those supposed golden years, it’s hard to know what’s going to make them gleam.

Do you want to plan for a second act, career-wise? Become a devoted grandparent? Cultivate heirloom tomatoes on your farm in Costa Rica?

George Kinder, a pioneer in the hybrid field of life and financial planning, is an advocate of asking yourself (and your spouse or partner) quality-of-life questions like these. Rather than viewing this sort of self-exploration as an abstract exercise, think of it as an investment in your future—a different sort of portfolio.

The answers to the questions of what you want and what makes you happy, will, over time, come to shape many of the financial choices above. And, like your actual investment portfolio, these inner guidelines will help you reach the future you want as well.

10 Things to Know About Money Before You're 40

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