If You’re Over Age 40, You Should Rethink These 3 Financial Rules
As you age and your goals change, so will how you should approach your finances. While some strategies are timeless, such as monitoring your expenses and looking for ways to boost your income, others ebb and flow. For instance, investors tend to pursue growth-oriented assets in their 20s and 30s, they generally get more defensive with their investment portfolio as they near retirement and focus on preserving their wealth.
That means that some financial rules you implemented in your younger years may no longer make sense for you. Everyone’s financial journey is — and should be — different, but here are three pieces of financial advice that you may want to rethink once you hit age 40.
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1. Invest 100-minus-your-age in stocks
A popular investing guideline is that you should subtract your age from 100 to determine how much of your portfolio should be in stocks. For instance, a 30-year-old investor would allocate 70% of their portfolio to stocks and 30% to bonds and cash alternatives, while a 40-year-old investor would allocate 60% to stocks and 40% to bonds and cash alternatives.
But experts say this rule may be outdated, especially as the cost of living and health care increases and you need to keep a larger portion of your portfolio in growth-oriented investments like stocks. The approach is also too generic to say that it makes sense for all 40-year-olds. While it’s a common strategy for people focused on retirement savings, there are many other goals someone might want to prioritize, like buying a vacation home or caring for an aging parent. The rule also doesn’t take into account alternative assets outside of stocks and bonds, such as real estate or commodities.
When you hit age 40, consider your goals and how long you have to reach those goals, as well as your risk tolerance. You may want to consult a financial advisor to discuss what changes, if any, you need to make to your investing strategy.
2. Don’t touch your home equity
There are several ways to tap your home equity, including via a home equity line of credit (HELOC), home equity loan and cash-out refinance. But they come with risks: Your home is put up as collateral, and you could be at risk of foreclosure.
That’s why experts generally say to avoid borrowing against your home if you’re planning to use it for something non-essential, like a vacation, or if you haven't closely analyzed the risks.
But these financial products can also be a strategic way to generate income leading up to or during retirement. They require careful consideration, but for some people, they can make sense.
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3. Delay Social Security as much as you can
When you delay Social Security you increase the size of your benefit check. That’s why a common piece of advice is to wait as long as you can before you start receiving your benefits.
But for some people, waiting can cost. For instance, if you don’t start taking your Social Security benefits until you’re age 70 but you pass away in your early 70s, you’ll miss out on income. People who have a familial history of short longevity or poor health may want to consider tapping into their benefits earlier.
You also need to consider your spouse’s situation. Some married couples opt to have the lower-earning partner claim benefits as soon as possible to ensure extra income, while the other spouse waits until turning age 70.
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