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Barbara Friedberg: How to invest in yourself when youíre in your 40s

McClatchy-Tribune Information Services

January 4, 2016


Youíve reached your 40s, have a family and a job, and maybe you think itís time to coast into the future. Think again.

Decisions you make now can impact whether the second half of your life will be filled with prosperity and health ó or not. Examine these personal and financial examples of how to invest in yourself now for a wealthy tomorrow.

SET UP AN EMERGENCY FUND

The furnace goes out or the roof springs a leak. Do you borrow to pay for the repairs? The correct answer is no. In order to successfully meet your present and future financial goals, you need "insurance" for unexpected life snafus.

Financial emergencies will always arise when you least expect them, so being prepared is your best defense. You should have six to nine months of your living expenses in an easy-to-access account for such occasions.

For example, without an emergency fund, if your roof needs a $2,000 repair, you would be forced to borrow money for the repair. If you use a credit card, which charges 18 percent interest to pay the repair, it will take you eight months to pay off that $2,000. And thatís with an added $124 tacked on for interest in addition to the $300 youíll have to fork over every month. This can put your budget in disarray and cause you to neglect other financial commitments.

You should always keep your finances in order so you can meet your current and future financial needs ó especially in your 40s. A cornerstone of sound financial management is financially preparing you and your family for the unexpected with an emergency fund.

EXPAND YOUR HUMAN CAPITAL

If youíre looking to retire at the full retirement age of 66, now is the perfect time to maximize your human capital and subsequently your lifetime wealth. Human capital is similar to any capital; itís all about investing in yourself, typically through education or training that will benefit you in the future.

Consider your career and working years as your human capital. If you earn $70,000 per year, then youíll have earned $1,820,000 between the ages of 40 and 66. Think about how you can maximize your human capital so that it will be worth more over time. In fact, how you manage it over the next 26 years could be the difference between a comfortable retirement and a tough one.

MAXIMIZE YOUR 401K CONTRIBUTION

Shomari Hearn, a financial planner and vice president of Palisades Hudson Financial Group, advises 40-year-olds to put retirement saving first ó even above childrenís college education. No one else will save for your retirement, yet kids have other options to pay for college.

For 2015, the maximum contribution amount is $18,000. This might sound like a lot, but consider the benefits. If you start with zero retirement savings at age 40, and invest $18,000 per period, you can end up with about $1.24 million at retirement age 66.

"At a minimum, you want to contribute enough to your 401(k) to at least take full advantage of any company-match contribution your employer may offer," said Hearn. "Donít stop at just making the maximum contribution to your company retirement plan. If your budget allows, consider contributing to a Roth IRA as well."

If your income is in excess of these limits, and youíre also covered by a company retirement plan, consider a "backdoor" Roth IRA contribution. This entails making a nondeductible contribution to a traditional IRA, then doing a Roth conversion immediately after.