In your 40s, life often becomes a balancing act, with career demands, raising children, school commitments, mortgage payments, and possibly supporting ageing parents. Many find themselves stretched, unsure of priorities, and delaying financial planning for a less busy time. However, neglecting finances now can result in costly mistakes that may jeopardise your long-term goals. Here are some common financial missteps to watch for—and avoid.
Incurring too much lifestyle debt
Your 40s are often peak earning years, yet they can also present financial challenges due to debt. Many in this stage purchase property, upgrade vehicles, travel internationally, or invest in a holiday home—tempting opportunities that can lead to lifestyle inflation as income grows. However, unchecked lifestyle upgrades can deplete disposable income, creating debt burdens and limiting future savings. Aim to keep a healthy income-to-debt ratio, and view salary increases as an opportunity to boost long-term investments, rather than a reason to spend more.
Not giving thought to where you live, work and educate your children
The location of your home relative to your workplace and children’s schools can greatly impact both financial and logistical aspects. It’s crucial to carefully consider and thoroughly research before purchasing a family home. High transfer costs mean that buying and selling multiple times within a decade can lead to financial setbacks. Additionally, living too far from work or school can result in extra expenses for transportation, au pairing, and tutoring. Be strategic and intentional when selecting your home location to avoid unnecessary costs and ensure it aligns with your long-term financial and lifestyle goals.
Not preserving your retirement fund money
Cashing in retirement funds when changing jobs may be tempting but is typically unwise. Early withdrawals interrupt compounding, causing you to forfeit potential future growth. Additionally, withdrawals incur substantial tax, eroding the real value of your savings. Preserving retirement funds is essential to ensure sustained growth and safeguard your financial future. Prioritize long-term stability over immediate gains.
Not taking calculated risks
In your forties, you still have a considerable time horizon for retirement planning, making it a good decade to take calculated business risks if you have a viable plan. Ideally, lay the groundwork and establish your venture while still earning a regular income. It’s also advantageous if your spouse is earning, as this can provide financial support during the early stages of the business when cash flow may be uncertain or limited. Planning carefully will increase your chances of success.
Investing too conservatively
By your forties, unless you plan an early retirement, you likely have a 20-year or longer investment horizon. During this time, it’s essential to avoid an overly conservative approach to your investment portfolio. With two decades ahead, ensure your investments are well-exposed to growth assets that can outpace inflation and increase your real wealth. If you’re contributing to a group retirement fund, be sure to review its strategy, keeping in mind that many default options are conservative, designed for those nearing retirement, and may not align with your longer-term objectives.
Not making use of tax deductions
While earning an income, contributing to a retirement fund offers significant tax advantages that shouldn’t be overlooked. Investing with pre-tax money not only lowers your overall tax liability but also enables you to allocate more funds toward your retirement each month compared to after-tax investments. It’s essentially free money, and maximising these contributions makes long-term financial sense, boosting your retirement savings efficiently.
Not making plans for your children’s education
Although not everyone can fully fund their children’s tertiary education, it’s important to start planning now. Without sacrificing your retirement savings, begin investing monthly towards education costs. When selecting an investment strategy, consider your timeline and when the funds will be needed. Explore all available funding options such as bursaries, scholarships, student loans, and NSFAS funding. It’s also essential to manage your child’s expectations early on regarding what you are likely to afford for their education.
Not protecting assets intended for your minor children
While your children are minors, updating your Will is essential to ensure their protection in case of unforeseen events. Appoint a guardian, and possibly an alternate, to ensure they are cared for by someone you trust. Additionally, consider creating a testamentary trust within your Will to safeguard any assets designated for them. This trust activates upon your passing, allowing appointed trustees to manage the inheritance until your children are mature enough to handle it.
Going offshore for the sake of going offshore
In response to crime, corruption, and a challenging economy, many South Africans are exploring offshore investments. However, offshore investing should be a strategic part of a broader investment plan, not merely a reaction to local issues. While global diversification can strengthen your portfolio, ensure that your offshore approach aligns with your financial goals.
Becoming financially dependent on your spouse
If you’re considering becoming a stay-at-home spouse, carefully weigh the long-term effects of relinquishing financial independence early on. Not earning an income can shift relationship dynamics and may lead to feelings of frustration or regret. Keep in mind also that your marriage contract significantly impacts your financial security; for example, being married out of community without accrual may place you at a financial disadvantage if divorced. To maintain financial security, consider ways to earn income from home while staying active and relevant in your industry.
Not keeping your income protector updated
When applying for your income protection benefit, you must nominate your income, which will determine your claims payout. As your income increases, it is essential to inform your insurer of your updated earnings; failing to do so may result in a smaller payout during a period of temporary or permanent disability. Conversely, if your income has decreased since obtaining the policy, it’s important to understand the implications this change may have on your cover and benefits. Regular communication with your insurer ensures that you are adequately protected.
Thinking it’s too late to start saving
If you haven’t started investing for retirement by age forty, it’s important to remember that it’s never too late, especially if you’re willing to work beyond 65. While current expenses such as bond repayments, school fees, and living costs may limit your disposable income, your ability to save will improve as debts are paid off and your children become financially independent. Begin by contributing a manageable amount to a retirement annuity, then increase premiums as your financial situation improves. Taking action now can help secure your retirement future.
Not talking to your parents about their finances
If your parents are not adequately prepared for retirement, it’s essential to address the situation promptly so you and your siblings can develop a plan – although this can be challenging if your parents prefer to keep their financial matters private. In such cases, consider seeking the guidance of an independent financial adviser with expertise in generational wealth planning. Early intervention can lead to better outcomes, particularly when it involves selling property, adjusting investment portfolios, reducing withdrawal rates, or liquidating assets.
Have a super day.
Sue
