How To Build Wealth In Your 40s

When you turn 40, you’re probably hitting your stride at work and making other big career decisions. You’ve settled into a growing phase, and have likely been building assets for a few decades. 

The truth is, many people in their 40s are at a crucial wealth-building point in their lives. Most have about 25 more years in the workforce before retirement, which might seem like a long time, but will likely go by in a blink. 

Building wealth is an ongoing process and there are many ways for those in their 40s to continue building and reach their financial and lifestyle goals. Let’s explore a few areas to consider on your wealth-building mission. 

Max Out Your 401(k)

Did you know in 2017 only 13% of people enrolled in a 401(k) plan maxed out their savings? If you’re one of those people, congratulations! Maxing out your 401(k) is a huge accomplishment that impacts your wealth-building strategy. 

But what about the remaining 87%?

Using the full measure of your retirement savings vehicles is an important step to reaching your savings goals. For many,  saving enough money to last through retirement is a huge concern. This fear can be relieved by creating (and sticking with) a proper savings plan.

Personal savings are critical to fulfilling your desired retirement lifestyle. With dwindling pensions and the uncertain future of Social Security, saving is an important way to accumulate the cash you’ll need post-career. 

One of the best and most efficient ways to save is by contributing to your company’s 401(k) plan. But you can take your contributions one step further by ensuring you reach the maximum contribution limit for your 401(k).

The IRS increased contribution limits for 2020 to $19,500 per year. Just think, if you started contributing $19,500 for 25 more years, you’d be looking at nearly $400,000 (before capital gains or interest)! 

Remember, this only takes into account your money. Any employer match would be in addition to the above. This example doesn’t factor in inflation or return variables, it’s just a way to help illustrate the money you could earn by investing routinely.

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Build Up Other Investments

While a wonderful tool, your 401(k) is hardly the only savings vehicle in your toolbelt. One of the best retirement accounts to add to your repertoire is a Roth IRA. The 2020 limit for contributions has remained at the 2019 level of $6,000.

You’ve probably heard people lauding Roth IRAs forever, but that praise is not entirely unfounded. 

While you do contribute after-tax dollars into a Roth, any qualified distribution is tax-free. This tax incentive is an excellent alternative to a traditional IRA and 401(k). With both of those accounts, you contribute pre-tax dollars but are responsible for picking up that tax tab once you take distributions in retirement.

The thought is to contribute money to a Roth IRA when you’re younger and your tax bracket is likely lower than what it will be in retirement. From a tax perspective, this makes a lot of sense. But what happens if you make too much money to contribute to a Roth IRA?

You mean there’s an income threshold for Roth IRAs?

Indeed, there is. For 2020, if you are married and filing jointly, your combined income must be less than $206,000 for contribution eligibility. For single filers, the limit is $139,000. This income threshold can present a big problem for many high-earners. 

But there’s a strategy that can help: a backdoor Roth IRA (otherwise known as a Roth conversion). This strategy allows you to roll over funds from a traditional IRA into a Roth IRA, bypassing the income restrictions. 

Now, this sneaky little move doesn’t come without tax implications (which can make this process more trouble than it’s worth for some investors), so be sure to work with a financial advisor to determine if a Roth conversion makes sense for you and your needs. 

Move Up the Ladder

Ever play Chutes and Ladders at a family gathering? Ever think about how it’s just like employees progressing through their careers? In the game, your goal is to climb a set of ladders and make it to the top. But depending where you land, there are many obstacles that can set you back. 

Your career in your 40s is an interesting and exciting time. With 20 or more years already in the workforce, you have experience backing up everything you do. Now is the time to take a holistic view of your career to see how it impacts your life, particularly your finances. 

Sometimes it’s easy to get stuck in your career. But it’s important to think about the value and assets you bring to your job and look to increase your compensation accordingly. 

Asking for a raise isn’t a straightforward process. You often can’t just walk into your boss’s office and ask for more money. It takes careful preparation, documentation, and strategy to get it right. Take the time now to look at the added value you bring to your job. Perhaps you:

  • Took on an additional project (or projects) without being asked
  • Assumed a bigger leadership role
  • Knocked it out of the park on a high-profile project
  • Remained consistent and reliable for your boss, but also your co-workers
  • Championed an extracurricular initiative improving office life such as community service, lunch and learn, or other events.  

Maybe you’re looking for a raise or maybe you’re looking to take on added responsibility — or maybe a combination of both. Either way, now is the time to start that conversation. 

Leverage Your Stock Options

In lieu of salary increases or additional bonuses, many modern employers offer their employees stock options as an additional form of compensation. Stocks are a great resource for your employer because they don’t require a huge influx of cash. 

As an employee, stock options are a great way to build wealth, add diversity to your portfolio, and give you further incentive to grow the company. Many stock options are discounted for employees, giving you the opportunity to invest at a better price than the fair market value. 

Before diving in head first, be sure you fully understand how stock option plans work. This includes when the stocks vest (vesting schedule), when you can exercise them, and what tax implications you can expect. While stock options offer an array of possibilities for many investors, it’s important to know the up-front costs and tax responsibilities so you can prepare for the best time and way to use them.

Get Rid of Your Debt

Debt is like a bug swarm in springtime — it comes on suddenly and feels impossible to get rid of. Debt is one of those roadblocks that can genuinely interfere with your wealth-building efforts because it really is the complete opposite.

Now that you’re in your 40s, take some time to look at the debt you may have accumulated. Examples are most likely:

  • Mortgage 
  • Student loans
  • Personal loans
  • Credit cards
  • Auto loans

Once you know the type of debt you have, you’ll be more equipped to create a repayment strategy that works best. 

After you get out of debt, it’s important to live a debt-free life as you continue to save for retirement. One way to do this is avoiding lifestyle inflation. Living within (or slightly below) your means is a great way to ensure you won’t stretch yourself too thin, and will also help you meet your aggressive saving targets(especially for those who want to retire early). 

When you do spend money, spend with mindfulness and intention. This connection to your goals and values is a great way to keep debt at bay. 

Talk With Your Advisor

There are so many strategies to consider as you build your wealth. Your 40s are an excellent time to recharge and re-energize yourself and your financial strategy. The most important thing is staying true to your goals and priorities, and using money as a tool to help you get there. 

We are passionate about helping people reach their financial goals. Are you ready to continue your wealth-building journey and expand what’s possible? Schedule a time to talk with us. We can’t wait to hear from you!


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