How to Build Wealth in Your 40s

Regularly contributing to your 401k can help you establish a strong savings habit and stay committed to your long-term financial goals.

Reducing debt can provide several benefits. Firstly, it can help save money on interest payments. When you have less debt, you have less interest to pay, which can free up money for other expenses or allow you to save more for the future.

Reducing debt can also improve your credit score. High levels of debt can negatively impact your credit score, which can make it harder to obtain credit in the future or result in higher interest rates. By reducing your debt, you can improve your credit score and increase your financial options.

Reducing debt can decrease financial stress. Debt can cause stress and anxiety, especially if you're struggling to keep up with payments. By reducing your debt, you can feel more in control of your finances and experience greater peace of mind. Additionally, reducing debt can increase savings. When you have less debt, you can allocate more of your income toward savings or other financial goals, such as building an emergency fund or saving for a down payment on a home.

Lastly, reducing debt can improve your cash flow. By reducing the drag from debt, you can increase your cash flow, giving you more money to put toward other expenses or financial goals.

As you move closer to retirement, your financial goals and objectives may begin to shift. While a 20-something professional may be earning less, they may be able to take risks in the stock market with portfolios heavily weighted toward more risky investments like small-cap or micro-cap companies. In the event of a prolonged downturn, these younger individuals can continue to earn and invest without needing to tap into the capital in their portfolios.

Mid-career professionals typically have a shorter time horizon, which means risk needs to be more diligently managed. While investors in their 40s still have enough time to weather both a downturn and a market recovery, some may prefer to mitigate some of the volatility in the market. This can be accomplished by decreasing their portfolio’s allocation to stocks and increasing their portfolio’s exposure to relatively more stable investments like fixed income funds or bonds. Along with mitigating their portfolio’s risk, fixed income investments can also serve as a source of passive income, which can diversify how an individual is building their wealth.

Similarly, investors in their 40s may have accrued enough capital to begin looking at alternative investments like private equity or private credit. While the minimum initial capital requirements (sometimes called the “stated minimum”) may be out of reach for an investor in their 20s, an individual with more capital can take advantage of some of the unique characteristics of alternative investments like reduced correlation to the overall market and potentially higher returns. However, this capital may be less liquid than investments in the public markets, and some offer monthly or quarterly redemptions. If you are interested in learning more about alternative investment options available to you, you can reach out to our advisors for more information.

As an investor progresses in their career, considering the tax implications of their investments becomes more important. Tax efficiency refers to how well a portfolio mitigates the amount of money lost to taxes, and there are several basic strategies for increasing your portfolio’s tax efficiency.

An investment strategy might be different between taxable and tax-deferred or tax-exempt accounts. For example, a fixed income investment in a taxable account has significantly different tax implications than a fixed income investment in a tax-exempt account (like a Roth IRA). The fixed income received in a taxable account is taxed, so an investor would lose a portion of all the fixed income generated in their taxable account to taxes. However, in a tax-exempt account, fixed income is not taxed, and an investor can keep the entire amount of their income.

Another example of tax inefficiency could be holding municipal bonds in a tax-exempt account. Because federal municipal bonds are not taxed, holding them in a tax-exempt account would be inefficient. Instead, investments in these bonds would be better off in a taxable account, freeing up space in a tax-advantaged account for protecting investments that would otherwise be taxed.

By identifying areas where you can cut back on expenses and sticking to your plan, you can build an emergency fund, save for retirement, and achieve other financial goals. Additionally, having a financial plan can reduce financial stress by giving you a clear picture of your financial situation and helping you plan for the future. This can alleviate anxiety and improve your overall well-being.

Your 40s represent one of the highest-earning periods of your life. With increased income, bigger investments, and heightened tax consequences, hiring a financial or wealth advisor is one option that can simplify your wealth, improve your financial situation, and give you peace of mind in knowing a financial professional is overseeing your wealth.

There are many types of financial advisors and many different fee structures financial advisors can offer. For example, as a fee-only fiduciary, we charge a fee on assets under management (AUM). Other financial advisors may charge hourly or include additional fees for financial planning. If you are interested in learning more about the different fee structures advisors might use, take a look at our guide to advisor fee structures.

Finally, if you’re interested in learning about how we help investors in their 40s optimize their wealth, you are welcome to reach out to us using our contact form.