If You’re Over 40, Rethink These 3 Financial Rules
As you grow and your goals change, so does the way you should approach your finances. While some strategies are timeless, like monitoring your expenses and looking for ways to improve your income, others ebb and flow. For example, investors tend to pursue growth-oriented assets in their 20s and 30s, often becoming more defensive about their investment portfolio as they approach retirement and focus on preserving their wealth.
That means some of the financial rules you used in your younger years may no longer make sense to you. Everyone’s financial journey is – and should be – different, but here are three pieces of financial advice you might want to rethink once you hit your 40s.
1. Invest your 100-minus-years in stocks
A popular investment guide is that you should subtract your age from 100 to determine how much of your portfolio should be in stocks. For example, a 30-year-old investor would allocate 70% of his portfolio to stocks and 30% to bonds and other currencies, while a 40-year-old investor would allocate 60% to stocks and 40% to bonds and other currencies.
But experts say this rule may be out of date, especially as the cost of living and health care rises and you need to keep a large portion of your portfolio in growth-oriented investments like stocks. This method is also very general to say that it makes sense for all 40 year olds. While it’s a common strategy for people to focus on saving for retirement, there are many other goals a person may want to prioritize, such as buying a vacation home or caring for an elderly parent. The rule also does not consider other assets outside of stocks and bonds, such as real estate or goods.
When you reach age 40, consider your goals and how long you have to reach those goals, as well as your risk tolerance. You may want to see a financial advisor to discuss what changes, if any, you need to make to your investment strategy.
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2. Don’t affect your home equity
There are several ways to tap your home equity, including a home equity line of credit (HELOC), a home equity loan and a 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 usually say avoid taking out a mortgage on your home if you plan to use it for something non-essential, like a vacation, or if you haven’t done a thorough risk analysis.
But these financial products can be a strategic way to generate income even during retirement. They require careful consideration, but for some people, they may make sense.
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3. Delay Social Security as much as possible
When you delay Social Security you increase the size of your benefit check. That’s why the general advice is to wait as long as possible before you start receiving your benefits.
But for some people, the wait can be expensive. For example, if you don’t start taking your Social Security benefits until you’re 70 but you die in your early 70s, you’ll lose your income. People with a family history of longevity or poor health may want to consider entering their benefits early.
You also need to consider the situation of your spouse. Some married couples choose to receive benefits for the lower-income spouse as soon as possible to ensure additional income, while the other spouse waits until they turn 70.
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