When you're in your 40s, you have about 20 years left to invest and save before you might need your nest egg. The good news is that you're likely close to peaking when it comes to income, so you have some disposable income to use. There are several investing options and strategies available, but you have to take the first step.
Differences in Saving and Investing
If you are putting money away in a bank savings account or certificate of deposit (CD) for an emergency or down payment on a vehicle, you're saving. But if you want to grow your money actively and purchase assets like stocks or bonds, that's investing.
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Both are important, but when you're in your 40s, you must accelerate healthy finances. To quickly do this, you need to develop an investment strategy.
What to invest in is as important as how you will allocate your dollars to these different assets. Investing in high-risk stocks might be tempting for a 40-year-old who's behind the eight ball when it comes to finances, but at the same time, a high-risk portfolio can be a dangerous strategy. If the stock plummets, you'll be even further behind in retirement plans.
A low-risk investor might want to stick to bonds and real estate. But slow and steady may not provide the returns desired in an accelerated manner. At age 40, you should determine your risk profile, which is the level of risk you can afford and are also comfortable taking.
Determining a risk profile is crucial for stock allocation. And using a risk profile helps lessen potential threats and risks.
Consider also: Investing
An index fund is effortless and is considered a low-risk investment. It has a wider diversification and is a representative example of a mixture of bonds and stocks. It is usually considered a passive investment because you basically set it and forget it. A fund manager selects the bonds and stocks for you.
For the 40-year-old, this could be attractive as it has several benefits:
- lower taxes
- lower costs
- lower risk through broader diversification
This is not an actively managed fund. As a result, it doesn't have as much active trading. This protects the investor somewhat from capital gains taxes. And because the fund manager isn't actively trading, manager costs are lower.
And finally, because there are thousands of different stocks and bonds, with a diversified portfolio, one going south doesn't affect the investor as severely. Other stocks and bonds offset the poorly performing asset. In other words, all the eggs aren't in one basket.
Consider also: How Long Will My Retirement Savings Last?
An index fund is effortless and is considered a low-risk investment.
Finding a Competent Broker
If you're 40 and just starting to think about or want to accelerate your retirement plan, a competent broker is necessary.
One way to facilitate trading stocks and bonds is through a competent brokerage firm. There are two routes to go with brokerage firms. You can go with a full-service brokerage or a discount one.
Full service firms like Schwab® or Fidelity® provide advice and analysis to a client. The 40-year-old who is scurrying to put a retirement plan together or pay for a wedding, may benefit from this advice. But the fees are higher than a discount broker.
A discount broker like eTrade does not offer advice. They merely carry out buy and sell orders.
It's a good idea to choose according to your competency level as well as the time you can personally commit to managing your portfolio when it comes to stocks and bonds.
Consider also: Facts About Stock Brokers
When you're in your 40s, it's important to keep a savings account as an emergency fund. While you might be able to invest comfortably, keep in mind that the unexpected and life emergencies can occur at any time. So determine your risk profile and act accordingly.
- My Stock Market Basics: What Should Investments Look Like in Your 40s?
- Optimized Portfolio: Portfolio Asset Allocation by Age-Beginners to Retirees
- Wells Fargo: Saving vs. Investing
- Vanguard: What Is an Index Fund
- GO Banking Rates: What Is a Brokerage Firm
- www.elearnmarkets.com/blog/: Discount Broker vs. Full Service Broker: Which One is Right for You