The important investment decisions in your forties

Your forties bring both feast and famine. You are often at the peak of your earning power, with knowledge and experience enabling you to command a higher salary; but you will also tend to be at the peak of your financial commitments, from childcare costs to paying the borrowing on your home, all eating into your disposable income. In the face of these financial pressures, it is tempting to put off long-term planning.

Making the right decisions in your forties can help you to benefit from greater financial freedom and reassurance in your fifties and sixties. It may offer you choices that might bring a turning point in your career, and help protect your family in the event of redundancy or long-term illness. You may still have 20 years or more until retirement, but action taken now can make a real difference.

Something is better than nothing

Finances may feel stretched, but there is always a little you can set aside for the future. You still have a significant period of time in your working life, and compound interest can help you increase your capital: €100 invested at the age of 40 producing a return of 5% would be worth €271 at 60. That same €100 would be worth just €164 if you wait another 10 years. Add in tax credits and the effect is even greater. However, you should not forget the reality of the inflationary impact on purchasing power. In 20 years’ time, prices will most likely have increased significantly and this will have an impact on your purchasing power. Still, it is always cheaper to invest for your retirement today than it would be tomorrow.

If you are employed, your employer may be providing you with a workplace pension in addition to the statutory retirement system. In many cases you can opt to contribute more through salary sacrifice schemes. This can be a relatively pain-free and tax-efficient way to boost your investment.

Watch the debt

The demands on your income may feel endless: a bigger house, education fees, cars, holidays, Netflix subscriptions… Until the recent surge in interest rates, it made sense to finance some of those costs with debt. Borrowing costs were extremely low and investors could generally get a far higher return on stock market investment.

That equation changed in 2022. The cost of borrowing for home loans has increased significantly as the European Central Bank started raising interest rates, and few analysts expect rates to return to the ultra-low levels of the past decade in any immediate future, while inflation may take several years to return to central banks’ 2% ceiling target.

Debt will be a far more expensive option going forward, and could leave families vulnerable if they face repayments significantly higher than they have been accustomed to

This means debt will be a far more expensive option going forward, and could leave families vulnerable if they face repayments significantly higher than they have been accustomed to. While setting aside capital for your future is important, it is also worth considering whether you can pay down debt, especially if it is subject to a variable interest rate that may continue to increase.

Design your retirement

You still have plenty of time to decide on the shape of your retirement. Nothing needs to be set in stone, but it can be helpful to decide whether you plan to retire at 55 or 70, whether you want to sink into an armchair or maintain an active travel schedule. It will also be important to consider whether you want to do any kind of paid work. Income from non-executive directorships or consultancy, for example, can delay the point at which you need to draw on your retirement income.

It is also worth thinking about your expenses. Will you still be repaying property debt, for example? Will you still have dependents? Is it possible you will need to care for elderly relatives? Are there non-negotiable expenses that you can’t be without – from sports club memberships to long-haul holidays?

Look at what you have

Your forties can be a useful time to take stock of what you have. If there is still a considerable gap between your ambitions and your resources, you have time to do something about it.

While it is dangerous to rely on an inheritance, it could be helpful to consider how it might change your plans if you received one.

Look at your various periods of employment and assess what pension entitlement you have built up. It could be worthwhile consolidating the various benefits in one place to ensure they are invested effectively. What other sources of income, such as buy-to-let property, do you have? Are you expecting to inherit significant amounts of money or property? While it is dangerous to rely on an inheritance, it could be helpful to consider how it might change your plans if you received one.

All this should help you to come up with a rough guide to what you will need to support your desired living standards in later life and an approximate figure for what you have already. From there, you can progressively build a more accurate picture of how much you need to save and invest over the next 20 years.

Don’t be too cautious

Twenty years is a long time, and there is a risk in being too cautious, too early, with your investments. You need your portfolio to keep pace with inflation, which is more likely to happen with so-called risk assets such as equities – as long as you have a long enough time horizon to be able to ride out the inevitable periods of stock market volatility. The 2023 JP Morgan Asset Management Long Term Capital Markets Assumptions report forecasts that cash will return on average 2.4% annually over the next 10 years, compared with 7.2% for a portfolio containing 60% equities and 40 bonds.

At the same time, don’t neglect the investment balance of your portfolio. It is easy to have lots of different pools of investments, such as pensions, investment funds and tax-incentivised savings products, pointing in different directions.

This is a particular problem when certain sectors have performed very well, as technology has done over the past decade. This can leave a portfolio vulnerable when the market changes direction. Look at the overall balance of your investments from time to time and ensure that between them they will get you where you need to be.

Think about insurance

If you have dependents, it is worth considering life and/or critical illness insurance. This is particularly important if you are sell-employed and therefore don’t have a safety net provided by the company you work for. Money from a life or critical illness policy will help support your family by paying off your home loan, or creating an income that could replace your salary.

In this spirit, it is important to make a will and ensure that your expression of wishes for your pension scheme and life insurance products are up to date. If you don’t, the people you intend might not receive your money if you die.

Your forties are the ‘it’s not too late’ decade. You can still make a meaningful difference to your financial wellbeing later in life by reviewing your situation and making changes where necessary. You just have to find the time to do it.