If you’re just starting out, financial advice is easy to find. Fast forward to nearing 60 and thinking about wrapping up your career, and suddenly just about every financial pitch you’ll hear screams “retirement.”
But what about those “middle years”, a professional’s peak earning years and a time of growing financial complexity, opportunity and – frankly – risk? Why don’t we hear more about that? Probably because the middle years are a lot more complicated and specific to each individual, than getting started (“just start saving”) or winding down (“figure out what you have and live within your means”).
Yet your middle years are ultimately where you hone the script of your career and create your endgame wealth and financial satisfaction. Professionals in mid-career have more varied financial needs than their younger counterparts. Their investment time horizon is still fairly long, but now they are likely to be juggling the competing financial demands of college for their kids and retirement savings for themselves, as well as having to help their parents manage their own retirement or declining health. That’s no small undertaking, especially when you stop to consider the big price tags associated with each of these, as well as the challenges of juggling two or three separate pots of money with different time horizons, decision criteria, and risk profiles.
People at this life stage may also face serious life – and in turn financial – setbacks from which they might never fully recover: a forced job change because of industry or economic forces, a debilitating health condition that limits work, time away from work to care for aging parents or a child with special needs that no one could have anticipated.
In short, the middle years are likely to be a time of maximum stress in your life, even if they are also the key to your long-term financial health and happiness. Here are some key priorities to keep in mind if you’re a midcareer professional looking to make sure you’re on the right track, financially and otherwise.
1. Nurture Your Human Capital
Investing in your own human capital – via additional education or training – is close to a slam-dunk for early career professionals. If you can increase your earnings power with such an investment, you still have a long time to benefit from it. However remember, that like any investment, cost matters. Medical schools and high-priced MBA programs aren’t filled with people in their 40s and older because higher lifetime earnings may not offset the outlay of money and time for costly training later in life.
Midcareer knowledge workers should, however continue to enhance their own human capital, taking advantage of opportunities to hone their skills and staying current on the latest developments in their fields as well as keeping current with popular technologies.
This may also be the right time to re-assess and adjust your long-term career trajectory. Would a lateral move in your industry – or one to a related field – enable you to finish out your career in a way that better suits both your professional goals as well as your personal desires? If so, you probably don’t want to wait until you’re 50+ to make that move. And you’ll need to plan to manage any short-term financial disruptions such a change may impose on your household.
2. Put College Funding in Perspective
Balancing college funding against saving for retirement is arguably the biggest financial challenge facing many midcareer couples. Many parents naturally feel the tug of shouldering at least a portion of their children’s college costs, but the cost of higher education continues to rise more than any other single cost-of-living component. Meanwhile, with the ratio of years worked to years retired declining, prudent retirement savers today will need to plan for at least a 25 to 30 year time horizon in retirement, necessitating a larger nest egg than many of us expect.
How can you reconcile these competing financial goals? First, remember to “put your own face mask on first” as they say in the airline industry. After all, if your own retirement isn’t secure, you risk eventually needing to rely on your children later in your own life and ultimately that isn’t want you probably want, or they deserve.
It’s important to be honest with your students about the cost and financial realities of higher education and sooner rather than later. You’re not doing your young adult child a favor by telling her that you’ll fully fund the cost of a top-tier private education if it ruins your retirement plan or saddles her or the family with unsupportable debt. Among other possibilities, your child might consider community college for the first two years, an option embraced by an increasing number of families since the global financial crisis. Growing up means, among other things, facing hard facts and being able to work towards tough goals, including one’s own education.
3. Protect What You Have
The more your wealth grows, the more important it is to protect what you have. The same basic insurance types that were valuable in your 20s and 30s – health, disability, property and casualty, and life insurance if you have minor children – remain every bit as essential as you head into your 40s and 50s.
Homeowners, however, may need to re-assess the nature and coverage of their property insurance, since basic policies don’t always ‘grow’ well as property values increase. Homeowners should also consider a personal liability policy to cover them in case an accident or other incident should occur on their property, as well as additional insurance protection for valuables.
Your 50s are a good life stage to start thinking about the possibility of a debilitating long-term care event. Financing your care as you age may or may not involve insurance, but your 50s is the time to start thinking about what kind of a financial provision you may want for such an eventuality. The longer you wait, the higher your insurance costs (should you choose this route) are apt to rise and the more likely you are to encounter a health condition that could disqualify you from purchasing such insurance.
Finally, be sure to review the adequacy of your emergency fund. Whereas younger individuals might reasonably adhere to the usual rule-of-thumb of three to six months’ worth of living expenses in cash, midcareer professionals, especially those with higher incomes, might want to opt for more. That’s because the higher your income and the more specialized your career path, the longer it could take to replace your job if you lost it (or simply decide that you want to change it).
4. Beware the Silent Killer: Lifestyle Creep
Your 40s and 50s are often considered your peak earnings years. But with higher earnings, it’s easy to let “lifestyle creep” gobble up every bit of your extra income. Before you know it, you’re driving a luxury car with a high monthly payment and shelling out for dog walkers and house cleaners.
One way to help ensure that your savings keeps up with your income is by switching on the auto-increase feature of your company retirement plan. If your plan offers this feature and you’ve elected it, your 401(k) contributions will increase each time you get a raise and you won’t have a chance to get accustomed to the higher income.
At age 50 you can also start taking advantage of ‘catch-up contributions’, which allow you to steer an additional $7,500 per year to your 401(k), 403(b), or 457 plan and an extra $1,000 into an IRA.
Beyond technical moves, simply remember to ask yourself this: Is my current lifestyle financially sustainable based on my existing wealth if I had to quit my job today? If not, you’re probably living on borrowed time, financially speaking. You’re “renting” a lifestyle that you can’t afford to “buy” and will likely be forced to scale back – painfully – in the years to come. A safer, and ultimately happier approach is to get ahead of your lifestyle habits by living below the possibilities of your current cash flow and building the wealth that will enable you to truly sustain a higher standard of living.
5. Be Mindful of the Cost of Complexity
As your income, wealth and the demands on your time – not to mention the possibilities that are presented to you – continue to grow, it’s all too easy to let the complexity of your life run amok. And that comes with significant, though often unseen, cost and risk.
Consider, for example the fact that as a high-income individual you will inevitably be presented with a constant stream of pitches for financial products. Many will seem intriguing, promising, or even exciting. Yet, with little time to devote to in-depth analysis of complex products or a holistic consideration of any financial strategy, the most likely outcome is a jumble of disjointed and sometimes ill-considered financial products over time. It’s like a magpie collection of shiny things.
Does this actually hurt? Perhaps not, but it probably will. Or at least it leads to more risk than necessary along with significant sub-optimization of opportunity. That’s because the value of a portfolio of financial elements lies in the extent to which they each contribute to a coordinated whole of risk reduction and/or opportunity maximization. And magpie collections almost never do that.
The antidote to this is to actually sit down with your financial advisor and think through the overall structure of your financial machinery. Then you can build a financial strategy that enables you to evaluate the value of each element to your long-term program. The benefit of this approach is three-fold. First, it’s more effective than a haphazard collection of financial shiny things. Second, it’s manageable and trackable, capable of being optimized and adjusted if necessary. And third – and perhaps most significant of all – it saves you the time, hassle and worry of having to consider dozens of new pitches, wondering about whether you’re missing something important. If you have a strategy, you’ll know what kinds of things you should be considering and which you can confidently ignore.
At Griffin Black, we specialize in working with successful, mid-career professionals. If you’d like to talk about any of these ideas, let us know. We’re here to help.
