How to Invest in Your 40s (7 Steps for Success)

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how to invest in your 40s

So you're here because you'd like to know how to invest in your 40s.

That's fine, there is still time for you to build a nice nest egg for retirement.

You are probably getting close to reaching your peak earning years in terms of your career, which means you may have plenty of extra cash to invest, which is great!

You have likely started investing through your 401(k), but you'd like to know a few more ways to invest your money to build wealth. 

And that's also fine, I can also help you out.

Let's dive into my guide on how to invest in your 40s.

1. Start Building an Emergency Fund

The first thing you'll want to do in your 40s if you haven't already is to build an emergency fund.

An emergency fund is a fund that stores money for any financial emergencies that may arise in your day-to-day life. 

This could be an unexpected medical expense or your car breaking down.

You should fully fund your emergency fund before you start investing your money to build wealth.

A fully-funded emergency fund should have enough money in it to cover three months of your day-to-day expenses.

Dave Ramsey says that a two-income household could get by with a three-month emergency fund. But if you're a one-income family, self-employed, or people earning straight commissions, a six-month emergency fund is probably a better idea.

The stock market and real estate markets are prone to fluctuations and are to be expected.

You should never have to sell your investments or use a credit card to pay for emergencies that may arise in day-to-day life, that's what your emergency fund is for.

You'll want to store your emergency fund in a high-yield savings account like CIT Bank's Savings Builder account to ensure that your money isn't being eaten away by inflation.

Once you have fully funded your emergency fund, it's time to move on to the next step.

2. Set Investment Goals

Once your emergency fund is set up, it's time to think about the sort of long-term financial goals you want to achieve, and plan how to get there.

If you're like the average American in their 40s, you'll have around $102,700 in your 401(k).

You won't ever have enough money to retire if you keep contributing to your investment accounts at this rate. 

You're really going to have to ramp up your contributions if you want to retire at the average retirement age in the US, which is 62 years old.

You'll have to invest $1850/month or $22,200 a year from age 45 if you want to retire a millionaire.

Here is what your investment portfolio would look like while growing at average stock market returns of 7% (adjusted for inflation) with your contribution of $1850/month.

investing $1850/month

Maybe you can't afford to invest this much money over the next 17 years to retire at age 62.

You can make things a little easier mathematically if you choose to retire at age 67.

You will only have to invest $900/month or $10,800 a year to retire a millionaire.

Here is what your contribution of $900/month would like look over 22 years.

This is going to be a much more achievable goal for most people.

You will make roughly $43,000 a year in dividend income with an investment portfolio of just over $1,000,000.

This puts you a little under the median household income in the US. It should still be enough to live off if you manage to pay off your mortgage by the time you're 67.

You can make more money in dividend income from a $1,000,000 portfolio if you choose to invest in stocks that typically have high dividend yields, like banks.

But $43,000 is the average dividend income amount you will make from a $1,000,000 portfolio if you invest in an S&P 500 index fund. As the average dividend for S&P 500 companies is 4.3%.

After you have set some investment goals, it's time to move on to the next step.

3. Consider Consulting a Financial Planner

Consulting a financial planner can be a great option for beginner investors. Financial planners are professionals that help you manage your money.

If you want to spend a bit more money, you could consult a certified financial planner. They have more credentials and experience than other financial planners. 

Their areas of expertise include financial planning (budgeting and investing), taxes, insurance, estate planning, and retirement.

Investing your money can be daunting, especially if you don't have close friends or family that are experienced in this area.

That's why financial planners are there.

A financial planner will help you create strategies to minimize financial risk and get you on track to achieve your short and long-term financial goals.

Financial Planners Can Give You Peace of Mind

It can be a great feeling knowing that your money is being managed by a professional financial planner.

You can spend less time worrying about money and more time working (to make the money to invest) or enjoying yourself.

4. Open a Brokerage Account

The easiest and most lucrative way to start investing your money is by investing in the stock market through a discount stockbroker.

Why the stock market you say?

The stock market has provided average returns of 7% annually (adjusted for inflation) over the past 130 years. It can also be a much more hands-off option to increasing your money's value than, say, buying a rental property.

Your money will double every 10 years on average while growing by 7% annually. Another way to see it is that $1 invested at age 45 will have grown to $3 by age 62 or $4 by age 67.

The best way to invest your money in the stock market is to invest in S&P 500 index funds.

S&P 500 index funds purchase all of the stocks in the S&P 500 index and simply grow over time without you needing to manage them.

My favorite index fund is the iShares Core S&P 500 ETF. This is one of the largest index funds in the world and charges minimal annual fees.

You will need to create an account with a stockbroker to buy shares in this fund.

The Best Discount Stockbroker

My favorite discount stockbroker is Webull.

Webull is a commission-free trading platform that gives you the tools you need to analyze and buy stocks.

This makes Webull a great option whether you’re new to investing or an experienced trader.

Webull specializes in stocks, options, and ETFs.

Read my Webull review if you'd like to learn more about the platform.

5. Contribute to Your Employer-Sponsored Retirement Account

Contributing to your employer-sponsored retirement plan is another way to invest your money for retirement.

You'll typically have a choice of large mutual funds to pick from when you start a 401(k), although some are starting to offer ETFs like the one I recommended earlier.

Investing in a 401(k) is pretty neat because you can contribute pre-tax money. This means you can reduce your taxable income while building wealth for retirement.

You will, however, have to pay long-term capital gains tax once you withdraw your money for retirement. The capital gains tax rate is typically around 15%-20%.

You can contribute up to $19,500 towards your 401(k) in 2020 if you're under the age of 50, which is more than enough for one year.

You can invest an additional $6,500 to your 401(k) if you're over 50, this is called a catch-up contribution.

This means the 401(k) contribution limit for people 50 and over is $26,000 in 2020.

401(k) Matching

As you may know, employers will match your contributions up to a certain amount, so you basically get free money added towards your retirement fund.

On average, employers will match up to 4.3% of your salary in contributions.

For example, if you made $62,000/year, your employer would match your contributions up to $2,666.

So you would be effectively contributing $2,666, + $2,666 for free from your employer.

401(k) Rollover

By this point, you've probably had a few different jobs and worked in a few different industries.

There is where a 401(k) rollover comes in.

401(k) rollover is when you take funds from your 401(k) and move them into another tax-advantaged retirement account.

401(k) Rollover Into Your Current 401(k)

A 401(k) rollover into either your current 401(k) or an individual retirement account is acceptable.

If you choose to consolidate multiple 401(k)s into your current 401(k), you'll be able to view all your money in one place, which saves you time.

The downside is that you are limited by the investment funds that your employer allocates to your 401(k).

401(K) Rollover Into an Individual Retirement Account (IRA)

Consolidating multiple 401(k)s into an IRA is a great way to take control of your investments.

This way, you can choose where your money is invested within your 401(k) and ultimately pick better performing funds with lower fees.

6. Open an Individual Retirement Account

Aside from your 401(k), another way to invest for retirement from scratch is through an individual retirement account or IRA.

There are two main IRAs, your traditional IRA and Roth IRA.

Contributions to a typical IRA are like a 401(k), in that they go in tax-free, which means you'll have to pay tax when you withdraw your money. On the other hand, Roth IRA contributions go in after-tax which means you'll be paying the tax when you contribute your money, and not after.

The contribution cap for Roth and traditional IRAs is $6,000 if your under 50 or $7,000 if you're over 50 in 2020.

7. Keep Your Savings Somewhere Accessible

As I mentioned, keeping your short-term savings somewhere that is easily accessible, like a high-yield savings account is very important.

You shouldn't ever need to sell your investments or use a credit card to cover emergency expenses.

You should keep your emergency fund in a high-yield savings account like CIT Bank's Savings Builder account.

This account has a low $100 minimum opening balance and offers some of the highest interest rates of any savings account.

Conclusion on How to Invest in Your 40s

Now you know the seven steps to invest in your 40s.

Also, remember that you shouldn't constantly be checking your portfolio to see if you have made money because the market will fluctuate.

There are some years when the market does not even grow at all. It's during these years that the best thing to do is simply keep contributing to your brokerage and retirement accounts when you get your paycheck.

If you check every day, you might get scared and be tempted to sell on days when your portfolio is in the red. This will ultimately hurt you in the long-term.

Remember that the market grows by 7% annually on average, meaning your investment will double every 10 years if you buy and hold for the long-term.

The best thing to do is to invest in iShares' Core S&P 500 ETF through a discount broker like Webull, and let your money grow on its own.

Also, here are some of the best ways to start investing your first $1000 today.