As the old saying goes, “Life begins at 40.”  Since I just reached that milestone myself last week, I have to tell you that it is true.  You might not think so but turning 40 was a very exciting event for me and not just because my husband “kidnapped” me from work and with the help of a good friend set up a day of pampering and then threw me a surprise party with family and friends that night.  He also single handedly planned a wonderful week long vacation for our family to celebrate this milestone in my life.  As I reflect on life at the beginning of this decade and realize both the good decisions I made (which include marrying this guy) and the mistakes I have learned from I begin to smile.  My life is very different than it was ten years ago.

Benjamin Franklin once quipped, “[a]t 20 years of age the will reigns; at 30 the wit; at 40 the judgment.”  I am always amazed at how his wisdom stands the test of time.  I have seen both men and women come into their own when they turn 40, and I believe it has to do with their life experience, which is of course a component of how judgment is based.  In my case, in the past 10 years I’ve run a workplace financial education firm, gotten married, and had a son.  My life experience is richer and deeper, which hopefully makes me wiser and a better CEO, as well as wife and mother.

The decade of the 40’s is a unique time in one’s life to get serious about financial planning because of this life experience and also because of the timing.  A 40 year old still has 20 – 25 years to save and invest so there is also still time to make an impact. Life is also no longer a “dress rehearsal” – life is serious.  We’ve also seen it zip by quickly and realize that we need to make good decisions going forward.  That is why the decade of the 40’s is a pivotal point for retirement planning.  With a long-term horizon, there is time to set plans in motion to significantly impact the future.

There are financial areas to focus on in your 40’s that will set the groundwork for a lifetime of financial security:

1.       Write a net worth statement each year. Know what you are worth and put it on paper.  A simple assets and liabilities statement will do the trick but the more detailed it is the better.  If you work with a financial planner, update your plan each year and keep them in a file.  This will help you immensely over the years because, just as in business, we pay attention to what we track and your wealth building is vital to your financial health.  Also, by having a record of your finances, you’ll be able to see your progress as your assets overtake your liabilities and you’ll also be able to analyze your financial strengths and weaknesses to help you in your future planning.

2.       Pay cash for (mostly) everything. If you are able to eliminate debt except for the big items such as your mortgage or a car payment, you’ll be ahead of the game.  Following the principal of “if you can’t afford it, don’t buy it,” you’ll save for emergencies, vacations, and larger purchases.  The average American household with a credit card has over $14,000 in credit card debt.  At an average rate of over 14% that means they are paying about $2,000 per year in interest – a complete waste of money.  It is making the banks richer and the credit card holder poorer.  The sooner you get out of debt (if you are in debt) and go to all cash, the more money you’ll have to build your financial future.  At least mortgages are a good kind of debt since you are investing in an equity position to someday be able to rip up the payment booklet and have the deed in your name instead of the bank’s.  Car payments can be a necessary expense of employment, but if you focus on paying cash you’ll never get behind the 8 ball.

3.       Plan to have your mortgage paid off when you retire.Whether it is selling your home and downsizing, moving into your vacation property, or paying off your mortgage on a schedule that fits your retirement date, a 40 year old has the opportunity to have a home free and clear in retirement.  A mortgage payment can be anywhere from 20 – 30% of someone’s income – most people’s largest expense by far.  Consider how valuable it would be to have reduced housing costs in retirement: it could mean the difference between retiring at age 62 or age 67.  Set yourself up to have that choice in your 60’s with a payment plan in your 40’s.

4.       Create multiple streams of income for retirement. Start a series of systematic investments and invest the maximum you can starting with your 401k and Roth IRA, but don’t stop there.  Whether you buy Treasury Bills monthly through Treasury Direct or invest in stocks or mutual funds with a dividend reinvestment plan, investing regularly in vehicles that can turn into an income stream later is a key lifetime wealth builder.  People turning 40 this year will not attain their full retirement age under Social Security until they are 67 years old and the U.S. Deficit commission recommends this be raised even higher.  Since many of my fellow Gen X’ers also don’t have access to company defined benefit pension plans, it is important to create your own income streams and not rely on the government or others to do so for you.  Invest soon and often using different investment vehicles.

5. Run a retirement calculator annually. Research shows that in 2011 less than 20% of employees are confident they are on track to retire with 80% of their income; find out if you are.  In your 40’s you still have time to make adjustments that aren’t painful.  You  have time to adjust your saving percentage and you still have a long-term investment time horizon so a few changes may get you on track.  If you aren’t, you could do a temporary “extreme retirement savings” and live on half your income for a few years to boost your savings.  Waiting too long means working longer or living an entire life in “extreme savings.”  To access a retirement calculator, click here.

Friends of mine who are in their 60’s tell me that decade is the best time of their lives.  They are well into their stride in their career, their kids are out of the house, and fortunately they are healthy.  Since my son is just a toddler, I can’t imagine him being gone – I am so excited to get home from work to see him and don’t look forward to the day when he has the normal teenager embarrassment with being seen in public with his parents.  If life begins at 40, then I have to say that life is indeed good because at 40 there is so much more to give and more that life has to offer.  It also comes with the realization that there are opportunities that can be easily missed.  Now is a pivotal time in our financial lives, and there is time to benefit from our future good decisions.

Liz Davidson is CEO of Financial Finesse, the leading provider of unbiased financial education for employers nationwide, delivered by on-staff Certified Financial Planner™ professionals. For additional financial tips and insights, follow Financial Finesse on Twitter and become a fan on Facebook.

Johnny and Lara’s Amazing Video!

You see, we all feel overwhelmed sometimes. We work and work, but bills keep coming and debt keeps piling up – many people feel like they just can’t seem to get ahead. Good news! Johnny and Lara have discovered the secret to living a truly wealthy life and reducing your stress over money. There’s a way to grow your wealth so you can truly afford the finer things in life – and have time to enjoy them.

You won’t believe what Johnny just bought Lara! CLICK HERE TO SEE VIDEO

I was so impressed that I’m sharing this video with as many people as I can – and I hope you will, too! It’s just five minutes long, and I promise, it may just be the best five minutes you’ll ever spend!

Sincerely,

Mark

P.S. I’m serious. You have to take five minutes to watch this video. Five minutes – you can do it during a commercial break! Just click here.

The roaring twenties

The study finds that the average wage of 16- to 20-year-olds climbs from £15,000 to £17,500 for people in their mid twenties. Earnings accelerate throughout their thirties, but flatten out at £35,000 for 16 years once they hit forty. And it gets progressively worse after that.

Women’s earnings reach their potential earlier, but with a whimper rather than a bang. Earnings plateau in the mid thirties and never reach the peak of £45,000 scaled by their male contemporaries.

The withering in wages coincides with a life stage that is typically more dynamic, making income stagnation a double blow. Around this age, eight out of ten people (85%) own their own homes, of which three in ten (32%) are family dwellings. Six out of ten (65%) support dependents, including both parents and children.

The snoring forties

For the typical twenty- and thirty-something, this is a cautionary tale, given that these groups racked up a sixth of Britain’s total consumer debt in recent times. However, credit that they cannot afford on their £25,000 salaries may be no more affordable ten years later, when the salary increases they hoped for fail to come about.

Additionally, countless new costs such as school fees and caring for ageing relatives are likely to arise when you hit 40. There may even be panicked contributions to a still-empty pension pot. But at 40, contributions of more than £2,000 a year will be necessary to support an average lifestyle at retirement.

David Kuo, Head of Personal Finance at Fool.co.uk, says: “We all like to think that milestone birthdays lead to exciting turning points in our lives. But it seems we shouldn’t get too ecstatic about life beginning afresh and full of bounty when we hit 40.

“With average consumer debt of £21,450, and potential mortgage debt of much more, it seems those of us indelicately referred to as middle-aged should show some of the conservatism the term implies.

“No one should ever think they are over the hill at 40, but you will have a financial mountain to climb if you haven’t saved enough when you were still young and upwardly mobile.

“Consequently, optimistic career climbers need to plan their finances earlier. Tightening purse strings is obvious – but remembering that salary-wise they may never loosen is imperative.”

From Easier Finance

I can’t believe I’m turning 40 two weeks from today. I think I’ve written about this before, but it’s starting to bother me. For one thing, I haven’t been to a doctor since I was 17. Several readers have written to me that I need to start going to a doctor, if only to check for prostate cancer on a regular basis, which apparently can start plaguing men “my age”. Here’s how I think about decades: In your 20s you should try as many things as possible (whether in your career or personal life) and try to ramp up as many learning curves as you can. In your 30s you have to have some initial success and start making money. In your 40s (I’m guessing now) you need to translate that initial success into permanence and in your 50s you need to figure out something completely new that you’re going to do for the rest of your life.
Nothing is set in stone but this is the way things seem to be shaping up. I was excited to turn 30 because I felt as if nobody would take me seriously in a meeting until I was 30. Particularly since I have the personal presence of “Pigpen” from the Charlie Brown comic strips and that tends to be a mark against me in business meetings.

But now that I’m almost 40 something else is starting to occur to me. I might die soon. And by soon, I mean, “fewer than 40 years”. I might be more than half way through my life span. So for the first time ever I have to think about ways to live longer. This is a matter of common sense and not thorough scientific research. For instance, basic exercise – such as walking an hour or so a day – is probably better than doing nothing. Reducing stress is also probably another good way to live longer. And how can you reduce stress? By laughing more. Using a magical tool called “Google”, on something the kids are calling “the world wide web”, I just found out that 100 laughs is equivalent to 10 minutes of rowing. Personally, I hate to row. I’d rather laugh. Another way to reduce stress: not worrying so much about your portfolio or the markets (more on this in a second). And it doesn’t take a rocket scientist to know that no smoking, no alcohol and better calorie intake is probably better than the reverse.

Now that you can live forever by following the tips above, it’s time to make your portfolio live forever since we don’t want you to run out of money when you’re 300 years old. The good news is that there’s no better time in the past four years for your portfolio than today. How come? Because people are assuming that the US is on the brink of a devastating economic collapse. I won’t get into all the reasons for or against this. I’m bored of that already. You can turn on CNBC to listen to endless pundits expounding on their books with well-crafted arguments on how we’re either going to boom or collapse. The reality is the markets will ultimately do what they always do: go up.

Here’s what we know. Citigroup and Bank of America have 7.5 per cent and 6.3 per cent dividends, respectively, and are at multi-year lows in stock price and price/earnings ratio. Not only that, but what happens when all their write-downs on subprime get marked back up sometime in 2008 and 2009? And it will happen. They might not get marked up to par but they were definitely marked down too much in 2007, thanks to hedge funds shorting the ABX index that was used to define the market in these instruments.

And Time Warner at $16, with a new CEO on board, is a great pick for the next year. I was at HBO when Bewkes took over. He was a monster who cut everything. People were prosecuted to the fullest extent of the law if they stole from the supply cabinets. The famous HBO Christmas party at Tavern on the Green was cancelled! But he brought us The Sopranos and ever-increasing profits. Look for Time Warner to spin off as much as possible, conserve cash, increase cash flows, buy back stock at these reduced levels and all sorts of other good things, and hit $20 by June. Similarly, expect Citigroup to return to $40 and Bank of America to $55.

A slightly smaller pick: Applied Biosystems Group. Carl Icahn just loaded up on ABI, which makes and sells systems and software used for human disease research, genetic analysis and pharmaceutical drug discovery. I view ABI as a backdoor play on the ageing baby boomers. Additionally, it helps that the company trades for just 12 times cash flows and analysts are expecting around 15 per cent growth over the next year.

I’ll have more picks next week. But these three are no-brainers right now. Meanwhile, speaking of eating well: I’m going to eat at Zen Burger on Lexington and 46th (465 Lexington) today. They serve “chicken, beef, tuna”, etc but none of it is real. It’s all vegetarian and tastes excellent. The grand opening is today and I’ll be holding “office hours” at 12pm if anyone wants to try out this place with me and talk stocks for a while. Live long and prosper.

james@formulacapital.com

Copyright The Financial Times Limited 2008