How to Invest Money in Your 40s – 5 Tips to Maximize Retirement Wealth (2024)

They say that 40 is the “old age of youth,” and 50 is “the youth of old age.” No wonder so many 40-somethings go through a midlife crisis.

So how do you navigate this transitional decade financially? How do you invest for maximum results and minimum risk and taxes?

Glad you asked. Successful 40-something investors tend to have some things in common.

How to Invest Money in Your 40s

Investing in the middle of your career brings some unique advantages and opportunities.

Follow these strategies to take full advantage of them while avoiding common pitfalls faced by your fellow 40-something investors.

1. Boost Your Savings Rate

There’s a good chance your 40s will be your peak earning years. You’ve climbed high into the ranks of your chosen profession but aren’t yet at the point where you might be forced to retire early.

So make some hay while the sun shines overhead.

Boost your savings rate as high as you possibly can. Aim to approach the problem from two sides: slashing your living expenses while also maximizing your income.

For the former, overhaul your budget categories from scratch. Try this budget template in Google Sheets to rethink your expenses entirely.

On the earning side, you can always negotiate a raise or pursue a promotion with your current employer. But you’ll likely score a bigger bump in pay by switching employers.

If you still have any unsecured debts left over from your lower-earning years, now’s the time to knock ‘em out. These include credit card debts, student loans, personal loans, or any other high-interest debt. Try the debt snowball method to plow through them quickly and efficiently.

It should go without saying, but while you’re overhauling your finances, take steps to avoid a midlife crisis. Nothing will derail your personal finances faster than a personal crisis.

With your higher savings rate, you can reach your financial goals faster. And that starts with the one financial goal that everyone shares: retirement.

2. Check That Your Retirement Savings Are on Track

It’s hardly a newsflash, but retirement has changed dramatically in the last generation.

Gone are the days of private pensions and free-flowing Social Security benefits. You need to plan and pay for your own retirement with less help from paternalistic employers or Uncle Sam.

Reconsider Your Target Retirement Age

Sure, you could retire at 65. Or 75, or 55, or maybe even in your 40s if you play your cards right. I’ve known people who retired at 30 through a combination of frugal living and investing in income-producing real estate.

Just bear in mind that you can’t count on your current income forever. In a worrying trend, more employers are pushing out older workers, who then have a harder time finding a new job. When in doubt, aim to reach financial independence earlier rather than later. You’ll find post-retirement jobs a lot more fun when they’re voluntary and you don’t need the money to put food on the table.

Check out these guidelines for how much you should save for retirement. Long story short: Your target nest egg depends on your expected living expenses in retirement and how quickly you want to (or can) save to reach your goal.

Max Out Matching Contributions

If your employer offers matching contributions to their retirement plan, take them up on it. It’s effectively free money.

You can also think of matching contributions as an immediate doubling of your investment.

Consider switching to a Roth 401(k) if your employer offers it as an option. With a Roth retirement account,: you pay taxes on contributions now, but your investments grow tax-free, and you pay no taxes on withdrawals in retirement. In your 40s, your Roth investments still have several decades of tax-free growth ahead.

Your retirement investments still have several decades to compound tax-free, an enormous advantage of Optimize Other Tax-Advantaged Accounts

Likewise, prioritize your Roth IRA over your traditional IRA as a 40-something. Beyond the tax-free compound interest and returns, Roth IRAs allow higher income limits, no required minimum distributions (RMDs) later on, and more flexible rules for early withdrawals if you decide to retire before 59 ½.

But don’t stop there. Consider maxing out an HSA as a secondary retirement account. You’ll certainly have no shortage of healthcare costs in retirement, to make tax-free withdrawals. And health savings accounts offer the best tax advantages of any tax-sheltered account.

3. Prioritize Your Other Goals

I’m going to go out on a limb and guess that retirement isn’t your only long-term financial goal.

You might want to help pay for your kids’ college education, or travel more, or buy a second home. Perhaps you dream of working a more fulfilling job that doesn’t pay as well as your current gig.

Write out all your financial goals and prioritize them in a strict order. You can split money to go toward different goals, but make sure you’re intentional and strategic about the split. Your kids have many options to pay for college, for example, but you have to fund your retirement with your own nest egg.

As with retirement, take advantage of tax-sheltered accounts if you plan to help your kids with college costs. Check out both 529 plans and ESAs as options on the table.

If you dream of switching to a lower-pay, higher-fulfillment career, remember to come at the problem from both directions. Lowering your living expenses helps of course, but you can also cover the shortfall with passive income streams.

Say your dream job pays $1,000 less per month than your current high-stress job. If you buy two rental properties that each generate $500 per month in cash flow, you’ve covered the shortfall. You can also make up that difference with dividend-paying stocks, real estate crowdfunding investments, or any other source of passive income.

4. Rebalance Your Portfolio

Pop quiz: what percentage of your investment portfolio is in U.S. stocks? International stocks? What about small-cap versus large-cap stocks? Bonds? Cash?

Sure, your asset allocation shifts a little each day, depending on how different investments perform. But you should know your target allocation — and have a plan for staying on track with it.

That starts with a cash emergency fund, with at least one or two months’ worth of expenses. If you have inconsistent income or expenses, plan on six months’ to a year’s worth of expenses. That protects you from financial shocks like losing a job, sudden bills like home and car repairs, medical crises, and life’s other endless curveballs.

But your asset allocation goes far beyond your cash savings.

Stick with Stocks for Now

As a 40-something, you still have plenty of earning potential for decades to come. So even if you plan to reach financial independence young and pull back on work, you can always go back to work full-time or pick up extra gigs in a financial doomsday scenario.

That means you don’t have to be cautious and conservative the same way that older investors do. You have more leeway to keep most or even all of your investment portfolio in stocks.

Likewise, that stock portfolio doesn’t have to stick with just blue-chip, large-cap U.S. stocks. You can and should diversify it to include small-cap stocks and international stocks, including some emerging markets.

Only invest directly in bonds if you feel a compelling reason to do so, such as hedging against inflation with TIPS or I-bonds. Or if you absolutely, positively need some bonds in your portfolio to help you sleep at night.

If you like, you can invest through a robo-advisor, which will automatically rebalance your portfolio for you. Or you can track your asset allocation with a tool like Personal Capital or Mint, and simply add to any under-represented assets when you invest with each paycheck.

Consider Adding Real Estate

I love real estate as a counterweight to stocks.

Real provides stability to balance stocks’ volatility and liquidity. It generates strong income, to balance stocks’ strong growth. And it comes with inherent tax advantages, such as ways to defer or avoid capital gains tax. That means you don’t need special tax-advantaged accounts to invest in it and score tax benefits.

You can invest in real estate directly by buying rental properties. Or you can invest in real estate crowdfunding platforms, REITs, or stocks related to the real estate industry, such as home construction companies. I do all of the above and more, such as lending private notes to other real estate investors.

A note of caution for would-be real estate investors: While you can earn a higher return by investing directly in real estate than more passive investments, it requires more labor and more expertise on your part. Only buy investment properties directly if you’re genuinely interested in real estate investing as a hobby and can devote as much time to it as you would any other side business — or more.

If you want some real estate exposure but don’t want to hassle with becoming a landlord, start with Fundrise for long-term investments or Groundfloor for short-term investments. Both let you invest with as little as $10.

5. Streamline Your Portfolio

Just because you’re investing in the right asset mix doesn’t mean you can’t improve further.

To begin with, look for and avoid any mutual funds or ETFs that are charging you high expense ratios. In today’s world, you just don’t need to pay for expensive funds. You can invest in low-cost index funds instead.

Next, reevaluate whether you need a financial advisor. If you don’t have one, would you sleep better having one? If you do have one, could you save some money with a one-time, flat-fee project, or the occasional hourly consultation, rather than paying them to manage your money?

For that matter, you might do just as well with a robo-advisor versus a human advisor. Or not, if you have a high net worth and complex financial needs.

You could also have room for improvement in your tax-sheltered accounts. For example, in my 40s, I’m now rolling over all my traditional IRA funds to a Roth IRA, for the reasons outlined above. I contributed to a traditional IRA in my 20s, when I didn’t know any better, and didn’t think about it again for a decade. Now, I have to pay taxes not just on my initial investments, but also on thousands of dollars of gains since then.

Give your portfolio some attention now so that you don’t make similar mistakes.

Investing in Your 40s FAQs

Everyone has money questions. If you don’t, you aren’t thinking hard enough about how to get ahead.

Here are a few common investing questions you could face in your 40s.

How Much Money Should I Invest in My 40s?

As much as you can.

My wife and I save and invest up to 70% of our household income each year. That’s extreme, but you should plan on saving a bare minimum of 10% to 15% of each paycheck. This rate won’t help you retire early, buy that second home, or switch to your dream career, but it will let you retire on time.

The more ambitious your financial goals, the higher your savings rate should be.

What Investment Strategy Is Best for 40-Somethings?

For the average investor who doesn’t want to have to think much about their investment strategy, you can keep life simple with a robo-advisor. I do recommend the most aggressive setting available for 40-somethings, or close to it.

You can gain broad exposure to the U.S. stock market by just buying shares in the Vanguard Total Stock Market ETF (VTI). Add in some shares for international stocks, such as Vanguard Total International Stock ETF (VXUS), and with just two funds you’ve diversified across thousands of stocks worldwide.

Consider rounding out your portfolio with a few reputable real estate crowdfunding investments and you’re in good shape. Or you can hire an investment advisor if you prefer having a hand to hold when the boat starts rocking.

Do I Need a Financial Advisor?

The average American doesn’t need an investment advisor. However, some people like having one, and peace of mind matters.

The wealthier you are, the more complex your needs. At a certain net worth, the savings can outweigh the costs of paying someone to help you protect your assets, minimize your tax bill, and so forth. As a broad rule of thumb, once your net worth reaches seven digits, the benefits likely outweigh the expense of hiring professional help.

Should I Pay Down My Mortgage and Car Loan Early?

Some people just sleep better at night when they’re debt-free. If that describes you, go ahead and put extra money toward paying down your low-interest secured debts early if you feel so compelled.

But mathematically, it doesn’t make much sense for 40-somethings to pay off low-interest debts early. If you pay a 3% interest rate on your mortgage, and you can earn a 10% average return on the stock market, you’re effectively earning a 7% spread on someone else’s money by keeping your mortgage and investing in stocks. Even a 6% mortgage rate means a 4% spread on your mortgage.

In your 40s, you can tolerate risk. You don’t need to sacrifice returns in exchange for low risk. And paying off low-interest secured loans represents the ultimate low-risk, low-return investment.

When Do Traditional IRA Contributions Make More Sense than Roth?

I still like Roth IRAs over traditional IRAs for 40-somethings, but you can start making a case in your 40s for traditional IRAs. If your tax bill comes in extra high this year, and you desperately need a deduction, consider contributing to your traditional IRA over a Roth IRA.

But remember, in your 40s your money still has several decades to compound. You’ll pay taxes on all that compounded money in retirement when you go to withdraw it. With your Roth IRA, you don’t actually need as much money saved up, because you won’t lose a hefty chunk of it to the IRS in retirement.

Final Word

By your 40s, you’re earning more money than ever before. It’s tempting to spend it on all those material things you always wanted: the picture-perfect house, the sleek car, the high-end restaurants or country clubs or second homes in the Hamptons.

The paradox of wealth is that the more of it you show off by spending, the less of it you actually build. Your true wealth exists in ones and zeroes, in the form of brokerage account balances, stocks, investment property holdings. It’s not sexy. You can’t show it off to the world to prove your success.

But real wealth gives you something even better: the freedom to design your ideal life. You can use it to retire young, or switch to a dream job, or help your kids with college tuition, or spend more time traveling overseas.

In the end, isn’t that more valuable than conspicuous consumption and keeping up with the Joneses?