Navigating Financial Planning In Your 40s & 50s
By: Stephan Hess, CFP® CDFA®
Life is hard enough financially, but sometimes the stars align in a way that creates a perfect storm, where multiple financial planning needs unfortunately arise all at once. Unexpected life events such as a job loss, a personal health crisis or divorce can certainly cause this. Still, sometimes, it’s just naturally occurring everyday life events that can do it.
An example of one of these naturally occurring alignments takes place between the ages of 45-55. What makes this window of time particularly unique? So glad you asked. Keep reading to find out.
Why Does Financial Planning Often Include A Budget Crunch In Midlife?
Start by asking yourself what is typically happening in someone’s life at this point, and what are they likely to be increasingly thinking about? Before we go any further let me first provide a brief warning: Some of you may find this wholly unpleasant, similar to how Ebenezer Scrooge felt when he met the ghost of Christmas Future.
The good news is that this is also a time when you are likely to be earning the most you ever have and are probably advancing nicely in your career. Hopefully, this is the case because you are going to need it. Well ok then, let us proceed.
1. College Expenses Are No Small Sum
Most of you probably have guessed that college costs are a big part of this alignment, and they are. You knew for 18 years that this day was coming, and now, it is here.
Depending on how many children you have and your commitment to financially support them, this could be just a few years of pain, or it could be spread across many. Most parents do their best to save for college, but a majority find themselves underfunded, and some by a lot.
Some parents will take on debt or liquidate other important savings buckets to fill the gap, but most will pull what they can from their salaries and extra cash flow. Depending on your budget this may be fine, but for most people, it is no small sum.
2. Entering The Pre-Retirement Phase Adds Pressure To Accumulate The Most Funds
If college were the only thing going on, it would be one thing, but the college years usually coincide with another important life phase: pre-retirement.
This is when people begin recognizing the shrinking time horizon for accumulating retirement funds and paying off debt. With 15-20 years remaining, this pre-retirement phase is critical for firming up your financial foundation and topping off reserves. Full retirement is closer than it once was and compounding alone will no longer get you there. People who find themselves behind, recognize that the only way to make up this shortfall is to increase their income deferrals to retirement plans and make larger debt payments. Now, you potentially have up to three large demands for your cash.
3. You’re Earning More Than Ever Before & You Want (Deserve) Life’s Finer Things
The last natural phenomenon is that people just want nicer quality and better things at this point. We deserve it, right?
For those who have been making responsible financial choices all their lives—this behavior can get tiresome. Now that you are finally making a better income it’s time to start treating yourself to some of life’s finer things. We want nicer cars and homes, better vacations, convenient food, relaxation and fun hobbies. Such lifestyle enhancements are also going to be competing for your dollars at this critical point. Now throw in some home repairs, aging parents with needs and a car replacement or two, and you’ve got yourself a full-blown budget crisis.
If You’re In A Budget Crisis, It’s Time To Prioritize Financial Decisions
Since suitcases of cash likely won’t fall from the sky and solve all this, you will have no choice but to prioritize your limited resources and make tough choices. Out of all these competing financial needs, what will you fund and not fund? What is going to get addressed today, and what is going to be delayed? “You can pay me now or pay me later,” is a well-known phrase for a reason. Unfortunately, what you choose to delay doesn’t just go away.
Yes, when you finally get past this budget crisis, you will have extra funds again, but you will also have a much shorter window to catch up. Some people can do it, but if you cannot, you will potentially face one of two things. Either you are going to have to add time to your work horizon to make up for the lost time, or you are going to have to accept a less desirable financial outcome with fewer options. As you might imagine, people don’t like to hear either of these, but what else can you do?
Our Financial Planning Advice To Prepare For Midlife:
1. Begin In Your 20s & 30s
This window of time is never easy for anyone, but it can be mitigated by taking early action and making responsible financial choices in your 20s and 30s. If you can slide through this time gap without significantly harming your progress or significantly delaying your goals, we call that a win. If you are able to meet your college goals and somehow still make decent retirement contributions and pay down debt, then you are a Rockstar.
2. Stay Proactive & Know That You’re Not Alone
If you are in the middle of this phase right now, please know that you are not alone. A majority of people find themselves experiencing this “crunch.” Any proactive measures you can take today will help you navigate this window of time better—and it will be worth it.
3. Schedule A Free Consultation With A Hess CERTIFIED FINANCIAL PLANNER® Professional In Harrisonburg.
When you hire Hess, we work for you. If you find yourself in a budget crunch despite proactive financial planning—schedule a free consultation. Let us show you the way forward together.
