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Where did the time go? One minute you're feeling forever young, the next you're half-way to retirement.
When it comes to financial planning, if you’re in your 20s or 30s, time is still on your side; by the time you reach your 40s, saving the children’s allowance, or taking a punt on the stock market may not be enough to meet your pressing financial obligations such as school fees or college expenses.
Things are getting serious.
If you have scope and time to make a few mistakes along the way in your younger years, your 40s are all about setting you up for the latter half of your life. And the difficulties in achieving that may be compounded by the fact that 40-something year olds today probably have greater expectations than their parents.
“Today’s generation may have been single for longer and are used to a particular lifestyle,” says Jane McAleese, co-founder of Wealth Alliance. “Some of them are very successful and have a lot of surplus income – but they may also have a big lifestyle that has a big cost.”
Others are still really strapped for cash and are trying to cover the basics first.
"The priority for most people is their home, their children's education and their pension – after that it's the icing on the cake," says financial adviser David Sommerville of First Choice.
1: Spending beyond your means – and that includes on your children
It’s something we can all fall prey to; keeping up with the Jones.
"People get caught up in the status of where they are," says Nick Lawlor, managing director of Employee Financial Awareness, while McAleese agrees. "Spending too much happens quite a bit."
But while it’s easy to deflect expensive nights out or holidays away when you’re young on the grounds that you’re broke, it can feel a bit more shameful to do it when you’re in your 40s. Compounding that is the fact that it’s now a case of a new-reg luxury car or an extension or private school fees, rather than having the latest iPhone.
It’s a sure-fire way of either deflecting funds that could have been used for other purposes, or of building up personal debt.
But for Lawlor it comes down to understanding the key difference between a “need” and a “goal”.
“Is a nicer car more important than putting money away for kids education?” he asks, noting that people are making decisions all the time with their money. “But the decisions aren’t the correct ones being made.”
It’s also easy to get carried away by spending on your kids. Grinds, tennis lessons, language classes, swimming lessons, Irish college, activity weekends, iPads, the latest runners, private school – and that’s before college is even a consideration.
Financial advisers are adamant: don’t spend on your kids at the expense of your own retirement. One US adviser suggests parents pay no more than 10 per cent of income on expenses for children.
2: Having no rainy day fund
Financial advisers will typically recommend that you have six months of expenses to hand to cover your expenses should things go awry. And it needs to be liquid. Your rainy day fund should not be tied up in property or invested in Chinese stocks – you need to be able to get access to it easily and quickly.
3: Leaving it too late to get on, or move up, the property ladder
While many 40-year-olds will have bought their first property in their 20s or early 30s, a combination of negative equity and recession may mean they’re only trading up in their 40s.
Others still are only buying for the first time.
Indeed many banks will now allow you to borrow until you're 70, and a growing number of people are getting on the ladder later than before. Recent figures from the Banking and Payments federation of Ireland, for example, showed that 7 per cent of buyers in 2016 were in the 41-45 year old age group, compared with just 3 per cent back in 2004.
But this can have a big impact on retirement.
“We’re caught in a situation where people in their 40s are very different to the generation that’s gone before. They’re going to have mortgage debt running into retirement,” says Lawlor. Indeed recent research from Friends First found that only a little over half of respondents expect to be mortgage-free when they retire. This means that some 46 per cent will not just have to contend with a dramatic drop in income due to a poorly-funded pension; they’ll also have to meet mortgage repayments.
For other people who haven’t yet bought, however, the clock starts to tick once you enter your 40s. Yes, some banks will lend until you’re 70 but many others won’t, which means you could be facing a term of 20 years or less on a mortgage if you do buy. While a shorter term does make a mortgage cheaper in terms of mortgage repayments, it will also impact on what you can afford to buy, as repayments will be significantly higher than on a 30-year mortgage.
Other Gen Xers are so-called "accidental landlords", having bought an apartment or townhouse first time around, and are now renting a family home near schools of their choice. But they still want to trade up.
“Quite often this isn’t ideal for them, especially if there is negative equity and decisions need to be made on which house to live in, do they rent or sell,” says McAleese.
4: Neglecting to rev up your pension savings
Got a pension? Know how much is in it? Or whether you’ll be enjoying a yellow-pack or luxury retirement? And what about the State pension? Do you know when you’ll qualify for this? If you don’t you’re not alone by any means, though that doesn’t mean you shouldn’t be in a hurry to find out.
Indeed Lawlor has often noted the “blank look on people’s faces at times” when it comes to talking about pensions, and the misconceptions they cling on to.
“Just because they’ve started, they think it’s enough – but the reality is so far from that,” he says, adding that people will start with saving €200 a month, and think, “I have a pension I’m sorted.”
But as he notes, €2,500 a year might only add up to €70,000 over a lifetime of saving – which won’t be enough.
McAleese agrees that it’s “maddening”, but thinks the pensions industry should bear some of the blame for that, given how complicated pensions are.
It’s further complicated by the fact that if you’re in your 40s, you won’t be getting your State pension until you’re 68 – three years later than your parents; and you might have a shortfall of three years, if your employer – and they typically haven’t done so yet – doesn’t increase their own pension age to 68.
To ensure you have enough, Irish Life suggests that if you’re 40, you need to put 25 per cent of your income into your pension each month. So, if you’re taking home €5,000 each month, €1,500 of this should go into a pension; or €2,500 if your income is €10,000. But it’s not many homes that could shoulder the burden of losing so much income.
Tax relief will help. If, for example, you’re earning €45,000, you should be putting €750 each month into your pension. With tax relief of 40 per cent, the net cost to you of this will however, only be €450.
And there’s a big difference in terms of the impact you can still make, particularly if you’re in your early 40s.
Sommerville gives the example of someone trying to replicate the State pension, of about €12,130 a year. A 40-year old will need to put away €491 a month – or just €294 after tax relief at the higher rate – to achieve this in retirement. A 45 year old will need to put in €671 while a 50-year old will need to save €961.
“There’s a clear message there that you need to start sooner,” he says.
5: Not overpaying your mortgage
If you have any extra money, paying down your mortgage can be a good financial priority – once you’ve considered all the trade-offs. After all, the sooner you have that paid off, the sooner you can bump up your pension payments or pack in that job you hate.
This is particularly relevant if it’s likely that you’ll be bringing your mortgage into retirement. As Lawlor notes, there can be “quite good value in overpaying your mortgage”. Indeed, if you put an extra €108 into a €300,000 mortgage over 20 years you’ll have cut the term by 19 months and saved €9,073 in interest repayments.
It also means that you should think carefully about remortgaging to fund an extension or renovation; doing so could be tying up funds you should be using for your retirement.
6: Treating decisions in isolation
Thinking of using up the last of your parental leave to spend more time with the kids? Finally thinking of getting around to that extension or new kitchen? Or what about that car you’ve always dreamed of?
If you have money to hand, splashing out on the object of your desire may seem like a no-brainer. But have you thought about the opportunity cost of putting that money to work elsewhere? Like paying down your mortgage, or bumping up your retirement planning, or starting a college fund.
“We have to get clients to understand that each financial decision has an impact somewhere else,” says McAleese. “Every decision has an impact somewhere else, but getting that picture across, that’s the difficulty.”
It means that if a client is considering a €50,000 extension, she will show them the trade-off of that decision in terms of their overall financial planning, and may mean that they will opt to downsize it and spend less.
7: Underinsuring
Critical illness, income protection, life protection; they’re all there in case things go wrong. But do you have enough? If your spouse is a stay-at-home parent do you have adequate cover for their life?
“I’d always recommended to people that they should roughly be protected for all their borrowings,” says Sommerville, and again, getting the cover in place now will be cheaper than leaving it until later.
“In your 40s and late 30s it’s way, way cheaper than late 40s and early 50s,” he says.
8: Thinking it’s too late
The advice from financial advisers is clear: there’s always time to turn things around – if you’re committed.
“It’s not too late, it’s never too late,” says Sommerville, although Lawlor adds, “Realistically it’s going to take an awful lot of financial commitment.”
And if all else fails, try and set your kids up for success in potentially lucrative field. Kumon maths, extra soccer. You never know, they could be the answer to a penurious old age!
