Investing for people in their 40s
The last thing someone who is middle aged and hasn't begun investing wants to hear is that they should have started 10 years ago. Although they are a little late in getting started, it isn't too late. They still have a long term horizon for when they probably need the money for retirement, and that gives them a chance for making for lost time.
Q: What are some strategies and methods every day investors should consider or ask when they are in their 40s?
A: Contribute to your 401K at work if possible. It is a method of putting money away for your retirement and deferring taxes. Plus, many employers match a percentage of what you contribute up to a cap. The money is also being socked away before you have a chance to spend it, so it helps those folks that need help budgeting.
If you don't have access to a 401k at work, you can start an IRA and depending on your income it could be tax deductible.
Q: For those that haven't invested yet, how can they get started this late in the game when time isn't on their side?
A: My advice...do something to get started. Anything. Don't be paralyzed or intimidated thinking the task is overwhelming. Open an IRA or contribute to the one you have open. A long journey starts with the first step.
Q: What are creative ways for people to do this if they work in an office?
A: Contribute to the retirement plan at work. Depending on your retirement timeline, select an investment fund that matches your level of risk and when you think you'll be tapping into those funds. In addition, consider allocating any future raises directly to retirement savings. That way, you won't miss the money and you'll be looking out for your future.
Q: What are creative ways for people to do this if they work for themselves or a small employer?
A: Business owners and those self-employed have some little known tools to help them save. They don't have the matching funds sometimes provided by employers in a 401K, but they can sock away large amounts tax deferred for their retirement. One of my favorites is the SEP-IRA. It is an acronym for Simplified Employee Pension Individual Retirement Account. Business owners can put away the lesser of 25% of their income or $54,000 towards their retirement, tax deferred. The paperwork couldn't be simpler to fill out.
Q: What are potential problems they need to consider trying to mitigate?
A: People should watch out for neglecting high interest debt like credit cards in the name for retirement. They could be paying a much higher level of interest that they could get in any investment, so their money could be better spent paying those cards down.
Q: What types of tax deferred, non-tax deferred accounts are useful?
A: See comment above on SEP-IRA. There is also the SIMPLE-IRA although the name is misleading. The paperwork is more involved than a SEP. The contribution caps are lower as well. There is nothing simple about a SIMPLE-IRA. The Roth IRA is very useful for those in lower tax brackets. You are paying all the taxes now and any investment growth is completely tax free.
Q: How should one make up for any youthful indiscretions?
A: Learn from it, put it behind you and move forward. If someone ran up a credit card when they were younger, learn from your mistake, correct the behavior and move on. You need to have an internal reality check with yourself and make sure you are determined not to make the same mistake again. Focus on new financial goals and how you are going to meet them.