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Financial Planning: What To Do In Your 30s And 40s

By Michael J. Brunner

Traditionally, financial planning was age-based and meant taking on payments and raising kids in your 20s and 30s, sending the kids to college in your 40s and focusing on estate planning and grandchildren in your 60s.

But these days, tradition isn't always the best guide. Not everyone gets married in their 20s or 30s, and some women are waiting until they well into their 40s to have their first child.

By your 30s and 40s, however, you've probably mastered at least the basics of managing your money and have settled down with a mortgage and a spouse. You're now realizing there are even greater challenges to meet such as raising your family and caring for aging parents. It's easy for your own financial plan to get sidetracked.
But the basic rules haven't changed. You still need to balance your current lifestyle against your future needs. Consider how to invest, how to adequately insure yourself and what you'll leave behind. Here are some basic guidelines for what to do in your 30s and 40s:

Retirement Savings

Make this your top priority. Get out of debt. Pay down your consumer debt, starting with accounts that carry the highest interest rate. Don't put saving for a house, car or child's education ahead of saving for retirement.

Take advantage of your employer's 401(k) or 403(b) plans and contribute the maximum amount. Contributions to these plans are made on a pretax basis, thereby translating into an immediate tax savings. Many of these plans also offer a matching employer contribution giving you an opportunity to double your nest egg. The 401(k) maximum contribution level for 2003 is $12,000 for individuals under the age of 50.
If you don't have a company retirement plan, contribute to a Roth or traditional IRA. If you're married and not working, you can still contribute the full $3,000. A traditional IRA will be fully deductible, even if your spouse has a retirement plan at work, as long as your joint income is less than $150,000.

Savings Plans

College tuition costs and long-term care of convalescing parents can easily deplete savings. If you haven't saved enough, either refinancing your home or perhaps a home equity loan at a relatively low interest rate could be good sources of funds. Long-term care insurance policies offer another alternative, but the time to look for them is before you need them.

Take a look at Section 529 Savings Plans. Section 529 plans offer tax-deferred growth and special estate-planning benefits. Regardless of whether your underlying investments are conservative or aggressive, the tax benefits of these plans make your money work harder than would comparable savings or investment accounts.
Qualified withdrawals from any state-sponsored college savings plan or qualified tuition program will be free from federal income taxes until at least Dec. 31, 2010. Congress must extend the law allowing tax-free distributions to continue after this date. If it doesn't, distributions will be taxed at the beneficiary's tax rate.

Also, many states extend favorable tax deductions and tax-free withdrawals to state residents who invest in a home state plan.

Insurance And A Will

If you have children or plan to, buy life insurance. Also, in today's environment, it's important to prepare a will. A will is a legal document that specifies how your possessions will be disbursed and who will manage your estate upon your death.
If you die without a will, state laws determine how your estate will be divided. In addition, if both parents die without a will designating who will be the guardian of a minor, the courts will make the decision. You can't afford to skimp on the future financial security of your dependents. Even if you do not anticipate owing estate taxes, drafting this document is a crucial part of the estate planning process.

Your financial plan is as unique as you are. However, at every significant juncture in life, we all need to make some very basic decisions to ensure our future financial well being and that of our dependents.

A financial consultant can offer valuable guidance along the way, from investing to saving to preserving wealth for your heirs.

Michael L. Brunner, CFP, is senior vice president-investments, portfolio manager and financial consultant for Salomon Smith Barney Inc. in Houston.

PULL QUOTE IF YOU NEED ONE:

"Your financial plan is as unique as you are. However, at every significant juncture in life, we all need to make some very basic decisions to ensure our future financial well-being and that of our dependents."