Financial planning in your 40s: how to maximise your financial potential

Your 40s can be a pivotal moment in your life – and for planning financially for the rest of your life. You’re potentially in your peak earning years, perhaps becoming an adept juggler: balancing family commitments, mortgage payments, and retirement savings, all while considering how to build and protect wealth for the future. With likely two decades or more until retirement, what action should you take to ensure financial security?

Assess your current financial situation

It’s best to get a clear idea of your overall financial position before making any decisions.

• Income vs expenses: Evaluate your earnings and spending habits to see if you can spot areas for improvement.
• Debt management: Establish which outstanding debts (including mortgages, personal loans and credit cards) should be prioritised. For example, mortgages are longer-term debt but overpayments could make sense, and high interest debt such as credit cards should be paid off as soon as possible.
• Savings and investments: Review your savings accounts, ISAs, pensions, and any investment portfolios – to see if they are suitable to meet your changing needs.
• Net worth: Calculate your assets versus liabilities to understand your overall financial position.

Focus on retirement planning

Retirement may still seem a long way off, but the steps you take now will significantly impact your quality of life later.

• Maximise your pension contributions: Take advantage of employer pension schemes and tax relief on pension contributions. The government provides tax relief on pension contributions up to £60,000 per year (or 100% of your salary, whichever is lower).
• Consider a personal pension: If you are self-employed or want additional savings, a personal pension allows greater investment flexibility.
• See if your pension is on track: You should determine if your pension will meet your needs later. Using an online pension projection generator can be very useful – our tools are powerful and easy to use and can be invaluable to assess whether your current contributions will meet your retirement needs.

With something as important as your retirement, you may well need advice to ensure you are on track – or to find out how to effectively take the right steps. You can book a no-obligation call with one of our advisers for a tailored assessment of your future potential.

With a pension, it makes sense to act sooner rather than later. In a survey – reported here in Pensions Age – we discovered that 41% of savers aged over 40 believed they are unlikely to have a large enough pot to support a comfortable retirement. Only 19% expressed confidence in their retirement preparedness.

Invest for growth

Because you have a decent timeframe to ride out the ups and downs of investment markets, your 40s are a crucial period for wealth accumulation – through tax-free wrappers such as pensions and ISAs, general investment accounts.

Some proven hallmarks of an enduring investment strategy include factors you can control.

Being diversified: You can balance the risk of investing – and capture more growth opportunities – by considering a diversified mix of equities, bonds, and also alternatives such as commodities and property.

Using tax wrappers: To maximise long-term growth, using tax wrappers such as pensions and ISAs will reduce the amount of tax you pay and therefore produce higher returns.

Staying invested: It is almost impossible to time investment markets in your favour, and because we are typically ruled by emotional responses it is generally much more beneficial to remain invested across a longer timeframe.  

We can illustrate this by showing (accounting for a substantial downturn like in 2008) how markets prove to be resilient over the long term. This chart shows the benefit of investing in a medium risk portfolio compared to a cash deposit. Look at how detrimental cash savings can be if you are tempted to seek refuge when markets are volatile, and then stay uninvested.

The benefits of staying invested – and not leaving your money in cash

(Value of Cash and Risk Level 4 portfolio indexed to 2007 prices)

Simulated historic performance is not a reliable indicator of future results.

Source: Netwealth and Bloomberg. The values represent £100k invested in 1 month Libor (a wholesale interest rate) and an example Netwealth Risk Level 4 portfolio indexed to 2007 prices. Data to end of December 2024. 

Investing efficiently: Paying less in investment fees and charges means more of your money will be put to work – which can make a significant difference over time. Even a small reduction, such as 1%, has the power to meaningfully change how comfortable you could be in retirement, or how comfortably you can reach your goals.

We explore these factors in more detail here but even one of these, a focus on lower fees, should make you pay attention – and if you need to, take action. Consider this example:

Let’s assume a starting amount at age 40 of £200,000, plus £300 in monthly contributions, with an average yearly return of 6% and 1% in fees. After 25 years this pot could grow to £852,991. If we use the same assumptions, however, yet pay 2% in fees, the pot would only grow to £685,822 – a staggering difference. Don’t you owe it to yourself, and those you care about, to evaluate how much you are paying when investing?

Note: this is a straightforward calculation, not taking into account inflation nor the benefits of tax wrappers to shelter wealth, nor the government uplift you receive in the case of pensions. 

Plan for your children’s future

If you have children, planning for their financial future is essential:

- Junior ISAs (JISAs): Tax-free savings accounts allow family members or friends put aside up to £9,000 per year for children.

- Education savings: Consider saving for university fees or private education costs – this can form part of your overall savings and investment strategy.

- Passing down wealth: Start thinking about inheritance tax planning and how best to pass wealth to the next generation. This free webinar can help you formulate your plans and make them more effective.

Other important considerations

The points above are concerned with growing and protecting your wealth and your family’s interests. Others key things to consider to ensure peace of mind include:

- Build and maintain an emergency fund: An emergency fund acts as a financial safety net for unexpected events such as job loss or medical emergencies. Ideally, set aside 6 months’ worth of living expenses in an accessible savings account.

- Create or update your will: If you don’t have one, now is the time to draft a legally binding will.

- Protect your wealth: Unexpected life events can derail financial plans, so you should consider life insurance, income protection insurance and critical illness cover.

Regularly review and adjust your financial plan

Financial planning is not a one-time task – it’s worth reviewing and adjusting your strategy as needed, like when your circumstances change. But not everyone has the will or time to make an accurate assessment of their situation, and effective financial planning can be quite complex.

To ensure you are on track in your 40s, it may be worth considering a Financial MOT. With powerful tools, personalised information and guidance it could be ideal to help you better understand how your choices could impact your financial outcome. Sign up here to get a clearer picture of your finances.

Final thoughts

Your 40s is a crucial decade for securing long-term financial stability. By focusing on pension growth, debt reduction, investment diversification, and estate planning, you can build a resilient financial future. Take action today to ensure that your wealth works for you in the years to come.

If you want to take the first step towards safeguarding your future, please get in touch.

Please note, the value of your investments can go down as well as up.

Netwealth offers advice restricted solely to our services. We do not consider the whole of the market, nor offer advice in relation to tax compliance, insurance products, or the transfer of defined benefit pensions.