An investing road map for mid-career accumulators

Key financial priorities for investors in the peak earnings years of their 40s and 50s.

Christine Benz 26 April, 2017 | 5:00PM
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Investment advice abounds for people just starting out in their careers, as well as for those who are getting ready to retire.

But mid-career investors, people in their 40s and 50s? Not so much. Workers at this life stage may be at their peak earnings level, and therefore may have more complex financial needs than their younger counterparts. Moreover, mid-career investors are frequently juggling the competing financial demands of education and retirement savings. That's no small task, especially when you stop to consider the big price tags associated with each, as well as the complexities of calibrating two separate pots of money with two different time horizons.

Even so, you tend to see less information about how mid-career accumulators should invest and manage their finances differently than their younger and older counterparts. Like 20- and 30-somethings, mid-career accumulators still have a decent amount of human capital, or earnings power. And with a runway of 15 or 20 years until retirement -- and perhaps 25 or 30 more years in retirement -- they can usually afford to take plenty of equity risk with their investment portfolios. At the same time, people at this life stage may face serious life -- and in turn financial -- setbacks from which they never fully recover: a debilitating health condition that limits work, for example, or time away from work to care for aging parents.

What follows are some key priorities to keep in mind if you're a mid-career accumulator looking to make sure you're on the right track with your financial and investing life.

Nurture your human capital

Investing in human capital -- via additional education or training -- is close to a slam-dunk for early career accumulators. If you can increase your earnings power with such an investment, you have a long time until retirement to benefit from it. The calculus isn't as simple as you get older, which helps explain why med schools and high-priced MBA programs aren't jam-packed with people in their 40s and older. Higher lifetime earnings may not offset the outlay of money and time for costly training later in life.

Yet mid-career accumulators should still make an ongoing investment in their own human capital -- taking advantage of continuing education programs and conferences to enhance their skills, networking, and simply staying current on the latest news and developments in their fields. And no matter your field, staying current on the latest major technology developments, both on and off the job, is a crucial way to ensure that you stay relevant.

Balance education funding with other goals

Balancing education funding against saving for retirement is arguably the biggest financial challenge facing many mid-career accumulators. Many parents naturally feel the tug of shouldering at least a portion of their children's tuition costs. But paying for university is a heavier lift than it was even a decade ago: Tuition has been inflating at a faster pace than the general inflation rate -- almost 4% per annum over the past 10 years, and the average tab for tuition and fees for the 2016–2017 school year was about $7,250, according to Statistics Canada -- though some programs can charge much more. Meanwhile, with the ratio of years worked to years retired declining, prudent retirement savers today will need to plan for at least a 25- to 30-year time horizon in retirement, necessitating a large nest egg. Morningstar Investment Management's David Blanchett has suggested that retirement savers target 25 times their desired initial retirement income in savings.

How to reconcile these competing financial goals? I'd advise putting retirement readiness front and centre on your financial dashboard. The simple reason is that if retirement is drawing close and you have a shortfall in your retirement savings, you'll have fewer levers available to you than is the case if your child gets close to high school graduation and you haven't socked away the tuition and fees. Your child might consider community college for the first two years, for example, an option embraced by an increasing number of families since the financial crisis.

Use online calculators like this one from the government of Canada and perhaps one-on-one guidance from a financial advisor to gauge the viability of your current savings rate. If it appears that you're comfortably on track and have room in your budget to spare, you can then consider steering a portion of your savings to education funding as well. Registered education savings plans offer tax-free growth, as well as generous top-ups by the federal government, as explained in this article.

Protect what you have

The more assets you amass, the more important it is to protect what you have. The same basic insurance types that were valuable in your 20s and 30s -- property and life insurance if you have minor children -- remain every bit as essential as you head into your 40s and 50s. Homeowners should also consider a personal liability policy to cover them in case an accident or other incident should occur on their property, as well as additional insurance protection for valuables. Finally, the 50s are a good life stage to assess whether disability insurance makes sense in your situation, assuming your employer doesn't provide some sort of coverage. The longer you wait, the higher your insurance costs are apt to rise.

In addition to reviewing your insurance needs, be sure to take stock of your emergency fund. Whereas young accumulators might reasonably stick with the usual rule of thumb of three to six months' worth of living expenses in cash, mid-career accumulators, especially higher-income folks, should target a year's worth of cash. That's because the higher your income and the more specialized your career path, the longer it could take to replace your job if you lost it.

Combat lifestyle creep and step up your savings

The 40s and 50s are often considered the peak earnings years. But with higher earnings, it's easy to let "lifestyle creep" gobble up every bit of your extra income. Before you know it, you're driving a luxury car with a high monthly payment and shelling out for dog walkers and house cleaners. One way to help ensure that your savings steps up with your income is by increasing your savings with each pay raise, so you won't have a chance to get accustomed to the higher income.

Employ additional accounts for retirement savings

For early career accumulators, maxing out contributions to tax-advantaged retirement savings wrappers like RRSPs and TFSAs is a worthwhile target. Making the maximum allowable contributions to these vehicles remains important as you age, but as your earnings increase, that may not be sufficient. In order to amass the level of savings you need for retirement, you're apt to need additional account types as well. This is particularly important for high-income people; a 45-year-old who's earning $260,000 a year and is maxing out her RRSP and TFSA is still only saving 10% of her income, which is probably not enough.

Where to stash the cash? High-income people who are making the maximum allowable RRSP and company retirement plan contributions should investigate whether an individual pension plan (IPP) could serve as an ancillary retirement-savings vehicle. An IPP is a registered pension plan with defined benefits that is set up and funded by an employer for a specific employee. It allows high-income earners (typically those with earned income over $100,000) to top-up their retirement savings on a tax-deferred basis. This article explains the nuts and bolts of the IPP.

In addition, a plain-vanilla taxable brokerage account can make a decent receptacle for additional savings. You won't be able to make pre-tax contributions or take tax-free withdrawals, in contrast with RRSP and TFSA accounts, respectively. But with a little bit of care you should be able to limit the taxes on your account on a year-to-year basis. Equity exchange-traded funds make ideal holdings for a taxable account because they limit taxable capital gains distributions, and their dividend distributions are taxed at a more favourable rate than bond income.

Begin to take some risk off the table in your portfolio

Portfolios for people in their 40s and 50s should still include plenty of higher-risk assets with higher return potential; after all, such individuals could be drawing on their portfolios for at least 40 or 50 more years, so they can't be content to hang out in low-risk assets with low returns to match.

That said, by the time you reach your 50s, it's a good idea to begin holding a bit more in lower-volatility investment types, especially high-quality bonds. True, the return potential of bonds is apt to be lower than is the case for stocks. But bonds can serve as valuable shock absorbers for your portfolio, cushioning the losses when stocks go down. That can help on a psychological level, of course, ensuring that you don't panic and sell yourself out of stocks when they're in a trough. Holding at least some assets in safer securities can also help serve as an insurance policy: If you are forced to retire early or find yourself out of a job prematurely, having a cushion of bonds can help you avoid tapping stocks for living expenses when they're in a trough.

Don't assume a larger portfolio means more complexity

As their assets grow, many investors assume that their portfolios should include more moving parts. But that's not necessarily so. Even as you may need to spread your assets across more and more silos as your assets grow -- company retirement plans, RRSPs, TFSAs, RESPs, taxable brokerage accounts, and so forth -- that doesn't mean you need to maintain distinct and/or narrow holdings in each of these accounts. In fact, it's hard to go too far wrong with a simple four-fund portfolio consisting of a Canadian equity index fund, a U.S. total-market stock index ETF, an international equity fund and a core bond fund; you can own that same cluster of holdings in each of your accounts.

Right-size your advice

As your financial life grows more complex and you get closer to retirement, paying a financial professional for help can be money well spent. You may glean insights that you hadn't picked up on in your own reading, or receive counseling in complicated areas like tax and/or estate planning. Be sure to right-size any advice you pay for, however. While investors who have complicated financial situations or need a lot of ongoing hand-holding might benefit from paying an advisor a percentage of their assets each year, investors who only need periodic checkups will find it more cost-effective to pay for advice on a per-engagement or hourly basis.

See also:

  • An investing road map for early career accumulators
  • An investing road map for pre-retirees
  • An investing road map for retirees
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    About Author

    Christine Benz

    Christine Benz  Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz.

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