What should my finances look like by the time I turn 40? That is, how much money should I have saved? What kinds of investments should I have? I know it’s different for everyone, but what’s the ballpark? — Marcus L., Miami
Good on you for being level-headed as you hit the big 4-0. A lot of guys are buying flashy cars and other expensive man-toys to show the world their virility. Instead, you’re using the milestone to seriously assess your financial preparedness.
You’re right – there’s no one-size-fits-all answer to how big your nest egg should be. It depends on factors like the lifestyle you expect to have in retirement, when you decide to stop working and where you’ll live.
As I’ve mentioned before in this column, I like the quick-and-easy guideline that the mutual fund company Fidelity puts out as a way to at least get in the right ballpark. They recommend having three times your annual salary by the time you reach 40 (and six times your salary by the time you hit 50). That number is based on several assumptions – for example, that you’ll retire at age 67 and continue to put away 15 percent of your earnings every year.
Needless to say, choosing a non-traditional retirement age will force you to make some adjustments. If you hope to call it quits at 50, you’ll certainly need a whole lot more than that. The same goes for lifestyle decisions. If you plan to spend your golden years playing daily rounds of golf at a posh club, you’ll have to build up your investments accordingly.
You can get a more accurate number by plugging your information into an investment calculator, although some are better than others. I’m a fan of AARP’s retirement calculator because it asks how much of your salary you’re saving and how much you expect to earn from Social Security, factors that are critical to your estimate. After answering a few quick questions, it’ll tell you whether you’re putting enough away to cover long-term needs.
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You also asked how you should be investing that money. It’s smart to slowly grow more conservative with your investments as you get older, but know that, statistically, you’ll probably live nearly four more decades – and possibly longer than that. So it’s okay to be fairly aggressive with your asset mix at this age.
You might want to start with the “110 minus your age rule” to figure out how much of your nest egg you want devoted to stocks. So at 40, you’d have 70 percent of your assets in equities, which have greater long-term growth potential, and 30 percent in bonds or other fixed-income instruments.
If you can live with a little risk, you may even want to be more aggressive than that. Indeed, you’ll find a lot of target-date funds aimed at folks your age, like the Vanguard Target Retirement 2045 Fund and Fidelity Freedom® 2045 Fund, with stock holdings that are closer to 90 percent.
I had to miss some credit card payments over the holiday because, in addition to standard expenses, my family went through some tough times (layoffs, unexpected travel for a family emergency). As a result, my credit score tanked. What is the fastest way to boost my credit rating again without killing my budget? — Brian W., Newport, Rhode Island
A recent survey by the interest rate comparison site MagnifyMoney found that the average adult racked up $1,230 in debt over the holiday season. You’re certainly not the only one to fall behind.
The trouble is, it takes time to work your way back from late payments, which are a huge part of your credit score. In FICO’s algorithm, for example, your payment history is 35 percent of your number. Your number will gradually improve when you start hitting your due dates routinely, but it can be a slow climb.
There are a couple ways to boost your rating pretty quickly, though. The most obvious is to look for any errors on your credit report that might be weighing it down. Generally, the credit bureaus have 30 business days to investigate your claim. If they agree that the information is incorrect, it’s taken off almost immediately.
Also work on paying down your balances, which is the second-biggest factor in FICO’s model. Expecting a tax refund this spring? It’s hard to think of a better way to spend it than getting the credit card monkey off your back. If you can get each account to below 30 percent of the available credit, you’ll notice a nice uptick in your score. Good luck.