29 May 2023

For many people in their 40s, the focus is very much on building wealth and, chances are, the prospect of retirement planning hasn’t quite sunk in. But is this short-term view of building wealth leaving you vulnerable down the track?

Research we recently conducted implies this could be the case. Our report, The Cost of Doing Nothing When Preparing for Retirement, shows the majority of Aussies have adopted the mindset that retirement is something they’ll deal with later in life. But when push comes to shove and retirement is on their doorstep, the reality truly sets in that the employer contributions they’ve banked on to set up their superannuation for retirement isn’t enough and most Australians, particularly women, are unprepared.

While the average Australian was worth $553,954 in late 2022, that includes figures from people who have retired and are enjoying their full superannuation. So, even though someone in their 40s is still building their asset base, it’s important that while they do, they keep an eye firmly on the horizon.

Read on to learn more about how to build more wealth in your 40s - and why it’s a good idea to align these financial objectives with your plan for retirement.

What is the average wealth of a 40-year-old?

The average net worth of a 40-year-old in Australia is just over $97,000. This is about triple the average wealth of someone just 10 years younger. This figure includes a variety of data, including savings, superannuation, and the value of assets like real estate.

When it comes to savings alone, the average Australian aged 40-55 has $34,025 in the bank, but there is a gender gap. Men in this age range have more than $41,000 in savings on average, while women have only about $26,400 in savings.

Furthermore, our research tells us that two in three Australians aged between 35 to 65 feel unconfident they will have the financial resources for a comfortable retirement. And the closer Australians get to retirement age, the less confident they become with only 17% of Gen X (aged 40 to 55) being very confident they will have enough to live comfortably; dropping down to just 5% of Baby Boomers (aged 55-65).

How to build wealth in your 40s

Australians in their 40s typically have a few decades of experience in their field, which can exponentially increase their income potential. They are also likely to own a home that builds equity. Between the ages of 35 to 44, 56.7% of Australians are homeowners but this figure increases to 72% for those between the ages of 45 to 54.

If your net worth is not exactly inspiring right now, it’s not too late to start improving your wealth. Even people happy with the direction of their wealth can benefit from a periodic evaluation of their strategy. We believe that financial advice can be beneficial for people at every income level and stage of life - giving them a better chance of achieving their financial goals.

The financial modelling featured in our report shows that even when you’re less than ten years away from retirement, Australians can still benefit from financial advice but that the gains increase the earlier you start!

Here are some tips for how to build wealth in your 40s.

Create a budget

Most people think of a budget as a restrictive term, but basically, a budget is a plan for your money. Just as you are more likely to achieve your goals by writing them down, having a budget enhances your chance of meeting your financial goals.

Every great wealth creation plan is built on the foundation of a budget. According to one 2019 Canstar study, 30% of Australians say they don’t set any budget at all. And this can have detrimental results. You could be overspending on everything from entertainment to utilities without realising it.

Having a financial adviser on your side helps keep you accountable. In the meantime, take an honest look at your monthly expenses as opposed to your contributions to savings or investments. If you continue on this track, how much will you have saved in 10 years? In 20 years?

If you haven’t begun saving by the time you’re 40, consider investing in yourself to increase your earning potential. A new university degree or course may pay off in the long term by increasing your income opportunities and ability to save.

Paying yourself first by automatically transferring funds into a savings or investment account each payday before paying bills makes it easier to remain on budget and meet your wealth building goals.

Maximise earning potential

In addition to investing in new education, you may want to investigate alternative sources of income that you can tap into right now. Many full-time employees take on consultant or freelance roles within their field, barring any non-compete clause in your employment contract.

You could also consider asking for a raise. Let’s say you’ve invested in yourself with extra education or gained further experience through a side hustle related to your chosen field, you could use this upskilling to try to negotiate a raise with your employer.

Even earning a few extra hundred dollars per month could accrue into a significant amount of wealth if you allow it to sit in the bank and yield interest. The highest paying side jobs in Australia are projects related to proofreading, editing, 3-D modelling, and illustrating.

Hire a financial adviser

The value of ongoing financial advice is significant when you’re mid-career, as a professional can help you with various wealth creation strategies and explain the impact of rising inflation on your investment strategy.

Our report shows that 62% of Gen X women said a change in financial circumstance like a big pay rise, receiving an inheritance or windfall would make them want to seek financial advice and 21% of Australian women aged 50-64 think it’s simply too late in life to bother planning for a comfortable retirement.

But ‘doing nothing’ has a financial cost. Every year you don’t fix your finances, you are costing yourself money. Over your lifetime, that could potentially cost you six figures – or more. Through the financial modelling in our report, we ascertained that even if you’re less than ten years away from retirement, you can still benefit from financial advice but that the gains increase the earlier you start.

If you’re in your late 40s, our financial modelling, based on the assumption that you are 49, part of a couple, and have a super balance of $215,000 invested in a default fund, shows that between now and the age of 65, you could potentially grow your net assets by 13% or close to $240,000 with financial advice.

Therefore, the benefits of hiring a financial adviser can’t be overstated. They can help you create a better budget and formulate a practical investment strategy. Your adviser may also be able to identify areas where you can cut spending or recommend high-yield accounts that will maximise your interest earnings.

Financial advisers work in areas that include, but are not limited to:

• Investment advice

• Portfolio management

• Estate planning

• Superannuation management

• Retirement planning

• Tax planning

• Insurance policy advice

Maximise your super contributions

Your 40s are also the time to consider sacrificing some of your salary toward your superannuation. For most people, the 15% tax rate for these extra payments - referred to as concessional contributions - is lower than their regular marginal tax rate. This strategy could make for a good tax strategy if you make above $45,000 per year.

Just keep in mind that there are limits to how much you can contribute to your super each year; be sure to check the contribution cap for the year you want to contribute extra for. For example, based on the current contribution caps, between you and your employer, you can’t add more than $27,500 to your super annually.

If you do go down the salary sacrifice route, here’s what you could be looking at in terms of outcomes. Please note, this data is based on the assumptions that an individual is earning a salary of $120k p.a., plus Superannuation Guarantee (SG) at 10.5% p.a., and has a maximum concessional contribution limit of $27,500 p.a., indexed by Consumer Price Index (CPI).

Outcomes may include:

• Net income reduced by $9,759 p.a.

• Super increased by $12,665 p.a.

• Net financial benefit of $2,906 in year one.

Other ways to maximise your super include making spouse contributions. As of 2018, if your spouse makes less than $40,000 per year, you can contribute to their super. On top of growing your savings, this contribution can serve as a tax offset. You may claim up to $540 as long as you meet the terms set forth by the Australian Tax Office and contribute a minimum of $3,000 per year. For more information, check with an experienced financial adviser or visit the ATO website.

Your 40s are also a good time to review your super investments. Sometimes superannuation funds will invest more aggressively for younger workers, while progressively reducing investment risk as members progress towards retirement. Now is a wise time to review your portfolio to decide if you wish to take a more aggressive, or conservative approach with your super investments.

Consider borrowing to invest

If you would like to boost your investment portfolio, talk to your financial planner about borrowing to invest, a strategy known as gearing. For instance, if you borrow money at 4% interest and your investment returns 7%, you could make 3% on the investment before accounting for any income or capital gains taxes that may be payable. This strategy is considered to be very high risk, so it is imperative that you talk to a professional adviser about the suitability of this investment strategy and if it’s right for you.

Pay off your non-deductible debts

Debts are often divided into “good debt” and “bad debt”. Good debts are those with deductible interest while bad debts, by contrast, don’t allow you to deduct the interest on your taxes. The primary reason for this difference is that debts classified as deductible have been used to fund an asset that creates assessable income; non-deductible debts don’t.

Because you can’t claim non-deductible debts on tax -- including the mortgage on your primary residence -- these should be prioritised for repayment. Your 40s are the time to maximise repayments to your mortgage, and other non-deductible debts such as car loans and credit cards, so that you can reach your retirement without any major liabilities on these loans.

Boost emergency savings

Moneysmart recommends having three months of expenses in an emergency savings fund. Having money set aside for things like car repairs or fixing a plumbing problem means you won’t have to dig into other investments to cover the costs. Emergency savings keep your other wealth-building strategies more stable. As Moneysmart points out, just $20 per week in an emergency fund translates to an extra $1,040 in emergency funding by the end of the year.

Avoid lifestyle creep

As you enter middle age, it’s tempting to start considering the luxuries you can now afford to be necessities. This is sometimes called lifestyle creep. As in, the more you earn, the higher your spending creeps. To build wealth in your 40s (when your income often begins to peak) you should resist the urge to treat an increase in disposable income as a licence to buy a bigger house and eat out every day.

Instead, strategically use your additional money to make investments or purchase assets that will generate a passive income.

This is also a good time to begin thinking about estate planning, writing a Will, and getting life insurance. These long-term wealth management strategies can ensure your financial legacy remains intact.

Key takeaways

Most people are earning more money in their 40s than during the previous two decades, and are poised to make some serious leaps with their wealth creation strategy. The best thing you can do for yourself is consider setting a budget and contacting a financial adviser. And others agree, with more than eight in ten Australians believing obtaining professional financial advice could benefit them in retirement.

You may also want to start thinking about retirement planning now so you’re ready when the time comes. Using some base assumptions, our modelling shows that a Gen X woman earning $100,000 p.a. and above may stand to be $192,000 better off in retirement even if they don’t start receiving financial advice until the age of 50.

Furthermore, if they were in a position to access good financial advice even earlier in their mid-30s, their financial outcomes could potentially have delivered $664,000 more in net assets at retirement age.

If you still have questions about building your net worth as an individual or business owner, contact Findex to learn more. Our services include business advisory, corporate finance, tax consultant, general insurance, and wealth management.

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