Investing in Your 30s and 40s: 5 Strategies to Build Long-Term Wealth

summary

If you’re reading this, you probably have read other financial articles that proclaim to have the secrets to making you rich. You might be thinking that you need to own real estate that you can then rent to others. Or, you should be analyzing individual stocks and determining which ones will be next week’s “winners”.

While rental real estate and individual stocks can work for some, I’m here to tell you that you can keep your investing strategy pretty “boring”, but still ensure that you’re on a path for financial freedom.

Having worked with many professionals and families in their 30s and 40s, I want to share the five core strategies to build long-term wealth:

1) Maximize Your Employer’s Retirement Contribution

2) Be Comfortable Taking Investment Risk

3) Invest 20% of Your Income

4) Don’t Put All Your Eggs in One Basket

5) Have Multiple Types of Investment Accounts

maximize your employer’s retirement contribution

Many of you probably have access to a retirement plan through your employer. These type of retirement plans are often called 401 (k) plans or 403 (b) plans.

One of the great features of these plans is that employers can contribute to each of their employees’ retirement plans. Some employers will contribute a certain percentage of your salary into your retirement plan - even if you do not elect to make your own contribution.

Example: Charlotte earns $55,000 as a marketing director at a local nonprofit. She opts not to contribute to her company’s 403(b) plan. However, her employer makes a 3% contribution for all eligible employees. So, Charlotte’s 403(b) will receive $1,650 in employer contributions, even though she does not contribute to her 403(b) plan.

The more common type of employer contribution is called the matching contribution. This type of contribution occurs when an employer agrees to make a contribution to your retirement plan, so long as you also contribute to your retirement plan.

Example: Kevin earns $70,000 at his local nonprofit. His employer will make a $0.50 contribution for every $1 he contributes to his retirement plan, up to a maximum of 3% of his salary. Kevin contributes 8% of his salary to his 403(b) retirement plan. For a full year, Kevin will contribute $5,600 and his employer will contribute $2,100 (3% of his salary).

Here’s an easy way to build long-term wealth: DON’T LEAVE MONEY ON THE TABLE. A key to investing is putting money to work as early as possible. In the last example, Kevin has to contribute at least 6% of his salary to ensure he receives the maximum 3% from his employer.

The retirement contribution made by your employer is essentially free money. Try your best to contribute enough to receive the maximum contribution. Not doing so could result in tens of thousands of dollars less in your account come retirement.

be comfortable investing your money

Sometimes, I will work with new clients who are sitting on a large amount of cash in their checking account, or they have their retirement plan invested in an investment option that pays a certain percentage each year. There’s comfort in looking at your statement each quarter or year and seeing that your account is worth more today than it was in the past. However, it is almost impossible to build a meaningful retirement account with these types of conservative investments.

Consider the following scenarios:

Scenario 1: You are 35 years old and plan to retire at age 65, so you have 30 years to grow your nest egg for retirement. You plan to invest $500/month in an account that invests predominantly in stocks and averages an 8% annual return. Fast forward to 2055… Your investment account is worth $745,179.72.

Scenario 2: You still plan to retire in 30 years and will invest $500/month, but this time it’s in an investment account that averages a 3% return each year. Fast forward to 2055… Your investment account is worth $291,368.44.

One of the basic principles of investing is that investors should earn a higher rate of return on riskier investments than on safer ones. That said, riskier investments also make for a bumpier ride. However, in the long run, they provide the returns you need to fund your retirement.

invest 20% of your income

If you’ve read my previous blog posts, then you know that this is not the first time I’ve discussed the importance of investing 20% of your income. As investors, there’s not much that we can control. We cannot control economic factors that lead to a recession or a global pandemic that causes supply-chain issues. Unfortunately, we can really only control a: how much we invest, b: what investments we select to invest in, and c: when we invest our money.

Investing for long-term wealth really boils down to controlling the controllables, one of which is how much we invest. Investing 20% of your income has the following benefits:

a: Jumpstarting Your Retirement Nest Egg - A large proportion of your retirement nest egg is determined by how much you contribute in your 30s and 40s. Investing 20% of your income can lead to higher growth (in dollar terms).

b: Living Within Your Means - The ability to invest 20% of your income shows that you’re not funding a lifestyle that you cannot afford. Building long-term wealth depends on your ability to manage expenses and not spend every dollar that you earn.

don’t put all your eggs in one basket

I want you to spend a minute or two looking at this chart. Do you notice any discernible pattern?

Callan Institute: Periodic Table of Investment Returns

Simply put, there is no pattern. It’s not as though a particular investment group launches toward the top after a few years at the bottom. There’s no proof that each investment class spends an equal amount of time as the “loser” of the year. So what’s the point of this chart?

One of the principles of investing is diversification, the idea that you should invest your money across a variety of asset classes. Why? Because we don’t know in any given year which group will outperform the others. But, by having money spread out, the money you earn from the winners hopefully outweighs the money lost by that year’s loser(s).

Imagine this scenario: it’s 2004, and you invest 90% of your retirement plan in an investment fund made up entirely of the largest U.S. companies. Over the next three years, that investment fund would have earned 4.91%, 15.79%, and 5.49%. But by not investing any money in international companies, you would have lost out on returns of 34%, 32.17%, and 39.38%.

This is not to say that any one investment group is inherently better than another. However, spreading out your money is like going to a racetrack and betting on seven different horses. There’s a good chance that one of those seven is going to be the winner, thus making you money. Contrast that with the person who puts all their money on the horse in lane 5. Yeah, they may hit it big now and then, but more often than not, they are going to go home with a hole in their pocket.

Investing for long-term wealth is not about hitting a home run. It’s about keeping it boring and hitting a lot of singles and doubles.

utilize different investment accounts

Where you invest your money plays a significant role in growing and keeping your wealth. Different investment accounts are subject to different sets of tax rules, and a solid investing strategy incorporates investing your money across various accounts. Why? We talked about not putting all our eggs in one basket (i.e., spreading out how your money is invested). However, the same principle applies to where we invest our money. We don’t want to spend 10, 20, or 30 years investing all our money into one type of account because we won’t have tax flexibility in retirement.

So, a sound investing strategy to build long-term wealth is to determine where you plan to invest your money annually. You may expect to receive a large bonus this year, so you want all your investment contributions to be deducted from your taxes. Or, you found yourself unemployed for a few months, thereby making it more appealing to contribute on an after-tax basis. Whatever the case, you should spend some time ensuring your investment strategy is optimized from a tax standpoint. The key is to build wealth in the three different tax buckets: 1) Tax now 2) Taxed later 3) Tax-Free

parting thoughts

Building long-term wealth does not require complex strategies, nor should it rely on the reel you watched on Instagram.

Implementing investing strategies that focus on investing an adequate portion of your income, spreading your money across different investments and accounts, and not leaving money on the table can lead you on a path towards financial freedom.

Discussing the right investing strategies for you and your family is one of the many services we provide to ongoing financial planning clients.

If you don’t feel confident in your investing strategies, feel free to schedule your introductory meeting and learn how we can develop a plan that puts you on a path towards financial freedom.