A guide to wealth building in your 40s and 50s

Saving for retirement and boosting your net worth can be challenging at any age. As you get older, investing becomes more crucial to meeting your retirement goals, paying for your kids' college education, and paying off debt. While there are many free and paid resources online, many people are uncertain about how to build long-term financial security.

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Here are 16 ways to build wealth in your 40s and 50s that you can start implementing today.

How to build wealth in your 40s

Build an emergency fund

As your career matures and you begin to make more money, it's important to establish and maintain an emergency fund in a liquid bank account. The emergency fund makes it easier to cover unexpected expenses or provide a source of cash in case of job loss or illness.

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A good rule of thumb is to save 3 to 6 months of expenses in your emergency fund. However, you may want to save more depending on how reliable your income is or your appetite for risk.

Prioritize non-mortgage debt reduction

Eliminating high-interest debt should be a priority during your 40s. Not only does this help to build wealth and increase your net worth, but you also get rid of costly interest charges that can eat up your monthly budget. Consider using the debt snowball (smallest balance first) or debt avalanche (highest interest rate first) strategies to determine which debt to pay off first.

Focus on career advancement & income growth

In your 40s, invest in yourself just as much as you invest in growing your net worth. By growing your career, you’ll increase your income and ability to invest and pay down debt. Consider:

• Finishing your degree if you didn’t graduate college.
• Exploring advanced degrees (ex: MBA, PhD).
• Attending seminars and workshops.
• Networking at industry conferences.

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The steps you take to build your education and knowledge will pay huge dividends throughout the rest of your career. You can get promoted by your current employer or qualify for jobs at other companies that may pay more or offer more lucrative benefits.

Maximize retirement contributions

Your 40s are the years to contribute the maximum amount offered by retirement accounts like 401(k)s and IRAs. This will allow you to benefit from compound growth over the next few decades. Prioritize increasing your contributions with every raise or windfall — and taking advantage of employer matches if available. Their contributions are free money that supercharges your net worth over time.

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Consider consulting a financial advisor to ensure you leverage tax-efficient strategies. By staying disciplined now, you'll build a solid foundation for a comfortable retirement.

Build a diverse investment portfolio

When constructing your investment portfolio, you don’t want to put all of your eggs in one basket. While stocks have unlimited growth potential, they can also go bust. Even financial planning experts cannot predict which stocks or sectors will generate the highest returns.

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With that in mind, having a diversified portfolio allows you to own investments with different investment returns and avoid losing your entire nest egg if any single investment loses its value. Investors benefit from investing in stocks of companies of different sizes, industries, and countries. A balanced portfolio should also include a mix of bonds, real estate, commodities, and other alternative assets.

Optimize your tax strategy

Paying taxes can put a big dent in your take-home pay and reduce your investment returns. One of the best ways to build wealth in your 40s is to keep more of the money you make every paycheck by lowering your tax bill legally. A smart tax plan not only reduces your liabilities today but also maximizes your wealth for the future.

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Work with a financial advisor to identify strategies that work for your situation, which might include tax-advantaged accounts like IRAs and Health Savings Accounts (HSAs), deductions, or investment opportunities that align with your long-term financial goals.

Prepare for kids’ higher education costs

Studies show that the cost of attending college is rising at 8% per year, which is faster than traditional inflation. Fortunately, families have several options to keep college tuition affordable.

• 529 Plans. 529 Plans are state-sponsored college savings accounts that grow tax-deferred. Plus, withdrawals used for eligible education expenses are tax-free.
• Coverdale Education Savings Account (ESA). These college savings accounts offer tax-deferred growth and tax-free withdrawals for eligible higher education.
• Prepaid tuition plans. Many states and colleges offer prepaid tuition plans where families can lock in today’s price of college by paying for school now instead of waiting until their child attends college.

Explore life insurance

Your family may be counting on your income to pay the bills and save money for the future. Life insurance policies help to replace your lost income if you die prematurely. A general rule of thumb is to have a death benefit of at least 10 times your annual salary.

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However, a more personalized approach includes other factors, such as your mortgage, student loans, and other debt, or to reach your financial goals like paying for college, retirement plans, and caring for disabled family members.

How to build wealth in your 50s

Explore passive income streams

Earning additional income outside your regular paycheck provides numerous benefits in your 50s. Passive income allows you to earn money without requiring you to clock in regularly like a traditional job. There are many ways to earn passive income, including owning rental properties, investment dividends, and investing in businesses.

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The extra earned through passive income provides a safety net in case you lose your job or get sick. It also boosts your disposable income, which you can use to bolster your retirement savings, pay down debt, and put toward your other financial goals.

Reduce your cost of living

Getting a handle on your spending habits can help you budget for retirement and determine ways to reduce your cost of living. Tracking your spending habits for a month, then discuss these purchases with your spouse or partner about how to cut your expenses.

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Instead of remodeling and aging in place, some homeowners in their 50s downsize their homes to reduce living expenses. By downsizing, you may be able to use your equity to buy a smaller home with cash or use the money to invest.

Become debt free

As retirement inches closer, it is crucial to pay off your debt. By becoming debt-free, you can focus your retirement income on travel, entertainment, and everyday living expenses rather than payments to the bank.

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If you still have debt in your 50s, there are ways to pay off your debt, including consolidation loans, balance transfer credit cards, and leveraging home equity.

Take advantage of catch-up contributions

Retirement accounts, like IRAs and 401(k) accounts, provide appealing tax benefits for eligible workers. The tax benefits benefits are so powerful that there's an annual limit on how much you can invest each year. However, when you reach 50, you become eligible for "catch-up" contributions that allow you to invest even more money.

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Catch-up contributions are additional amounts that you can add to eligible retirement accounts like traditional or Roth IRAs, 401(k)s, 403(b)s, and 457(b) government retirement accounts.

Consider shifting toward safer investments

Reducing risk in your retirement portfolio is generally recommended as you get closer to retirement age. While you still have many years left to live, your ability to rebuild your nest egg in the event of a significant loss is much smaller. Shifting assets toward safer investments can preserve their value in an economic downturn.

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When deciding how to allocate your investment accounts, the safest approach is to consult with a professional.

Think about when to claim Social Security

Many retirees count on Social Security income to cover monthly expenses when they retire. But when you claim Social Security can dramatically impact your net worth and income. While the full retirement age ranges between 65 and 67 years, depending on when you were born, retirees can claim Social Security as early as age 62.

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The downside of claiming benefits early is losing 8% of your monthly Social Security check for every year you file early. This not only impacts your monthly income for the rest of your life, but it also affects surviving spouse benefits. Every year that you delay up to age 70, your benefits increase by 8%. Before filing for benefits, evaluate your finances and work with a financial advisor to understand your options.

Create a long-term care plan

As you age, you may need long-term care assistance to handle daily activities. Today, the average long-term care facility charges $4,500 per month. However, costs vary by state, the type of facility, and the level of care. Fortunately, long-term care insurance can mitigate the cost of assisted living and reduce its impact on your net worth.

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Like most insurance policies, purchasing a long-term care policy is cheaper when you’re younger and healthier. Talk with a licensed insurance agent to explore options.

Establish an estate plan

Estate planning allows investors to control their assets from beyond the grave. If you don’t have a living trust, assets may go through probate, where a judge makes the final decision on who gets what assets. Additionally, probate taxes may take up to 40% of the value of your assets.

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With an estate plan, you can ensure your family is cared for. Speak with an estate planning attorney about reducing taxes, paying for college, and caring for a disabled family member.

Final thoughts

If you want to learn how to build wealth in your 40s and 50s, follow the simple strategies. During these peak earning years, you can grow your income, invest in your future, pay down debt, and boost your net worth.

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While every strategy may not be right for your situation, choose one to implement immediately. As you master it, add another and repeat. Over time, you’ll make tremendous progress toward building wealth and reaching financial stability.

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