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What Should Your Investments Look Like in Your 40s?

Keeping your investments on track in your 40s means shifting asset classes becomes even more important

Click through to nearly any investing website and you’ll find the same thing, a collection of individual stock picks and ways to ‘beat the market’.

It’s this one-size-fits-all investment strategy, trying to pick stocks for the highest return possible, that causes most investors to lose money and miss their long-term goals.

What you won’t find on most investing sites is how your investments will change as you get older. It’s this HOW to invest that is critical to meeting your goals and so much more important than the specific stocks or investments you pick.

This is the fourth in our seven-part series on life-long investing, how to match your investments with your personal needs and how your portfolio should change as you age.

If you read the prior two articles on how to invest in your 20s and 30s (linked below), you probably noticed that the portfolio changes to the amount held in stocks, bonds and real estate didn’t change much. That’s because younger investors still have decades left to put their money to work.

That’s not the case for investors in their 40s and those necessary changes to your portfolio will start to become even more crucial to staying on track to meet your goals. You may have college expenses coming up in the near-term or may have just started investing. This is going to mean a big difference in how you invest and how your portfolio changes as you get older.

Check out the other three articles in the series:

The Investor in their 40s

Investing needs are starting to change for the investor in their 40s like we haven’t seen in the prior articles for younger investors. The 40-something investor is looking at less time to retirement and may soon be withdrawing money to cover educational costs.

As your investing needs and risk tolerance change, you’ll need to slowly shift the focus from growing your nest egg to protecting it.

According to Fidelity, the average investor in their 40s has $63,000 saved for retirement. While comparing your retirement savings with the median for investors in their 20s and 30s was ok, here it can get you in trouble.

That’s because the average investor in their 40s is already far behind where they need to be.

Most advisors recommend having saved at least 3-times your salary by now. Your investment goal for retirement is going to determine how much you should have saved at different points in your life but it’s going to start getting difficult to reach that goal if you haven’t saved a sizable amount by your 40s.

Let’s look at an example. We’ll say our hypothetical investor, age 45, wants to have saved $600,000 by the time they retire at 67 years old. That’s enough to withdraw about $30,000 annually for expenses and not have to worry about running out of money. Combined with Social Security, that’s enough to maintain the standard of living for the average American.

How much would you need to save each year to meet that goal, depending on how much you’ve saved already?

how much should i have invested by 40s

How Much Should You Have Invested in Your 40s?

The average investor with $63,000 saved by age 45 would need to save an additional $7,550 a year, $630 monthly, to reach their $600,000 investing goal by retirement. That’s not an impossible task but might be stretching the budget a little.

The investor with just $25,000 saved to this point needs to save an additional $904 a month to reach that same retirement target!

We’ll talk more about what you can do if your retirement savings are falling behind in the next section. This shrinking time left to invest for the investor in their 40s is going to be a factor going forward into your 50s and 60s as well. The fact that you have less time to let your portfolio recover after a stock market crash means you’ll want to invest more in safety investments like bonds and diversify into real estate.

We started looking at higher liquidity needs, the idea that you might need to withdraw some of your investment money, in the previous article. By their 40s, most investors are facing the immediate need to pay for educational costs for their kids.

That means you’ll want to put aside some of your money, apart from your retirement savings, to protect it from losses. Any money you need within the next five years should be invested as if you were in retirement, with a focus on protection rather than growth.

Taxes are probably at their highest for the investor in their 40s so you should be taking full advantage of special savings programs like a company-sponsored 401k, an individual retirement account (IRA) and a 529 for college savings. Your priority should be to at least max out your company match on the 401k and save up to the limit in your IRA.

Are you playing catch-up with your investing plan?

Most people don’t have the benefit of starting investing in their 20s. They either just couldn’t find the extra money or it wasn’t a priority.

Still many others don’t save much in their 30s either.

If you haven’t saved much of anything for retirement by your 40s, you’re going to have to avoid some risky temptations.

Let me tell you a story. Jon has just $15,000 saved for retirement by the time he reaches 45 years old. He clicks through to a retirement calculator, plugs in his numbers like an investment goal of $750,000 and 22 years left to retirement. He can only save $4,500 a year ($375 monthly) so he plugs that number in as well.

The investment calculator tells him he needs to get an annual return of 13.5% to reach his goal.

Seeing that the overall stock market only produces an average annual return of around 8%, Jon looks to individual stocks to beat the market and get his 13.5% return. He spends hours watching the financial news for stock picks and invests in risky companies.

Jon’s investments plunge during the next stock market crash, he panics and sells out of his stocks to protect what little savings he has left.

The moral here is that you can’t start chasing returns to meet an investment goal. It ends badly, very badly.

how to invest in my 40sIn your 40s, you still have a couple of decades left to take more risk and get a higher return but there is a limit. Don’t expect an average return of more than 8% on even the riskiest portfolio, heavily invested in stocks.

You still need some of your money in bonds and real estate to protect yourself from stock market weakness. It’s going to mean accepting a slightly lower average return but with a lot less stress.

If you find yourself behind in your savings, you still have options at this point.

  • Reassess your retirement goals. Can you live on a little less by moving to a smaller home or even to a different city? Can you reduce some planned expenses like transportation by using more public transportation?
  • Make more money! This doesn’t mean you have to get a second job for the next two decades. Putting 10-hours a week to a side project can close your savings gap within a few years. The earlier you get started and increase your monthly savings, the faster it will grow and help you catch up.

Investor Types in their 40s

Through the series, we’ve looked at three example investors. These three investors are all the same age but differ in other characteristics like how much they have saved and how they react to risk.

Because of their differing personalities and needs, these three investors might put their money to work in different investments. Understanding which investments best fit their needs and personalities will help reach their financial goals with as little stress as possible.

Conservative Cody is our risk-averse investor. This need for lower risk comes from one of two factors, either a low willingness to see his investments jump around in value or a low ability to take on much risk.

A low willingness to take on investment risk comes from your personality. If you are just a naturally high-strung kind of person, the slightest drop in your portfolio might keep you awake at night. Taking on more risk than you should is only going to lead to bad investment decisions so we want to match your risk tolerance with your investments.

A low ability to take on investment risk comes from other factors like the amount you’ve already saved and the time you have to needing the money. If you haven’t saved enough for retirement, you can’t afford to see it wiped out by a market crash. You need to protect what little you’ve got saved, growing it slowly, to at least have something to live on in retirement.

Conservative investors may have more risk in other parts of their financial lives so they want to balance it out with less investment risk. If you own your own business or plan on switching employers, your income might be irregular or more volatile compared to other investors. That means you’ll want to protect the money you earn with less portfolio risk.

Average Amanda is our base-case investor. She’s got a stable job and budgets so she is able to save regularly each month. She’s been saving for a while so has a little more saved than the average investor for her age.

Amanda makes sure she is covered by the necessary insurance policies like health, auto and home so she knows she won’t face any catastrophic expenses that will require selling out of her retirement portfolio. She still has a little over 20 years to retirement and no immediate need for the money.

Risky Rebecca is our risk-taker, the investor with the ability and willingness to take more investment risk.

Rebecca’s higher ability to take risk comes from the fact that she has already saved much more than the average investor. At this rate, she’ll have well over the amount she needs in retirement. That means she can take a little more risk and not have to worry about falling short of her goals. Her stable job and high salary also means she can save a little more each month if she starts to fall behind because of risky investments.

Rebecca’s willingness to take on investment risk comes from her personality. She doesn’t worry about her investments. She knows that investing for retirement is a very long-game and stock market losses are just a short-term part of that game. She keeps her money invested in diversified funds no matter what happens and doesn’t lose sleep when the market stumbles.

Which Type of Investor are You?

Investing is personal. How you invest depends on your own goals, needs and personality. You may not see yourself exactly in one of the three investor examples above but take the time to understand your investor type.

  • Take a risk tolerance questionnaire to determine how your investments and personality fit with different investing styles.
  • Understand that having saved less means you may want to protect that money rather than take on a lot of risk to grow it fast and ‘catch up’. Too often, the investor that was taking on too much risk to catch up turns into the investor with losses that just wants to ‘get back to even’.
  • Balance your financial risk with your investment risk. If you work in an industry that sees regular layoffs or is prone to the business cycle, you might want to take less investment risk. Likewise, if you have irregular income or a lot of business risk then your focus should be on protecting your investments.

Understanding your investor type will help you put together the portfolio of stocks, bonds and real estate to best suit your needs. You won’t have to worry about your money being there to meet your goals and you won’t make the bad investment decisions that come with taking too much or too little risk.

Portfolio Examples for Investors in their 40s

Once you have a grasp on your investor type, you can match it with a portfolio that will reach your goals but won’t keep you up at night. The example investment portfolios below only differ slightly in how they invest and the expected annual return but the difference in risk is significant.

We get these differences in risk and return mostly from how much we invest in the three different asset classes; stocks, bonds and real estate. The three asset classes all have their unique characteristics, advantages and limitations. Putting them together in a portfolio means you get the best of all three and are protected from a crash in any one asset.

Conservative investors in their 40s may want to start shifting assets from stocks into bonds and real estate, especially to protect the part of their portfolio needed to pay for near-term college costs.

An example portfolio for the conservative investor might look like this:

example investments for 40s investor


From our example portfolio for a 30-year old investor, we’ve shifted 5% of our money from stocks to U.S. real estate. That meant reducing the amount invested in the individual sectors but we kept the percentage invested in the developed markets fund. You’ll get some investment exposure to foreign economies from your U.S. investments but it’s important to also invest in foreign companies to limit the risk of a U.S. recession or market crash.

I split the allocation to bonds from all in the core bond fund in the 30s portfolio to some in a high-yield corporate bond fund. These high-yield bonds (also called junk bonds) are from companies with lower credit ratings so they do tend to fluctuate more than other bonds but they are still less risky compared to stocks. Even the conservative investor should have no trouble investing some money in a high-yield bond fund for a little extra risk and return.

We’ve still kept the 5% allocation to cash savings in case emergency expenses or something else comes up. You may want to keep more in savings if you have large expenses coming up within a year or two.

The average investor in their 40s is still going to have most of their money in stocks and real estate versus the safety of bonds. At this point, you might start shifting money from stocks to real estate and bonds every five or ten years but you still need the growth from stocks to meet your goals.

The average investor portfolio might look something like:

average investor portfolio in 40s

Average Investor Portfolio for Investor in their 40s

Compared to our average portfolio for the investor in their 30s, this one shifts 5% from stocks to bonds for a little more safety. The money shifted goes into high-yield bonds so the difference in returns isn’t as large as if you had shifted it to investment-grade bonds. The high-yield bond fund has returned 5.5% annually over the last decade, a percent higher than the aggregate bond fund.

The portfolio still invests across all the sectors and holds some foreign stocks through the developed markets fund. An investment in the individual sector funds, rather than one investment in the S&P 500 market fund, makes sure you invest evenly across the sectors. Simply putting all your stock money in one S&P market fund means you’ll have a much larger share in tech stocks (23%), financials (15%) and health care (14%) which means more risk to those specific sectors.

I’ve also shifted 5% of the real estate exposure from the foreign real estate fund to the U.S.-focused. I like international property for diversification but you also get currency risks that can weigh on your returns and I like to shift to U.S. property as time passes.

The risk-taker investor in their 40s will hold a portfolio similar to the average 30-something investor. They might have lost the extra decade to invest but other characteristics mean they can take on more risk without worry.

The large weighting to stocks will provide higher returns and some inflation protection. The portion held in real estate provides more inflation protection and returns just slightly below stocks. We still only have about a fifth of the portfolio in bonds but it’s enough to protect from stock market crashes and real estate weakness.

An example portfolio for a high-yield investor might look something like:

example investments 40 year old investor

Like in the previous moves for our 30s-investor portfolio to the 40s-portfolio, we’ve shifted 5% of our money from stocks to real estate. You’ll still have 15 years or more to retirement so you have plenty of time to take investment risk for higher returns but these portfolio shifts become more important as you get older.

Shifting your investment weightings from your 20s to 30s was minor and not necessarily a must-change. Realigning your portfolio from your 40s to 50s and beyond is going to be critical to protecting your money and meeting your goals.

No matter what your investor type, whether conservative or higher-risk, you’ll want to start shifting from a stock-heavy portfolio to one that includes more bonds and real estate. This might mean a slightly lower annual return but will lock that money in for when you need it. It will help protect you from inflation, with increased real estate investments, and from economic risks with the increase in bonds.

As you get older, into your 50s and early 60s, you may want to start revisiting your portfolio allocations every five years instead of every decade.

Investment Returns for Investors in their 40s

The changes made to the sample portfolios above, compared to the investments in the 30-something investor portfolios, didn’t change expected returns much but shifted around the risks.

The conservative portfolio actually sees the expected return increase from 6.9% to 7.0% for the example portfolio above because of the addition of high-yield bonds. The portfolio is slightly less risky with a higher percentage in real estate to protect against inflation and stock market volatility.

The return on the average portfolio falls slightly from 7.66% to 7.5% on the shift from stocks to bonds. That’s still a very solid return on a diversified portfolio and most investors should be able to meet their goals without losing sleep during a market crash.

The example high-yield portfolio for the investor in their 40s produces the same 7.8% expected return as high-yield portfolio in the previous article but shifts the risk a little. While the returns based on historical data may be the same, this portfolio might have slightly less upside potential. Stocks may have performed about the same as the real estate index in the past but have a higher upside on corporate profits and the economy.

Looking at these expected annual returns, remember that these are based on returns for each fund over the last decade and won’t be exactly what you get in the next decade. Returns going forward might be higher or lower but should be close to the averages.

Closing Summary and Action Steps for 40s Investor

If you’re just getting started investing in your 40s, don’t panic but you’ll need to avoid some of the investment risks that cause many people to lose money. This means aligning your needs with the perfect portfolio and not chasing higher risk just to make higher returns.

While the changes from one decade to the next have been fairly minor, the shifts to less risk in your portfolio start becoming more important as you get older. Comparing the 40-something investor’s portfolio with the 30-something examples doesn’t seem like there’s much difference but the difference become much larger compared to the 20-something investor’s portfolio. The focus on our example portfolios in the next couple of articles will shift even further to protecting your money rather than producing those high returns with stocks.

  • If you haven’t already, click back to read the first article in the series for an explanation of how to estimate your investing goals and needs.
  • Use an investment return calculator every few years to recheck the return you need, given how much you’ve saved and how much you can deposit monthly, to keep on track. If the return you need to meet your retirement target starts creeping higher, it may be a sign that you aren’t saving enough on a regular basis.
  • Reassess your investor type with a risk tolerance questionnaire. Our goals and risk tolerance change as we get older, especially with family changes and life events. More often than not, this means changing to a more conservative portfolio though you might find that you can take on a little more risk for a higher return.
  • If you’ve been investing, compare it to one of the example portfolios above. You don’t need to match it exactly, either in weights to the asset classes or the investment selections, but there should be similarities. All investors should hold some money in bonds and real estate to protect against a volatile stock market.

Investors in their 40s will start seeing bigger changes in their investments as they get older. Whereas the difference in time left to invest for a 20- or 30-year old is minor, the difference between a 40- and a 50-year old is much more significant. When you have less than 15 years to retirement or needing your money, you’ll need to start thinking seriously about which investments will provide for protection. This means taking a closer look at your investment goals to make sure you know exactly how much you need and how you’ll get there. Investing regularly and shifting your portfolio every five or ten years to appropriately meet your needs will help keep you on track to meet your goals.


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