Roadmap To Investing: For 40-50 Year Olds
Written by: Samantha Butcher | Advisory Team
People in their 40s and 50s are in a crucial phase of their financial lives, often referred to as the “peak earning years”.
Typically, your children are getting older and becoming more financially independent, debt is becoming more manageable, and you are more likely to be earning more than you were a decade earlier. You may find that you suddenly have more disposable income than in previous years. I often get asked:
“What should I do with this ‘extra’ money? Pay more on my home loan, contribute to super, or invest outside of super?”
My answer is, it depends. Everybody’s circumstances are different, and you should seek professional financial advice to determine the best solution for you.
If you’re on the cusp of the age bracket we’re deep diving into but want to know more about the early years, check out this blog we recently put together: Roadmap To Investing For 30-40 Year Olds.
Why Consider Investing At This Age?
Many people still hold a significant amount of cash in the bank. This offers security (especially with our government’s guarantee), but simply saving cash may not keep pace with inflation, eroding its purchasing power over time. Investing in equities can help protect against the risk of inflation, ensuring that your capital maintains its value.
Another reason to consider investing between the ages of 40 and 50 is the fact that we are living longer, which means more years to support financially after retirement. Investing now will increase your accumulated wealth upon retirement to help maintain a comfortable lifestyle through to life expectancy and beyond.
Individuals aged in their 40s and 50s are often wanting to start saving for new major life goals like buying a second, travelling extensively, or paying for children’s (or grandchildren’s) education. Strategic investments can help meet those life goals while preparing for future financial stability.
And finally, investing now allows you to accumulate a wealth portfolio, making you less reliant on the age pension in retirement.
Want to know more about the age pension and what you’re entitled to? Check out this blog we recently put together: How Much Age Pension Will I Get + How Can I Maximise It?
Investment Into Your Superannuation With Contributions
Individuals in their 40s and 50s may not have saved enough for retirement. You may consider contributing extra to super and taking advantage of tax savings and compound interest. Investing early in this age range gives money a chance to grow.
There are limits on how much we can contribute to super.
Firstly, you can contribute up to $30,000 annually, including employer contributions, and these contributions are taxed at just 15%, often lower than your marginal tax rate. If you haven’t used all of the concessional cap from previous years, you’re allowed to carry forward unused portions for up to five years if your super balance is below $500,000.
Secondly, you can also contribute up to $120,000 annually from after-tax money. If you have access to a large sum of money, you can ‘bring forward’ the next two years and contribute a maximum of $360,000 in one year (you are then precluded from contributing under this non-concessional cap for the next two financial years).
Investing Outside Of Superannuation
You also have the option of investing outside of superannuation, which gives you the flexibility of accessing these funds if required in the future but before retirement.
You may consider investing in Australian or International shares as an example. Look for blue-chip companies with solid dividend histories.
You can also diversify by investing in exchange-traded funds (ETFs) or managed funds because they provide exposure to a broad range of companies with minimal fees.
Australian stocks often pay high dividends, and with the franking credits system, these dividends can be very tax-efficient. Consider companies that offer fully franked dividends to maximise tax benefits. If you do not need the additional income these stocks provide, you could consider dividend reinvesting, which will further help accumulate long-term wealth.
Any income earned from these investments will get added to your taxable income and taxed at your marginal tax rate. For those in a higher tax bracket, this may not be the best option. Conversely, investment earnings inside super are taxed at a maximum of 15%, which means you keep more of the earnings. However, the downside is you do not have access to your superannuation until you meet a condition of release.
Some people aged between 40 and 50 prefer to gear their non-super investment portfolio, meaning they borrow to invest and offset the interest expense of the loan against the income that the portfolio has generated. This is a risky strategy and relies on the capital growth of your shares to make it worthwhile.
Another popular investment option (particularly in Australia) is real estate. Purchasing an investment property can generate both rental income and capital appreciation. Keep in mind, that property investments require significant capital and come with risks such as maintenance costs and potential vacancy.
If you don’t want to manage a property, investing in Real Estate Investment Trusts (REITs) can offer exposure to the property market without direct ownership. These trusts pool money to invest in a commercial or residential estate.
Investment Bonds + CGT Considerations
A less common investment option is Investment Bonds.
These are long-term investments with tax advantages, particularly if held for over 10 years. Investment bonds in Australia are taxed at 30%, which can be lower than your marginal tax rate, making them attractive if you’re in a higher tax bracket.
Capital Gains Tax is a major consideration when deciding which investment option is right for you. Investments owned outside of super will have the taxable gain reduced by 50% if owned for longer than 12 months, and for investments inside super, Capital Gains Tax is even less (reducing to nil once in pension phase).
Regardless of whether you decide to invest inside or outside of super, you should be investing according to your risk tolerance. As you approach retirement, it’s important to diversify your investments to reduce risk. A balanced portfolio combining stocks, bonds, and other assets can help protect against market volatility. Those in their 40s and 50s still have enough time to recover from short-term market downturns, allowing them to take on moderate risk for higher potential returns. However, you must also consider your risk capacity, i.e. how much of your investments can you lose without negatively affecting you and your life.
Again, this varies from person to person, which is why I stated earlier that it depends on your circumstances when considering what pathways are right for you.
Canny Advisory + Your Need For Financial Advice
Given the complexities of the Australian tax system, superannuation, and investment options, consulting with a financial adviser can help optimise your investment strategy and ensure it aligns with your financial goals and risk tolerance.
Investing in your 40s and 50s provides a blend of growth opportunities and security for the years ahead. It helps balance immediate financial needs with long-term planning, ensuring a smooth transition to retirement.
However, knowing which investments to purchase and which structure to own these in, requires careful consideration and professional advice. As I mentioned above, you also need to weigh up the pros and cons of investing in shares (whether that be inside or outside Super) as opposed to reducing debt.
At Canny Advisory, we will provide a solution tailored to your personal goals and objectives, factoring in tax, immediate needs as opposed to long-term needs, and your risk capacity.
Get in touch with our team to have a chat about how we can start your investment journey today.
