An Investing Road Map for Midcareer Accumulators

Investment advice abounds for people just starting out in their careers, as well as for those who are getting ready to retire.

But for midcareer investors, people in their 40s and 50s? Not so much. Workers at this life stage may be at their peak earnings level, and therefore may have more-complex financial needs than their younger counterparts. Moreover, midcareer investors frequently are juggling the competing financial demands of college for their kids and retirement savings for themselves. That’s no small task, especially when you stop to consider the big price tags associated with each, as well as the complexities of calibrating two separate pots of money with two different time horizons.

Even so, you tend to see less information about how midcareer accumulators should invest and manage their finances differently than their younger and older counterparts. Like 20- and 30-somethings, midcareer accumulators still have a decent amount of human capital, or earnings power. And with a runway of 15 or 20 years until retirement—and perhaps 25 or 30 more years in retirement—they can usually afford to take plenty of equity risk with their investment portfolios. At the same time, people at this life stage may face serious life—and in turn financial—setbacks from which they never fully recover: a debilitating health condition that limits work, for example, or time away from work to care for aging parents.

Here are some key priorities to keep in mind if you’re a midcareer accumulator looking to make sure you’re on the right track with your financial and investing life.

1. Nurture your human capital.
2. Balance college funding with other goals.
3. Protect what you have.
4. Combat lifestyle creep and step up your savings.
5. Employ additional accounts for retirement savings.
6. Begin to derisk your portfolio.
7. Don’t assume a larger portfolio means more complexity.
8. Rightsize your advice.

Nurture Your Human Capital

Investing in human capital—via additional education or training—is close to a slam-dunk for early career accumulators. If you can increase your earnings power with such an investment, you have a long time until retirement to benefit from it. The calculus isn’t as simple as you get older, which helps explain why medical schools and high-priced MBA programs aren’t jam-packed with people in their 40s and older. Higher lifetime earnings may not offset the outlay of money and time for costly training later in life.

Yet midcareer accumulators should still make an ongoing investment in their own human capital—taking advantage of continuing education programs and conferences to enhance their skills, networking, and simply staying current on the latest news and developments in their fields. And no matter your field, staying current on the latest major technology developments, both on and off the job, is a crucial way to ensure that you stay relevant.

Balance College Funding With Other Goals

Balancing college funding against saving for retirement is arguably the biggest financial challenge facing many midcareer accumulators. Many parents naturally feel the tug of shouldering at least a portion of their children’s college costs, but paying for college is a heavy lift. Meanwhile, with the ratio of years worked to years retired declining, prudent retirement savers today will need to plan for at least a 25- to 30-year time horizon in retirement, necessitating a large nest egg. If retirees are pondering a 4% starting withdrawal rate, it makes sense to target a retirement savings pool that’s 25 times or more their desired initial retirement income.

How to reconcile these competing financial goals? I’d advise putting retirement readiness front and center on your financial dashboard. The simple reason is that if retirement is drawing close and you have a shortfall in your retirement savings, you’ll have fewer levers available to you than is the case if your child gets close to matriculation and you haven’t socked away the tuition and fees. Your child might consider community college for the first two years, for example, or take loans to help make college affordable.

Use online calculators like the T. Rowe Price Retirement Income Calculator and perhaps one-on-one guidance from a financial advisor to gauge the viability of your current savings rate. If it appears that you’re comfortably on track and have room in your budget to spare, you can then consider steering a portion of your savings to college funding as well. 529 college-savings plans offer the most generous tax benefits and allow for larger contributions than other college-savings vehicles. Check to see how good your home state’s plan is and how generous its tax breaks are; Morningstar’s 529 Plan Center can help you identify the plans that are best of breed.

Protect What You Have

The more assets you amass, the more important it is to protect what you have. The same basic insurance types that were valuable in your 20s and 30s—health, disability, property and casualty, and life insurance if you have minor children—remain every bit as essential as you head into your 40s and 50s. Homeowners should also consider a personal liability policy to cover them in case an accident or other incident should occur on their property, as well as additional insurance protection for valuables. Finally, the 50s are a good life stage to assess whether a long-term care insurance policy makes sense in your situation. While such coverage isn’t for everyone, the longer you wait, the higher your insurance costs are apt to rise, and the more likely you are to encounter a health condition that could disqualify you from purchasing the insurance.

In addition to reviewing your insurance needs, be sure to take stock of your emergency fund. Whereas young accumulators might reasonably stick with the usual rule of thumb of three to six months’ worth of living expenses in cash, midcareer accumulators, especially higher-income folks, should target a year’s worth of cash. That’s because the higher your income and the more specialized your career path, the longer it could take to replace your job if you lost it.

Combat Lifestyle Creep and Step Up Your Savings

The 40s and 50s are often considered the peak earnings years. But with higher earnings, it’s easy to let “lifestyle creep” gobble up every bit of your extra income. Before you know it, you’re driving a luxury car with a high monthly payment and shelling out for dog walkers and house cleaners.

One way to help ensure that your savings steps up with your income is by switching on the auto-increase feature of your company retirement plan. If your plan offers this feature and you’ve elected it, your 401(k) contributions will increase each time you get a raise and you won’t have a chance to get accustomed to the higher income.

At age 50 you can also start taking advantage of what are called catch-up contributions, which allow you to steer an additional $7,500 per year to your 401(k), 403(b), or 457 plan and an extra $1,000 into an IRA.

Employ Additional Accounts for Retirement Savings

For early career accumulators, maxing out contributions to tax-advantaged retirement savings wrappers like IRAs and 401(k)s is a worthwhile target. Making the maximum allowable contributions to these vehicles remains important as you age, but as your earnings increase, that may not be sufficient. In order to amass the level of savings you need for retirement, you’re apt to need additional account types as well. This is particularly important for high-income people; a 45-year-old who’s earning $200,000 a year and is maxing out her 401(k) and IRA is still only saving 12% of her income, which is probably not enough.

Where to stash the cash? High-income people who are making the maximum allowable IRA and company retirement plan contributions should investigate whether a health savings account could serve as an ancillary retirement-savings vehicle. These accounts, only available to people who are covered by a high-deductible healthcare plan, offer a three-fer on the tax front: pretax contributions, tax-free compounding, and tax-free withdrawals in retirement. Worst-case scenario and you need to tap an HSA for nonhealthcare expenses in retirement, your withdrawal will be taxed at your ordinary income tax rate. The 2024 contribution limit for HSAs is $4,150 for self-only healthcare coverage and $8,300 for families; an additional $1,000 per year catch-up contribution is available for HSA savers who are older than 55.

In addition, a plain-vanilla taxable brokerage account can make a decent receptacle for additional savings. You won’t be able to make pretax contributions or take tax-free withdrawals, in contrast with traditional and Roth accounts, respectively. But with a little bit of care you should be able to limit the taxes on your account on a year-to-year basis. Because they limit taxable capital gains distributions, equity index funds and exchange-traded funds make ideal holdings for a taxable account. Municipal-bond funds can work well for shorter-term income needs.

Begin to Derisk Your Portfolio

Portfolios for people in their 40s and 50s should still include plenty of higher-risk assets with higher return potential; after all, such individuals could be drawing on their portfolios for at least 40 or 50 more years, so they can’t be content to hang out in low-risk assets with low returns to match.

That said, by the time you reach your 50s, it’s a good idea to begin holding a bit more in lower-volatility investment types, especially high-quality bonds. True, the return potential of bonds is apt to be lower than is the case for stocks. But yields are up dramatically since 2021. Moreover, bonds can serve as valuable shock absorbers for your portfolio, cushioning the losses when stocks go down. That can help on a psychological level, of course, ensuring that you don’t panic and sell yourself out of stocks when they’re in a trough. Holding at least some assets in safer securities can also help serve as an insurance policy: If you are forced to retire early or find yourself out of a job prematurely, having a cushion of bonds can help you avoid tapping stocks for living expenses when they’re in a trough.

Don’t Assume a Larger Portfolio Means More Complexity

As their assets grow, many investors assume that their portfolios should include more moving parts. But that’s not necessarily so. Even as you may need to spread your assets across more and more silos as your assets grow—company retirement plans, IRAs, HSAs, 529s, taxable brokerage accounts, and so forth—that doesn’t mean you need to maintain distinct and/or narrow holdings in each of these accounts. In fact, it’s hard to go too far wrong with a simple three-fund portfolio consisting of a total market US index fund, a total foreign-stock index fund, and a core bond offering; you can own that same cluster of holdings in each of your accounts.

Rightsize Your Advice

As your financial life grows more complex and you get closer to retirement, paying a financial professional for help can be money well spent. You may glean insights that you hadn’t picked up on in your own reading, or receive counseling in complicated areas like tax and/or estate planning. Be sure to rightsize any financial advice you pay for, however. While investors who have complicated financial situations or need a lot of ongoing hand-holding might benefit from paying an advisor a percentage of their assets each year, investors who only need periodic checkups will find it more cost-effective to pay for advice on a per-engagement or hourly basis.