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5 Smart Money Moves for Middle-Agers

Wednesday - 2/27/2013, 5:04pm  ET

In tough times, people of all ages are struggling to make the most of their money. All week long, we've been looking at the distinct challenges that people in various age groups face and how they can overcome them to achieve financial security.

After having given tips for retirees and near-retirees earlier in the week, today we're turning to the particular issues that most affect people in their 40s and early 50s. As you'll see, the balancing act that middle-agers have to manage requires a different set of financial skills than what you'll use later in your career.

All in the family
Not every middle-aged person in America has a family to support. For those who don't, your 40s and 50s are a good chance to get a head start on the same issues that near-retirees face.

But for those who do have families, the conflicting financial needs that come into play dominate the money discussion in middle age. Even if you're fortunate enough to have seen your income rise during your career, you have to weigh immediate, near-term, and long-term drains on your finances to set reasonable priorities. As children get closer to adulthood, the major expense of college also looms large, threatening your ability to set money aside for your own long-term retirement goals.

It's tough to walk that tightrope, but it's not impossible. Here are five ideas to help keep you on the straight and narrow.

Idea 1: Get the college vs. retirement answer correct...
It's natural for parents to put their children first, but when it comes to college expenses, you have to be selfish. While your children will likely have access to student loans and other sources of college financial aid, there's no resource for you that will help you supplement your retirement spending if you don't save on your own. That doesn't mean you have to cut out your kids entirely, but make sure you put at least something aside for your retirement.

Idea 2: ...but set yourself up for financial aid as well as you can.
Even giving retirement savings a higher priority, you can still structure your finances in a way that maximizes your children's eligibility for financial aid. For instance, money in retirement accounts is excluded from calculations of parents' assets, as is equity in your home, family owned businesses, and insurance products like life-insurance policies and annuities. Moreover, putting money in accounts in your kids' names will result in a bigger financial aid reduction than if you keep them as parental accounts or use 529 plans for college savings.

Idea 3: Gauge if your savings plan is on track.
No one expects you to be ready to retire in your 40s or early 50s, but you should have a considerable nest egg saved up already. According to Fidelity, your goal should be to have three times your salary saved by age 45 and five times your salary by age 55.

But to reach Fidelity's assumed annual return of 5.5%, you can't be too conservative in your investing. The dividend yields on iShares Dow Jones Select Dividend and SPDR S&P Dividend will get you about halfway there, and historical capital gains on dividend stocks should get you the rest of the way with room to spare. Yet to offset the lower returns of cash and bonds in your portfolio, consider adding other asset classes with higher return potential. Vanguard Emerging Markets opens up the higher-growth economies of emerging-market countries to investors, while iShares Russell 2000 gives you exposure to small-cap stocks, which have historically produced higher returns.

Idea 4: Have protection for your family.
If you haven't addressed issues like wills, trusts, and insurance, don't delay any further. If you have children, a will should name a guardian who'll take care of your kids if something happens to you, as well as who'll be responsible for managing money you leave behind for them. In addition, if your family depends on you financially, getting term life-insurance coverage to replace lost income in the event of your death can help prevent a financial disaster.

Idea 5: Take a close look at your career path.
The days of sticking with one job throughout your working life are over, with most Americans expecting to change jobs several times over the course of their careers. With age discrimination still an unfortunate reality, you don't want to wait too long to make a switch, but your 40s are a good time to assess your situation and, if you choose, to make a change that will get you into the place you want to be, both in terms of job fulfillment and financial success.

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