A Midlife Money Checkup

Where did the time go?

Just yesterday your financial life was all about scrambling to make rent, learning what a 401(k) was and lobbying to get out of the cubicle and into an office. Now you're pushing 45 or 50, you've got a mortgage and college tuition bills, and you're the boss of a crop of ambitious 22-year-olds.

Face it, you've reached middle age.

Sure, you have a long road ahead - three or four decades or more. But when it comes to your finances, you're not a kid anymore.

"Back in your twenties, you probably thought turning 50 was far in the future," says Mari Adam, a financial adviser in Boca Raton, Fla. "Guess what? Your future is starting now."

Will that future work out the way you want? Hard to say, but you'd be wise to see how you're doing so far. That means conducting a head-to-toe money checkup that covers everything from investing to insurance.

Once you know the state of your financial health, you should find it easier to get in shape and then stay on track toward your goals, whether they include early retirement, career changes or starting a business.

How do you take this test? Ask yourself the same questions that a financial planner would pose. Your answers will lead you to your diagnosis and, if you find ills, a cure. Get started.

1. Are you saving enough for retirement?

When you're just starting to save and invest, this question is hard to answer with any precision. Who knows how much money you'll need in retirement when those days are eons away? Now that you're in your forties or fifties, it's easier to make an educated guess.

You have a 401(k) balance or other plans you can check on (if you can bear to look today). And you probably know how long you want to keep working and have an idea of what you want to do afterward - travel, launch a second career, kick back. You still have time to refine your goals. But as retirement draws closer, you can't put off creating a concrete savings target and measuring your progress.

One way to look at this is to come up with the Big Number. As a rule of thumb, figure you'll live on 80% of your pre-retirement income when you stop working. So if you make $100,000, that's a retirement income of $80,000. If you assume you have no pension and that you'll collect $20,000 a year from Social Security (get an actual estimate at ssa.gov), the remaining $60,000 will come out of your savings.

The standard financial planning advice is that you can safely withdraw up to 4% of your assets in the first year of retirement. You then increase that amount each year to match inflation. So in this example you'll need to amass $1.5 million by the time you quit ($60,000 divided by 0.04, if you're keeping track at home).

Work up your own Big Number and an annual savings goal with our retirement calculators. You can also use the worksheet to the right to see where you should be by now. Whether you're on target or behind, remember to keep saving. It may seem hard to buy when the market is stumbling, but think of it as a 10%-off sale on stocks you have to buy anyway.

2. Is your portfolio properly diversified?

In just the first weeks of this year, the stock market has slid some 8% and recession talk has reached fever pitch. That's especially worrisome for midlife investors. You've lived through bear markets before - 1987, 1990, 2000-02 - but now you have more money on the line and a tighter portfolio-building schedule to meet.

At times like this, you want to make sure you have a mix you can live with. So check on your investments but don't chicken out. As long as you are properly diversified, you can ride out this market downturn too. Retirement may seem close, but your investing time horizon is still decades long.

While boomers should have a sizable stake in bonds and cash to cushion risk, stocks should continue to be the linchpin of your portfolio. Yes, stocks can often deliver sharp losses, but they remain your best bet for outpacing inflation.

By your late forties, a sound asset mix, according to planners at T. Rowe Price, is 83% stocks and 17% bonds. Gradually shift so that by age 65 you have a 60/40 mix. For maximum diversification, your equity stake should include large-caps, small-caps and foreign stocks. To create your own allocation, use the tools at morningstar.com.

3. Are your investments in the right accounts?

If you've been stashing away money for 15 or 20 years or more, you've probably built up savings in both tax-deferred plans, such as a 401(k) or an IRA, and taxable accounts. Now you need to consider what's called asset location - that is, putting investments that trigger a high annual tax bill in tax-deferred accounts and keeping more tax-efficient ones outside your plans.

A study by Vanguard found that effective asset location can improve your after-tax returns by as much as 10% over 10 years. Investments that throw off a lot of income are tax-inefficient. Prime examples: bond, real estate or high-dividend stock funds. If the payouts are in the form of interest or short-term capital gains, you'll owe taxes at a rate as high as 35% on the money.

Growth stock and index funds are tax-efficient. They tend to generate few short-term payouts, while any long-term gains would typically be taxed at a 15% rate. Municipal bond funds are also low (or no) tax, and the case for owning them is quite strong now

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