Are you like me and in your 40’s? Are you preparing for your retirement to happen in the next 20-25 years? If so you are like many people who find themselves in this pivotal decade for workers and families. If you follow me on Twitter or Facebook in the past few weeks I have posted money mistakes that people make in their 20’s and 30’s but I felt compelled to write something for those who are in their 40’s mainly because I am 42 and I know many people who are in the same shape as I am. In your 20’s and 30’s you are able to save in different manners and spend in different ways. In your 20’s chances are you are just starting your career and not making much in the way of an annual salary. In your 30’s you may be making more at work, settling down and starting a family, and maybe buying a first house. Your 40’s are a transition decade that sees you going after more possessions and you are entering the earnings apex of your career. The following are some common mistakes that people make in their 40’s that you can avoid with some proper planning and a common sense approach.
Many people and couples who are in their 40’s may feel that they have outgrown their smaller starter house and have the urge to super-size to a new larger house. Here I am not telling you not to buy the larger house but rather if you do opt to buy a bigger home do not buy one that is too big or out of your comfort zone as far as price and mortgage payments. The reason I advise you to not buy too big is because in many instances when you do retire and the children are out of the house people have the urge to then have the urge to then downsize their homes. Also many times when people upgrade their homes in their 40’s they do so at the expense of college savings if they have children and in many instances at the expense of their retirement accounts. It is never wise to sacrifice your retirement accounts for any reason at this point in your life. But if you are dead set on getting a larger house buy one that is a minimum of what you think you need and do not go for the biggest house in the neighborhood or on the street. Modest homes that accomplish your needs is all that is really needed and excess is a waste at this point.
Just as with the house it is not wise to put your children’s college education expenses ahead of your own retirement. The best thing to do is put some money in a 529 plan when you are young and first married in your 20’s or 30’s along with funding your retirement accounts. Then let time and compounding of interest and earnings work in your favor for both accounts. But if you are like many people and have not started saving for your children’s college until your 40’s it is never wise to save for their expenses at the risk of your retirement savings. Always pay yourself first in the way of retirement accounts and if there are funds left then use them to fund a 529 plan for your children. And 529 plans can have anyone contribute to them not just you as the parents. And it makes more sense to have your children take a greater responsibility for their education as they will have a much longer period of time to repay loans while they are younger and working. But it is important that they also save for their retirement at the same time just as it was for you when you started out in your career. And never overlook scholarships, grants, and having your children work while in college to help cover the expenses.
When you reach your 40’s it is important that you no longer are saving like you did in your 20’s and 30’s. You are now technically within 20-25 years of retirement and you need to step up your savings in such a manner that will allow you to retire in a manner in which you are comfortable. When you are younger you can save a little less because you have time on your side and the longer the money is saved in a retirement account the more it will grow. Compounding is really a true wonder of the world. In your 40’s the money you save will have a shorter period of time to grow so you have to save more to accomplish the same result. The goal when you are younger is to save 10% of your salary for retirement and that percentage needs to increase as you get older. Try living on the same as you did before as your salary grows and save the difference.
Another problem that goes along with the savings is how you invest your funds. Most people in their 40’s are investing in a manner that is more conservative than is practical. Now I am not saving to invest outside your risk tolerance level or in a manner that is not prudent or safe. But as we are living longer in retirement we need to invest in a manner that will allow for our funds to continue to appreciate and allow for capital appreciation of our assets. In past generations people retired and could expect to spend 15-20 years in retirement prior to their deaths. Now people are living much longer and your retirement funds may need to last 30-35 years or longer. Find a happy medium for your risks and rewards when it comes to your retirement accounts to ensure that your funds to run out prior to your death. In today’s world of financial instruments there are several options for people to choose from that will allow them to achieve their financial goals and ensure you do not run out of money in your retirement years.
Now that you are in your 40’s chances are you are married, have children, and have bought a house. There is no reason to now avoid the inevitable which is your death. In order to ensure your wishes are carried out and to protect your family it is imperative that you draft a will. Better yet if you are married you and your spouse both need to have this vital document done to protect each other and your children if you have any. Also this is a good time to make sure your insurance is at an adequate level to protect your family in the event you die prematurely. And for those who are really on top of their game go all in and see a professional and develop an estate plan to protect your family and all of your assets. And never overlook the use of a power of attorney for medical and financial purposes in the event you become incapacitated.
If at all possible avoid tapping into 401(k) loans and home equity lines of credit in your 40’s. Many people are changing careers in their 40’s and if you have an outstanding 401(k) loan you must repay it in a short amount of time or face penalties and taxes on the outstanding balance of the loan. And if you are laid off the same applies. As for home equity loans you are placing your home at risk if you cannot repay the loan for any reason. 401(k) loans also affect your earning power as you are taking funds out of your account and this potentially will have a negative impact on your long term value. Again if possible avoid both of these loans and do not use them as a piggy bank.
Your 40’s are a pivotal decade as far as family and retirement. Avoid these traps and you can make the most out of your hard work up to this point. But do not stop here consult a professional and see what changes you may need to make to ensure you have a dream retirement. If you have any questions or concerns please do not hesitate to contact me and I will do my best to help you.
