Your 40s are a crucial time for smart investing practices. You still have enough time until retirement to build up a healthy nest egg. With several good investment options, it’s relatively simple to take control of your investments during this crucial decade. Your stock and bond funds in your workplace retirement 401(k) plan might be the best investments, but you also need to avoid the worst investment to make in your 40s.
There are many “bad” investments. For example, Roger Wohlner, an independent financial advisor, said that one of the worst investments a person in his 40s could make is choosing “a high-cost annuity product sold to them by an annuity sales person who is more concerned with his own commissions than with doing what is in their client’s best interest.”
Other investing and financial planning professionals list gold, penny stocks and commodity futures as bad investments. But then there are good investments that can become bad if you pursue them at the wrong time. Among all of the so-called “bad” investments, you might be surprised by what is actually the worst investment you could choose if you’re in your 40s.
What Is the Worst Investment to Make in Your 40s?
Investing in your child’s 529 college savings plan instead of your 401(k) or individual retirement account is the worst investing mistake you can make in your 40s. Before you rush to your email to question why I would recommend avoiding this sensible investment vehicle, hear me out.
A 529 plan, in and of itself is not a bad investment. In fact, this tax-advantaged savings plan is designed to facilitate saving for your child’s college expenses. But the many advantages of investing in a 529 plan do not outweigh the need to fund your own retirement. If you can’t afford to invest in both, you must avoid investing in a college 529 plan and invest instead for your own retirement.
To help illustrate exactly how much farther ahead you can come out financially by focusing on retirement investments instead of your kid’s college fund, here are two examples that break down the numbers of how parents can invest their money.
What You Should Do
Consider Tina, she hasn’t started investing yet, but at age 40, she decides to invest for her retirement. From her workplace 401(k) options, Tina chooses the Vanguard Target Date 2040 Fund, which coincides with her retirement age of 65. This fund invests in stock and bond mutual funds and is expected to average a 7 percent annualized return during the next 25 years.
Tina directs 10 percent of her $65,000 salary, or $541.67 per month, to be invested in this fund. Her employer also chips in $270.83 each month to match 5 percent of Tina’s salary. The combined amounts result in a total monthly contribution of $812.50 invested for Tina’s future retirement.
At retirement — assuming the 7 percent annualized return — Tina amassed a healthy $438,792 from her own retirement plan contributions. Meanwhile, her employer’s contributions grew to $219,392 to net Tina a healthy $658,184 retirement pot.
Tina avoids making the investment mistake of investing in a 529 instead of her 401(k). Duane, Tina’s colleague, however, makes the worst retirement mistake for someone in his 40s. Find out what this mistake costs Duane.
What You Shouldn’t Do
Duane, like Tina, is also a 40-year-old parent. He is more worried about his children’s college education than his own retirement and decides to contribute to a 529 plan. He assumes that he can make up the lost retirement investments in later years. Here’s how Duane is making the worst investment mistake he could make in his 40s.
Duane waits to invest for his own retirement until age 50. With only 15 years before his planned retirement age of 65, and assuming the same 7 percent return, he’ll have to invest $1,384.37 per month to reach the $438,792 that Tina had at age 65. That’s a 156% percent greater monthly investment than Tina needed to contribute for the same payoff.
Keep Reading: 28 Retirement Mistakes People Make
Total Cost of Not Investing in a 401(k) in Your 40s
Now let’s look at both Tina and Duane’s total out-of-pocket retirement costs:
Tina contributed a total of $162,500 to earn her $438,792 in comparison with the $249,187 that Duane needed to invest to yield the same amount at retirement.
In order to make the comparisons more similar, let’s throw in a $270.83 employer match for Duane as well. Duane’s employer invests this amount monthly on Duane’s behalf from age 50 to age 65. At age 65, Duane’s employer contributions grew to a respectable $85,843. When added to his own retirement investment pot of $438,792, he has $524,635 in comparison with Tina’s $658,184 retirement nest egg.
By investing in a 529 education account for 10 years during his 40s instead of his 401(k), Duane forfeits $133,549 for his own retirement. In addition to having less money for retirement, it cost Duane an additional $86,687 in contributions.
The total cost of this bad financial investment decision: Duane is $220,236 worse off than Tina for choosing to invest in the 529 during his 40s instead of saving for retirement.
|What 10 Years of Waiting Costs You|
|Same Total Saved With Interest: $438,792||Tina||Duane|
|Age Started Saving||40||50|
|Years Spent Saving||25||15|
|Total Contributed to 401(k)||$162,500||$249,187|
Your child has many options to help pay for college, but you can never get back the compound interest you lose when delaying retirement savings. Additionally, you have no one but yourself to depend on in retirement, and that is why you must prioritize saving for your future first.
How to Avoid Making This Investing Mistake
To avoid the mistake of saving for your child’s education instead of your own retirement, be aware of your and your children’s options. If you’re not yet in your 40s, start saving and investing now. The earlier you begin investing, the more time your money has to grow and compound. If you begin investing a small amount for both retirement and your children’s college fund, you can save less for greater long-term payoffs.
If you can’t afford to pay for college and retirement at the same time, then it’s important to choose retirement. Although you might want to save first for Junior’s college fund, there are many ways to pay for college, including loans, part-time work, grants and scholarships. You can’t fund your retirement with debt or a scholarship.
According to Money magazine, financial advisors and authors such as William Bernstein and Rick Ferri recommend that parents save in the following order:
- Invest in your company’s 401(k) plan at least up to the amount necessary to receive the employer match.
- Pay off high-interest debt.
- Save up an emergency fund of several months’ worth of income.
- Invest in a 529 plan.
Investing in Your 40s: The Biggest Takeaway
Investing in and saving for your retirement using 401(k) or similar IRA vehicles needs to be your first priority in your 40s. Any delay in building up retirement savings when you’re in your 40s can cost you a lot of money while you’re still working and during your retirement. Because many people in their 40s have children approaching college age, turning focus away from retirement to save for college tuition and related costs can seem like the “right” thing to do, especially if you haven’t saved enough — or anything — for either. Don’t be swayed by panic.
If you don’t have enough money to retire, your entire family can be affected financially. In your 40s, you have fewer retirement planning options and less time to save than your children have options for paying for college. Time is a key factor in how much money you’ll have in retirement, and if you sacrifice this advantage, your golden years might not be as comfortable as you’d like.
Keep Reading: What to Do When Your Job Offers an Awful Retirement Plan