Your 40s are a pivotal stage in your financial journey. On the one hand, you can look forward to another two (or more) decades of income from working. You probably have more self-awareness about your money style. However, by this age, you may also find yourself juggling a lot from planning for retirement to paying off a home mortgage. Maybe lifestyle creep and credit card debt have gotten the better of you.
Additionally, your own financial needs might increasingly be sandwiched between the prospect of sending children to college and caring for elderly parents. It’s essential to navigate this stage wisely to secure your financial future. In this article, we’ll explore seven financial pitfalls of your 40s and how to avoid or alleviate them.
Neglecting Retirement Planning
Fewer than half of people aged 35-54 have even tried to calculate how much money they will need to live comfortably in retirement, and Gen X is the least prepared for retirement, according to the Employee Benefit Research Institute (EBRI). Heather Courtney Quinn, ChFC, of Fortuna Wealth Management said some people “believe they will start planning for retirement once they arrive at a certain level of success, and the truth is that the time value of money and compounding is integral to building wealth.”
As the U.S. population ages, so do individual needs. “Life expectancies are pushing further out, which means our retirement life can be almost as long as our working life,” said Quinn.
Even those getting a late start can begin saving for retirement now and readjust input as needed to take full advantage of employer-sponsored plans. If you have been saving for years, avoid the temptation to withdraw money prematurely, as it can lead to penalties and taxes. Prioritize your long-term financial security over making home improvements or paying for kids’ college. The magic of retirement savings happens over the long haul.
Underestimating Emergency Funds
Without an emergency fund, unexpected expenses can derail your financial stability. Even if you’ve had an emergency fund set aside for years, as your budget has grown it may not be enough to cover your current needs. Reevaluate your expenses and aim to have at least three to six months’ worth of living expenses in an easily accessible savings account. One easy way to do this is to funnel any work bonuses directly into the fund.
Managing Elderly Parent Costs
Providing care for aging parents can strain your finances as well as your emotional resources. Work with your family members to understand their financial situation and create a budget for caregiving expenses in different scenarios. Don’t forget to explore government assistance programs, like the National Council on Aging, which has a helpful Benefits Checkup tool. Unions and guilds sometimes offer retiree benefits and services as well.
Neglecting to Prepare for Health Challenges
Health issues can arise as you age, derailing the quality of life you’ve been working to maintain for years and causing added financial burdens. Pew Research Center found that almost a quarter of people 65 and up report having a disability, and that percentage rises to 46% at the age of 75. Invest in comprehensive health insurance, disability insurance, and consider long-term care insurance to protect your assets. Do not underestimate the importance of health coverage in safeguarding your financial well-being.
Failing to diversify your investments can result in significant losses. Quinn notes that some investors don’t seem to employ any strategy.
“They pick a few random stocks that they like, or they are holding only one out of the nine major asset classes in their portfolio,” she said. You’re not alone if you don’t know how to properly manage or diversify investments. You’re probably not aware of your biases and shortsightedness about your money. This is where a professional can add value to your plan and become a strategic partner in meeting your goals.
Accumulating Consumer Debt
As your budget has grown and you’ve grown accustomed to comforts, your debt may have grown too. It is always a good time to evaluate your high-interest consumer debt. Credit card debt in the U.S. has risen steadily for over ten years and just hit an all-time high of over $1 trillion, according to the Federal Reserve Bank of New York. Prioritize paying off consumer debt as soon as possible and revamp your budget to manage spending.
Ignoring Additional Income Streams
Most college-educated workers enjoy steady pay growth through their 20s and 30s, but for women, growth levels off at 40, while men enjoy it well into their early 50s CNBC reported.
In your 40s, relying solely on your primary job can limit financial growth. Explore side hustles or part-time jobs to supplement your income. The extra money can accelerate your savings and help achieve your financial goals sooner.
To ensure a secure future, avoid these common money traps by taking proactive steps such as saving for retirement, managing your investments wisely, and planning for emergency needs and caregiving responsibilities.
Make it a habit to seek advice from financial experts and stay informed about the best money moves to make for midlife stability and growth. Doing these things will set you on the right path to financial success for decades to come.
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