You’ve graduated from college, gotten through your first couple of jobs, and now you’re moving ahead with a stable position and a promising career. Perhaps you are married, have kids and own a house. Or perhaps you are single with a great career and lifestyle. Don’t look now but you are also 40.
Presumably, you’ve gotten into the habit of saving for retirement starting with your first job. And you’ve been saving diligently in your employer’s 401k or similar retirement plan ever since. But unplanned expenses, or even day-to-day expenditures, have made you feel squeezed. Maybe you’re thinking that tapping your retirement nest egg isn’t such a bad deal since you still have decades until your retirement.
Consider these 15 ways that 40-year-olds blow through their retirement — and then do the opposite.
1. Using Retirement Funds as an ATM
Financial planner Katie Brewer of the firm Your Richest Life offered this advice: “If a new larger house requires that you raid your 401k funds, then you should be saving up for it out of your cash flow instead of raiding your long-term retirement investments. You know you shouldn’t be doing this but a lot of people rationalize it and do it anyway.”
At this age, you might be feeling more established and your children are getting older. It is important to avoid the temptation to buy a bigger home or a nicer car or anything else than you can’t afford without tapping your retirement plan.
2. Not Having Emergency Funds
Financial experts advise adults of all ages to save at least six months’ worth of living expenses in an emergency fund. This way, if an unexpected event occurs, you would have the funds already reserved rather than having to raid your retirement plan or other investments.
3. Taking Out a 401k Loan
Ryan Guina, founder of the site Cash Money Life, called 401k loans terrible because “individuals lose out on market movements” and “they usually cannot make new contributions while the loan balance is outstanding.”
In addition, he said, workers who leave their jobs are usually required to pay the full balance of the loan within 60 days; otherwise, they will face hefty taxes and early withdrawal penalties.
Unless you’re facing a dire emergency, avoid 401k loans if at all possible.
4. Not Getting Full Employer Matching Contributions
Saving enough in your 401k plan to get the full employer matching contribution is a no-brainer. If you’re 40 and you can’t afford to contribute enough to your retirement plan to get the full match, then take a hard look at your spending habits and make adjustments.
Taking advantage of the full employer match is like getting free money added to your retirement account, Guina said. “This is a part of your compensation package and should always be utilized to the fullest extent.”
5. Contributing Only Enough to Get the Match
Stashing an amount of money into your retirement account to get the full employer match is good — but it’s not enough if that’s all you’re doing.
Brewer, whose practice focuses on Gen Y and Gen X clients, said people often overlook the actual amount they need to save in order to live comfortably in retirement.
“If the only money that you’re putting into your retirement accounts is the amount that it takes to get your employer match, you are not putting enough in,” she said. “One of the most important areas of a retirement strategy is knowing how much you need to be putting aside to be able to retire when you want and with the amount of income that you need. Make sure you know your numbers.”
6. Day Trading Your Company Stock
Brewer cautioned workers against day trading using the company stock in their 401k plan. Day trading is the practice of buying and selling a stock within the same day in an attempt to profit from small price movements in highly liquid stocks or indexes.
“While it may seem tempting to trade your company stock in your 401k plan, it is not the best investment strategy,” she said. “In fact, some employers have cracked down on this by implementing new rules around how frequently you can buy or sell your company stock fund in your retirement plan.”
7. Investing Too Heavily in Company Stock
With many years left until retirement, 40-year-olds might be tempted to take advantage of any opportunity to sock money away into their company’s stock, such as through the 401k or discount share programs that some companies offer to their employees.
No matter how solid you believe your employer might be, or how well the stock has performed, keep your allocation reasonable. Remember Enron? Tying too much of your retirement portfolio to the company that provides your livelihood is a recipe for financial ruin if the company should tank.
Related: 5 Stocks to Buy Before Christmas
8. Ignoring Your Asset Allocation
Many 40-year-olds are busy building their careers and tending to a growing family. But ignoring their investment portfolios can hurt their ability to grow their nest eggs.
“It’s not a good idea to day trade within your retirement portfolio but you shouldn’t be completely hands off either,” Guina said. “You should periodically go into your accounts and rebalance them to make sure you are taking profits off the table where it makes sense. This also helps your portfolio weather market changes more easily.”
Investors should pay attention to how their money is allocated and invested. Hire a financial advisor if need be.
9. Taking Too Much or Too Little Risk
A 40-year-old is years away from retirement, so investing for growth in order to enable a retirement nest egg to grow is essential. As with investors at any age, however, 40-year-olds need to invest appropriately for their age and time horizon.
Taking excessive risk could cause big losses and workers don’t want to start over in their retirement savings mid-career. Likewise, taking too little investing risk will undoubtedly cause them to come up short in their retirement savings. The best solution is to have a plan for your investments and adjust that plan over the years as you age or as your situation changes.
10. Basing Your Retirement Mix on Coworkers
Brewer said that investors should avoid asking their colleagues for investment advice and instead stick to financial professionals.
“Asking your co-workers about their investment mix is like asking your friend for tax advice when they work in marketing,” she said. “Your co-workers may have a different timeline and tolerance for risk. They may not be qualified to give you advice on the investments or how they fit into your particular situation,” she said.
By age 40, people should have a financial plan that includes an investment strategy.
11. Forgetting Old Retirement Accounts
By the time you are 40, you might have already switched jobs several times and the likelihood is that you will do so again during your career. It is important that you make a decision about what to do with your old 401k and other retirement accounts when leaving a job.
Allowing these accounts to just sit neglected will likely cause you to miss out on investment growth you might have otherwise enjoyed by investing these accounts as part of an overall investment strategy.
12. Cashing Out Your Plan
As you leave one job for another, you might think that a 401k with a few thousand dollars isn’t worth rolling over. So you just cash it out. This mistake can be costly. First, the money will be taxed, and you will pay a 10 percent penalty on top of that tax.
Secondly, this money will not have the chance to grow and help in your retirement savings efforts. Even relatively small accounts can grow to be part of a retirement nest egg.
13. Having Inadequate Life Insurance
Life insurance helps surviving spouses ensure that their retirement savings remain intact. Many 40-year-olds might be married and supporting spouses who stay at home to care for their children.
If the primary breadwinner dies, then life insurance can help the surviving spouse fund his or her retirement and make up for the lost retirement savings from the deceased spouse.
14. Not Having Disability Coverage
Bad things happen to good people, and one of those things could be an illness or injury that leaves you unable to work. Disability insurance enables you to maintain your lifestyle if such an event occurred. Policies and coverage options vary. Generally, payments are a percentage of your former earnings; 60 percent is a common figure.
Disability payments can help keep you and your family from having to dip into retirement savings to pay for basic living expenses.
15. Saving for College Instead of Retirement
Surely you want the best for your children, and the cost of college seems daunting. It is a mistake, however, for 40-year-olds and others, to save for their kid’s education ahead of their own retirement. There are many ways to fund college costs, but you only get one shot at retirement. Besides, your kids will thank you for not being a burden to them when you retire.
By the time you turn 40, you should be in mid-career, and your retirement savings should be in high gear. Don’t undermine your retirement security by making these mistakes.