5 Financial Mistakes to Avoid in Your 40s

Oct 20, 2014

Aside from the gray hair, mid-life crisis, and teenager drama, your 40s are some of the best years of your life! Why? According to PayScale.com, that’s when men and women reach their peak earnings potential. But, as rapper, Biggie Smalls, once told us, Mo’ Money, Mo’ Problems.

As incomes can be higher than ever, so can expenses. Your growing family has led you to a bigger house, bigger car, and bigger debt repayments. Whether good or bad, the decisions in your 40s can define your retirement picture. Let’s count down the top five financial mistakes to avoid in your 40s!

Mistake #5: Saving for Kid’s College over Your Own Retirement

Always remember, you can borrow for college, but you can not borrow for retirement. Ideally, you should start saving for your children’s college educations when you are in your 20s and 30s. If you didn’t, sacrificing your own retirement savings, during peak earnings years, is not the right answer. Best advice: Implement your recommended annual retirement saving strategy; be frugal; and then save excess cash flow towards college education. A little college savings is better than nothing.

Mistake #4: Using Your 401(k) like an Emergency Fund

Believe it or not, in 2013, more than 30% of people in their 40s cashed out their 401(k)s after changing jobs, according to Bloomberg. If you withdraw $50,000 from your 401(k) and repay it with interest over the next 5 years, don’t fool yourself into thinking you will make yourself whole. You can never make up the lost compounding or the potentially higher investment returns on your 401(k) investments. When investing in the stock market, time is the most powerful tool. Losing time will likely mean less money and fewer choices during retirement.

Mistake #3: Getting Too Conservative Too Soon

Too often people become too conservative with their portfolio, too soon. Your investment asset allocation should be based on your time horizon, financial goals, and appropriate risk profile. While in your 40s, you have a long-term investing horizon since you have almost twenty years before being able to access your retirement funds without penalties. Plus, if you live to be age 90, you could have almost 50 years of life to fund. Your investment portfolio needs to focus on long-term growth to achieve a comfortable lifestyle in retirement. For most people, at retirement, a moderate asset allocation of 50% stocks can be appropriate. However, only under rare circumstances is it appropriate for an individual in their 40s. Stick with your long-term investment plan and don’t try to time the market.

Mistake #2: Saving Like You’re Broke!

When in our 20s, we all had reasonable excuses regarding why we were only contributing the amount required to get the full employer match into our 401(k)s. The reality is that saving 4% of your income on a pre-tax basis is not going to cut it! As your income has grown over the years, your lifestyle has most likely grown with it. It is easy to increase your standard of living, but very difficult to revert back to your old frugal ways. With your income high, this is a perfect time to get back to a budget. Start by reviewing your family expenses. A few changes to your monthly dining out and shopping budget may free up another 5% to10% of pre-tax income to be earmarked for retirement. In your 40s, you should be maximizing your contributions to retirement plans.

Mistake #1: Not Planning for Contingencies

It would be nice if everything worked out the way we planned. Unfortunately, it doesn’t for everyone. That’s why it is important to plan for the unexpected. If you become disabled and can’t work, how will the bills get paid; college savings set aside; or your spouse’s needs met? What if you die prematurely? Owning the proper amount of disability and life insurance is key to ensuring your family is financially secure if misfortune strikes. In addition, if you have put off writing a will and other estate planning matters, now is the time to do it. Don’t delay. No one knows your wishes but you. Plus, no one wants children or other family members in disagreement over your desires upon your death. By working with an estate attorney, your wishes can be properly executed.


While every decade is important, take advantage of your peak earning years to right a ship that may have gotten off course during your 20s and 30s. You still have time to change Biggie Smalls’ prediction. More money handled appropriately can mean more opportunities and more financial security for your family.

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