The saying “stuck in the middle” is not only a commonly heard phrase among those in their 40s, but it also accurately describes the sandwich generation – middle-aged individuals who are responsible for both their children and their parents. Some are still paying off their own college debts while planning for their children’s education. Others are trying to maximize their retirement savings while also helping their parents financially.
It’s a delicate balance that can easily result in missteps. According to financial advisors, here are seven common financial mistakes people in their 40s make, and how to avoid them.
1. Not understanding your cash flow
In this potentially turbulent decade, Cristina Guglielmetti, CFP and president of Future Perfect Planning, encourages her clients to focus on things they can control – and that does not include the stock market or federal interest rates. Understanding their expenses is crucial.
She suggests conducting a cash flow analysis over a two-year period to identify seasonal fluctuations (such as bonuses or summer camp expenses for kids). Distinguishing between fixed costs like housing and recurring expenses such as gym memberships and groceries is also important.
This analysis helps to reveal disposable income and facilitates discussions on how to best utilize those funds. Guglielmetti emphasizes, “It’s not about eliminating expenses, but rather understanding your current financial reality. Is your money serving you? Is it aligned with your values and goals?”
2. Failing to plan for and adjust as circumstances change
As clients contemplate how to achieve their savings targets, Guglielmetti advises them to look for turning points. Families with young children may reach a stage where they no longer have childcare expenses. Individuals in their 40s may receive a salary raise. These moments present opportunities to adjust budgets, expenses, and income, thus allowing for better financial redirection.
For instance, some clients may decide to postpone retirement contributions due to current cash flow concerns. However, this may lead to insufficient retirement funds in the long run. Guglielmetti suggests establishing a threshold such as age or income level to prompt a change in financial strategy. She adds, “Once money starts coming in, there should be automation and systems in place with a clear income capture plan.”
3. Putting all your retirement eggs in one basket
Carleton McHenry, CFP and founder of McHenry Capital, advises his clients to diversify their savings, particularly in their 40s when small changes can have significant impacts by the time retirement rolls around. “I advocate for having money spread across various investment vehicles – tax-deferred, traditional qualified retirement plans, tax-free plans. Individuals in their 40s still have a long runway ahead of them. Having funds in tax-free assets can prove advantageous in the future,” he explains.
Once diversified investments are in place, the key is to exercise patience. Guglielmetti recommends ignoring market fluctuations and focusing on long-term investment goals. She emphasizes, “Tune out the noise if you’re investing for the long haul. Market volatility can be rational or irrational at times.”
4. Falling into the trap of lifestyle creep
McHenry notes that individuals in their 40s often hit their stride in their careers, resulting in increased earnings. However, the desire to keep up with peers in terms of lifestyle choices can lead to higher expenses. “They may move to a new neighborhood, see a neighbor buying a new electric vehicle, and feel compelled to do the same,” McHenry observes. “They start purchasing luxury items like boats or recreational vehicles, or may even buy a larger home. Consequently, their expenses increase significantly compared to before.”
Over time, this can result in debt or inadequate savings. McHenry suggests prioritizing savings and then determining the optimal utilization of discretionary income.
5. Not considering the future, now
This tendency is particularly common among women. Women have a longer life expectancy than men – 79 years compared to 73 years. Whether single or partnered, women can anticipate needing more savings due to longer years of self-care.
Despite requiring larger retirement and emergency funds, women often spend more time out of the workforce caring for children than men. This absence from paid work means women miss out on income, employer-supported retirement benefits, and Social Security contributions.
These factors can significantly impact women’s financial preparedness for retirement. Guglielmetti recommends two proactive measures. Firstly, if women are in a relationship, they should ensure their partner has sufficient life insurance coverage. Secondly, if a woman decides to stay at home, the household should account for the non-working partner’s retirement savings contributions. This advice is relevant for partners of any gender as well.
6. Not tapping into disability insurance
Disability insurance policies protect individuals against income loss in case they are unable to work due to a disability. Many people have a basic policy provided by their employer. However, as McHenry highlights, these group insurance policies often have restrictions on coverage amounts, monthly benefits, or may have delays in payouts. He recommends investing in a private disability policy to safeguard income during prime earning years. Additionally, “If you have your own disability insurance policy, it’s portable. You can take it with you,” McHenry points out.
7. Compromising your future for children or parents
McHenry identifies retirement and funding children’s college education without accruing debt as the top financial challenges faced by his clients. In some cases, people in their 40s dip into their retirement savings to assist financially unprepared parents. Although there are no easy solutions, McHenry discourages jeopardizing one’s retirement plans to support parents financially. He recommends exploring alternative strategies that do not involve using retirement funds.
He also stresses that there are numerous ways to finance college education, including merit-based aid for students. McHenry advises shopping around and negotiating. “There are plenty of options available. Unless you’re eyeing elite institutions, many other colleges would be delighted to admit your child,” he states. “Avoid overspending by focusing on the schools that interest your child and exploring financial aid opportunities.”
