In Your 40's? Some Financial TipsSubmitted by Moneywatch Advisors on July 27th, 2018
I refer to those in their 40’s and early 50’s as the “financial sandwich generation.” Many are paying off student loan debt, possibly saving money for children’s education, maybe even helping aging parents – all while trying to save for their own retirement. Talk about a squeeze! Here is some advice to help put a little more jelly on that sandwich.
Prioritize retirement savings over college savings
If you have kids, you love them dearly and would do almost anything to help them. Need a kidney, son? Go ahead, start cutting. So, it’s quite tempting to cut your retirement saving in order to pay or save for college. Don’t. Here’s why – you won’t do your kids any favors if you come up short in retirement and need help from them. Think of it like the flight attendants as they explain the safety procedures on the plane: in the event of a loss of cabin pressure, put on your mask first, then put on your child’s.
We all sacrifice for our children, as we should. This, however, should be an exception as we can borrow for college, but we can’t borrow for retirement. So, rather than decreasing your retirement savings, find those dollars by decreasing expenses somewhere else – easier said than done, I know – or by exploring college loans and additional ways of financing their education. See a longer post on this subject here: https://www.moneywatchadvisors.com/blog/retirement-or-college-which-come...
Buy just enough house
It is soooo tempting to buy that home that matches what everyone in your group of friends is buying. But, guess what, just because they are up to their eyeballs in debt doesn’t mean you have to be. It is natural to assume that someone who has an expensive house is wealthy. Natural, but often incorrect. Wealth is what we have saved and can spend on our future selves – houses and cars don’t count. We had clients last year who, after selling their house faster than they anticipated, signed a contract on a house very quickly and then realized their mistake. They bought more than they needed and probably before really researching neighborhoods too. So, they did the smart thing and extricated themselves from the contract and are renting until they find the right house..at the right price. Remember, just because the bank says we can qualify for a mortgage at a certain level doesn’t mean we have to borrow the max.
Protect your retirement funds
I have a large-hearted friend who raided his retirement savings to fund a vacation to Iceland with a friend who had received a diagnosis of a terminal illness. No, I won’t blame him for that. Sometimes in life we just have to do what we have to do. But, had he asked for my advice prior to the trip I would have suggested considering a home equity line of credit rather than taking from his future self. First, some 401(k)s or 403(b)s don’t allow you to borrow from it so you may pay a 10% penalty imposed by the IRS plus ordinary income taxes on your withdrawal. If your retirement plan does offer loans, however, let’s look at some simple math: 1) If invested properly, one can expect an average annual return of about 7% when averaged over a several years period; 2) The cost of a home equity loan is currently about 4.5% to 5%. Keep the dollars in your retirement plan with the assumed 7% return and take on a small loan for an interest rate lower than that. No, we rarely encourage more debt, but sometimes life interferes with plans and we make the best of the cards we’re dealt. Bottom line: if you have a short-term need, explore options other than taking funds from your retirement plan.
Don’t chase the next Amazon
I could write 15 blog posts on this subject but, suffice it to say, trying to time the market or buying and selling frequently decreases earnings. So, switching your investments after the stock market declines or buying a fund or a stock after CNBC predicted it would be the next Amazon is a good way to drag down the earnings of your overall portfolio. In fact, "Individual investors do not earn market returns," said Jerome Golden, president at Golden Retirement in New York City. "Various studies show that investors do not stay in the market at all times," he said, referring to the widespread habit of bailing out when the market dips and missing the rebound by staying out too long. As a result, typical investors earn 1 percent to 4 percent less than the market average each year, undermining the benefit of compounding — the process by which investment gains increase as a function of length of time in the market.
Prepare a will
No, having a will won’t pave the way to your early demise. But it will prepare your family to move forward with a little less hassle if something should happen to you. It’s no fun to think about, which is why most of us put it off, but it is the responsible and loving thing to do.
While you may not yet have a retirement age in your sights, these tips and others will help you get and stay on the right trajectory toward financial freedom.