Your 40s represent the midpoint in your working lifetime, and they're some of the most important years for your long-term financial well-being and your ability to retire comfortably. Because of this, it's important to avoid certain mistakes that could hurt your retirement plans that you've been working so hard toward.
Here are three of the biggest mistakes to avoid, as explained by our experts.
George Budwell: The allure of trying to buy shares in the next Tesla Motors can be overwhelming for retail investors, especially those playing catch-up in their later years. For those new to this story, Tesla Motors' stock rose by nearly 770% in less than five years (2010-2015), and even topped 1,100% at its peak last year.
Unfortunately, I have borne witness to several cases where individuals chase highly speculative stocks like Tesla -- even taking out second mortgages to do so -- only to end up in bankruptcy court. That's not a place you want to be in your 40s.
At the end of the day, the cold, hard truth is that hitting a home run on an emerging new technology is an extremely rare feat, and most investors trying to catch lightening in a bottle typically lose most, if not all, of their capital in the process.
To illustrate this point, one only has to look at the sizable number of investors who got caught up in the renewable energy craze upon President Obama's first election, and consider what has happened to the vast majority of solar stocks since then.
Although First Solar managed to stay afloat while the industry at large crashed, its shares have still dropped a staggering 70% since 2008. And the poor souls who decided to chase Chinese solar stocks fared even worse, as most of these companies have either gone belly-up or lost over two-thirds of their value in the last few years.
If there is a time in your life to swing for the fences, so to speak, it's certainly not in your 40s, when you should start rotating into relatively safe investing vehicles that will fulfill your long-term retirement needs.
Matt Frankel: One money mistake too many people make in their 40s is borrowing from their 401(k) accounts in order to cover large expenses. This is almost always a bad idea, as you can set your retirement savings back by more than you think.
Let's say you're 40 and you have $70,000 in your 401(k) and are contributing $5,000 per year. You decide to borrow $30,000 from your account. If your plan requires you to pay yourself back over six years at 3% interest, at first glance, this may sound like a great deal. After all, you couldn't get that kind of interest rate from a bank.
However, the real issue is the missed opportunity that comes from five years of not having your money invested and working for you. Sure, you're paying yourself back "with interest," but is a 3% return on your investments really what you want? And, many plans charge even less interest than that. Over the past 20 years, the S&P 500 has averaged total returns of 9.5% per year, so accepting such a low return on your 401(k) dollars, even for a few years, can really make a difference.
In addition to paying yourself back the principal and interest, that $30,000 loan can cost you more than $55,000 in retirement savings thanks to the missed investment returns, assuming you want to retire at 65. You'd be better off borrowing the money you need elsewhere and leaving your savings invested and working for you.
Jason Hall: With mortgage rates still well below historical averages, refinancing your mortgage can be smart, especially if it will reduce how much total interest you'll pay.
However, home values have rebounded in a lot of places, and when combined with low interest rates, the circumstances could lead you to make a big mistake if you take cash out.
Don't get me wrong: There are scenarios where this makes sense, like if you have a significant amount of high-interest debt, and it will -- again, this is the key point -- mean you spend less money on interest paying off that debt. But it's not a simple matter of a lower interest rate on your mortgage meaning you'll pay less.
Every dollar in equity that you cash out today will take years to gain back, as the majority of your early payments will go toward interest, not principal. If you're considering taking cash to pay other debts, look at the total dollars over the term, not just the rates.
Most importantly, if you refinance with a 30-year mortgage at 45, you'll be making that payment well into your retirement, when your income will almost surely be less than today, and your capability to find new income will be at its most limited.
Don't forget a lesson millions learned the hard way just a few years ago: Your home isn't a piggy bank. It's a durable asset that can provide a measure of safety in later years. Don't turn it into an albatross.
