Keeping a Midlife Crisis from Ruining Your Retirement Plan

Keeping a Midlife Crisis from Ruining Your Retirement Plan

It’s easy to make fun of a midlife crisis — especially if it’s someone else’s.

As shown in movies and on TV, the stereotype is familiar: a middle-aged man becomes mentally disturbed when he turns 40 and leaves his wife for a younger woman and a sports car. Is. Or maybe just the car.

However, in real life, midlife crises are rarely so obvious or dramatic, or the sole province of men. Milestones like a 40th or 50th birthday, or becoming an empty nester, can create uncertainty about your life and your future. And this uncertainty can affect the way you spend.

“Emotions drive behavior,” said nathan astle, a financial therapist in Kansas City, Mo. If you feel dissatisfied with your life, you can buy a new wardrobe or spend on cosmetic procedures. Or if you’re looking for excitement, you can spend money on big-ticket items like travel or expensive alcohol.

Of course, there’s nothing wrong with the occasional gift, especially if you budget for the expense. The problem is that as retirement becomes more real, a midlife crisis may occur. Experts say if you’re going to treat yourself, you should also make sure your retirement savings and investments are on track.

When it comes to investing, timing is more important than “timing” ashley agnew, a financial therapist. In other words, saving for retirement early in life makes more sense than entering the market when stock prices are low and exiting when they are high.

For example, with a 6 percent return, investing $5,000 each year (for 40 years) will grow to more than $800,000 by the time you’re 65, Ms. Agnew said. But if you invest the same amount for 30 years, you’ll have $400,000.

As the path to retirement grows shorter, there is less time to save. “Short-term thinking can have long-term implications,” Ms Agnew said.

Marty AwadA financial advisor in Denver said signs that a midlife crisis may be in full swing include taking money out of your 401(k) or individual retirement account, or borrowing against your home for purchases that aren’t needed. Are. Racking up credit card debt or hiding purchases from loved ones are also warning signs.

But because shopping often improves mood (even temporarily), spending isn’t seen as a problem — it’s seen as a solution, Mr. Astle said. That’s why it’s important to have a plan before a problem arises. To prevent a midlife crisis from derailing your financial goals, consider these safeguards.

If you are fortunate enough to be employed continuously for several years, income generally increases with age and experience.

A 2022 survey The survey, conducted by the U.S. Census Bureau, found that the median household income of 45 to 54 year olds was $101,500 per year, while the median household income of 25 to 34 year olds was $80,240.

“Typically, people enter their highest earning years in their 40s and 50s,” said Paco De Leon, author of the book “Finance for the People.” With more income, you may be able to afford more expensive restaurants, luxurious vacations, or a bigger home.

However, buying these things can lead to a phenomenon called lifestyle creep, which occurs when your expenses outpace your income.

“It’s a slippery slope,” Ms. De Leon said. For example, if you earn $80,000 a year and get a 3 percent pay raise, some extra expenses like dinners out and weekend vacations — not to mention inflation — can quickly eat up your extra money.

Ms De Leon warned that even a one-time extravagance could be dangerous. For example, if you buy designer shoes, you may decide that your wardrobe looks dull. Or if you order a hand-knotted rug, your Ikea furniture may look dated. This mindset can make former luxuries seem like necessities, causing you to overspend.

To prevent lifestyle degradation, try setting financial limits. For example, if your salary increases, invest the extra income in your retirement account. If that’s not possible, try following a common financial advice, which is to put 20 percent of your growth into savings. And if you get an annual bonus, spend a small amount of it, and invest the rest, Ms. de Leon advised.

The midlife crisis can highlight a “here and now” mentality about money, Ms. Agnew said. And it can make you more vulnerable to impulsive spending.

To prevent this, Ms. De Leon recommends creating what she calls a shopping list. That said, write down whatever you want and imagine you’re buying the stuff.

Like scrolling through social media or drinking wine, shopping provides a dopamine rush, However, shopping lists can trick your brain into thinking you’ve spent the money, while providing the same reward, she said.

If two weeks go by and you still want the item, think about the downsides before doing anything. Ms. De Leon suggests answering this question: “Will this put me in a more vulnerable position financially?”

Just like eating too much won’t lead to instant weight gain, spending a little extra won’t immediately hurt your bank account – but it’s important to calculate the long-term cost.

For example, participating with an extra $50 each week adds up to $200 by the end of the month. If you’re a decade away from retirement and maintain that pace, you’ll have spent $24,000 by the time you retire.

As we age, unexpected expenses can increase. Health care costs may increase and caring for sick family members may come with a greater financial burden. When saving for retirement, don’t forget to take these potential costs into account, Ms. De Leon said.

If you’re considering a big expense, such as a dream vacation on an important birthday, Ms. Awad suggests reviewing your retirement planning first. Financial planners have software that can run “stress tests” to analyze the impact of purchases, he said.

A stress test runs different return scenarios, Ms. Awad said, revealing the inherent risk in your financial choices. Looking at the range of potential returns can help you determine whether your nest egg can withstand the expense.

Financial mishaps can be embarrassing, preventing you from taking action. “Shame is the enemy of change,” Mr. Astle said. So, if you’ve overspent, don’t be afraid to ask for help.

For example, if stress has fueled your wasteful spending, a financial therapist can teach you healthy ways to handle your emotions. Being able to name your feelings can help you respond differently, she said.

If withdrawing money from your 401(k) hurts your financial health, meeting with a fee-only financial planner can help you get back on track. And if you’ve racked up credit card debt, a professional can come up with a plan to help you pay it off. If you need low-cost or free credit counseling or budget management, there are resources available here Financial Counseling Association of America And this National Foundation for Credit Counseling, The Foundation offers free courses.

Even if your savings have been affected, the consequences of money missteps are rarely fixed. “Taking small steps to correct your mistakes goes a long way,” Mr Astle said.

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