How to Master Your 401k in Your 40s

Once you hit your 40s, you’re approximately halfway through your working years. By this time, you’re likely well-established in your career and hopefully earning a good salary. In terms of lifestyle, you might be married and possibly have kids who are reaching their teens. Expenses can get high during this time in your life.

On the other hand, retirement is only about 20 years away. That means it’s time to get serious about saving for it if you’re behind, and time to keep up the momentum if you’re on track.

A study by Fidelity showed that by the time you’re 45, you should have three times your annual salary saved for retirement:

• For someone earning $50,000 annually, this equates to $150,000
• For someone earning $100,000, this equates to $300,000
• For someone earning $250,000, this equates to $750,000

These are just benchmarks. But if you find yourself falling short of these numbers, it’s time to get going. Find out what you need to do to master your 401k in your 40s.

If you haven’t done much saving for retirement yet, this is the time to ramp it up. In your 40s, you are still young enough to get on track, and you are hopefully earning a decent salary at this point in your career.

“If you find that you haven’t been saving enough in your 20s and 30s, now is the time to hit the accelerator on retirement savings,” said John McCarthy, CPA of McCarthy Financial Planning. “It can be tough to allocate more money to savings in your 40s, especially for families where college costs are right around the corner. Make sure that you aren’t sacrificing your retirement for college costs. There are always student loans for the kids, but there is no loan for your retirement.”

Too often, parents sacrifice their own retirement for the sake of their children’s college educations. But your children will be more likely to thank you for saving enough for your retirement so they don’t have to support you in your old age.

In your 40s, lifestyle can “crowd out” your ability to save. It’s important to ensure that you allocate enough toward retirement savings to meet your goals.

“If you having difficulty squeezing in additional retirement savings, take a hard look at your spending habits,” said McCarthy. “For every $100 per month extra that you save, you could have $87,000 more at retirement after 25 years of compounded growth. Simple actions like cutting your cable bill and looking for a discount cellphone provider can lead to a more comfortable retirement if you are willing to invest the savings.”

For those who are interested in contributing to a Roth account, a Roth 401k has some advantages over a Roth IRA. “As your income increases, which is likely the case in your 40s, your [adjusted gross income] might prohibit you from saving to a Roth IRA,” said financial advisor Sterling Raskie of Blankenship Financial Planning. “If your employer has the option, consider investing your money in their Roth 401k.”

A Roth 401k, like a Roth IRA, is funded with after-tax dollars; your earnings grow tax-deferred, and qualified withdrawals are tax-free, said Raskie. However, a Roth 401k has a higher contribution limit, at $18,000, whereas the Roth IRA limit is $5,500. “This allows someone who cannot contribute to a Roth IRA the ability to still have a tax-free account for retirement,” he added.

Retirement plans, like a 401k, pass to your heirs by the beneficiary designation, not by a will or any other estate planning document. It’s important that your beneficiary designation for your 401k be kept up to date.

“Double-check your beneficiary designations,” said financial planner Grant Bledsoe. “This is easy to forget when you’re in the middle of your career, but is very important as your life evolves. This should be done every few years, or immediately after a marriage, divorce or the birth of a new child.”

The risk of losing money is one thing; yet the risk of outliving your money is the most serious risk retirees face.

“Even when you are in your 40s, you most likely have 15-plus years until retirement, and then another 20-plus years while actually in retirement,” said Clint Haynes, founder and financial planner at NextGen Wealth. “This means you can still handle some risk…. Your 401k has to last you the rest of your life, and getting conservative too young could cause inflation to be your own worst enemy.”

Taking more risks with your 401k means you can allocate more toward stock funds or managed accounts, such as target date funds with a high allocation to stocks. Although you shouldn’t take excessive risk, you still have a long time until retirement and can afford to ride out market fluctuations.

Trying to time the market is rarely a good idea, and an even worse one when it comes to your 401k. Retirement investing is a marathon rather than a sprint, and panicking during the inevitable market downturn can cause you more harm than good.

“Barring a significant change in investor circumstances, ‘doing nothing’ is generally the best approach when one’s 401k is temporarily in the red,” said financial advisor Kevin Smith with Smith, Mayer & Liddle. “Successful investors are those who stick to their strategy, control their emotions, continue to invest regularly and remain focused on the long-term prize — even in the midst of turbulence and uncertainty.”

Countless studies have supported that low investment costs are a key factor in determining investment success. One study by Vanguard indicated that an annual 2 percent increase in your investing costs could erode 40 percent of the final value of your nest egg over a 25-year period.

“Costs are just as important as proper allocation and risk tolerance,” said Wayne Bland, financial advisor and retirement consultant with Metro Retirement Plan Advisors. “Consider low-cost index funds or ETF options if offered by your plan. If your plan doesn’t offer them, contact your benefits [administrator] and request they add these options to your plan.”

Frequent monitoring of your accounts likely does more harm than good. “Many investors log into their investment accounts, constantly monitoring the value of their investments,” said Robert Johnson, president and CEO of The American College of Financial Services. “They get concerned when values fall, and often panic and make irrational decisions that impact their wealth in the long run.”

This is not to say that 401k participants shouldn’t monitor and adjust their investments on a periodic basis — they absolutely should. However, set a regular time to monitor — for example, at the end of each quarter or semi-annually. Then, if needed, make adjustments to your account.

Some employers offer a meeting with a financial advisor, and this can be a great opportunity. “Sometimes this means a face-to-face meeting, and sometimes this is online advice,” said Doug Carey, president of retirement software firm Wealth Trace. “Companies are also beginning to offer great third-party tools to help you manage your 401k plan, along with all of your investments.”

Be cautious, however, that this advisor doesn’t have a vested interest behind the advice provided. Other companies offer online advice through firms like Financial Engines or similar providers. Be sure to understand any costs, limitations or conflicts of interest when taking advantage of these services. That said, these advice services can be a big help to you in your efforts to save for your retirement.

Some employees have the option to invest their 401k contributions in their own company’s stock. “While this may appear to be a good idea initially, it has ruined some people’s retirement,” said Carey. “Always rebalance your retirement funds if one position becomes too large.”

One example of a bad investment in company stock is the sad tale of the Enron collapse. Those employees lost all or much of their retirement savings because they had significant amounts invested in the company’s stock when the company went under.

If your 401k plan charges outrageous fees, you might be able to do something about that. “You can go to your human resources department and request that they search out better 401k plans with lower fees,” said Carey. “More companies are now taking this seriously and are actively looking for lower fees for their employees.”

Offering a good 401k plan and meeting their fiduciary responsibilities is top of mind for a growing number of employers. Of course, you will want to present your concerns in a respectful fashion.