Saving for retirement isn’t a one-size-fits-all proposition. How much you need to save depends on a variety of factors, including the type of retirement lifestyle you hope to lead as well as how long you plan to work. But Fidelity has a general guideline. By age 30, aim to save at least your annual salary. By age 40, you should have banked at least three times your yearly income.
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If you’re in your 40s and behind on your retirement savings based on that advice, you’re not alone. And it’s not too late to turn things around financially. Here are some tips to start planning today so you can avoid retirement regrets tomorrow.
Set Reasonable Objectives
“Having a goal to work toward can make saving easier. In fact, according to a poll by Charles Schwab, 78% of people with a financial plan can pay all of their monthly payments and save money, compared to only 38% of those without a financial plan,” said Levon Galstyan, a certified public accountant at Oak View Law Group.
“Consider the age at which you would like to retire, then establish a savings target by that age. Being as realistic as feasible is essential. If you are 45 years old and have no money, retiring in your 50s with $1 million may not be doable. The more attainable your goals are, the more likely you are to achieve them.
“To calculate your objectives, enter your data into a retirement calculator. This might provide an estimate of how much you should save monthly and how much you should save by the time you reach retirement age. Don’t be scared to experiment with different numbers here. Examine how your results change if, for instance, you delay your retirement age by one or two years or reduce the amount you anticipate spending each year in retirement. Determining what attainable goals entail will be easier to design a financial plan to achieve them.”
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If you’re in your 40s and haven’t started saving for retirement, do it now.
“If you feel like you are lagging behind your peers in retirement saving, the best first step is to start. Everyone has to start somewhere,” said Herman (Tommy) Thompson Jr., a certified financial planner at Innovative Financial Group. “Have money regularly swept from your checking account to a mutual fund account. Money in a checking account finds a way to get spent. As humans, we tend to think of money in an investment differently than money in our checking account and it’s harder for us to spend our investments.”
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Save for Yourself First
Just as a flight attendant cautions you to put on your oxygen mask before assisting others in an emergency, a savvy financial advisor will tell you to tend to your own savings needs before investing in friends and family.
“Prioritizing saving for retirement often means spending less in other areas,” said Julia Vanzler, a private wealth advisor at SVB Private. “One of the largest expenses for people in this stage of life is their children’s college education. It is a wonderful gift to be able to help pay for college, but it’s important to remember that students can borrow money for school; there are no loans for retirement. You need to save for retirement first, and then determine if there are excess savings that can go toward college expenses.”
Colin Exelby, a certified financial planner who is the president and founder of the Celestial Wealth Management, said it’s crucial to save enough each month.
“Work toward 10% of your after-tax income, and then strive toward 18%. Everyone’s taxes are different, so I prefer to use a percentage of after-tax income rather than gross income,” he said.
Lower Your Debt
When you’re in your 40s, it’s not enough to put money aside for retirement. You also need to tackle outstanding debt.
“Start with the basics. Get on a budget, pay off your debt and then start saving and investing,” said Dr. Jay Zigmont, a certified financial planner and founder of Childfree Wealth. “Debt is stealing from your future and the time to take care of it is now. The key is to make paying off debt a priority, not just something you do with money that is ‘left over’.”
Brady McAninch, the founder and CEO of HM-Attorneys, advised to target high-interest bills first.
“Sometimes, high-interest consumer debt can undermine a person’s retirement savings,” he said. “Therefore, you should prioritize paying off your high-interest consumer debt as quickly as feasible. Then, you can address your mortgage and any other outstanding debts. By settling your debts now, you will not have to worry about them when you retire. The best part is that when you pay off your debts, you can use the money you would have spent on bills to save for retirement.”
When you’re saving for retirement, it’s important to recognize that every penny you spend takes away from your saving. That starts by living on a budget.
“My central piece of advice is to get control of your budget. Regardless of whether you’re a W2 employee or a business owner, your ‘take home pay’ is getting split in ways that are not adding to your retirement,” said Frank Murillo, a certified financial planner and partner at Snowden Lane Partners.
But how do you do that? Murillo advises a review of your checking account to determine your deposits from your earnings over the past 12 months. Then, review your year-end summary of your credit cards to determine how much you’re spending — and what you’re buying — and add in the things you don’t put on credit, such as your rent or mortgage, utilities and car payment.
“You don’t have to get granular to get an understanding of your finances,” Murillo said. “Once you understand where you’re spending, you can start to see where to trim the fat. Make reductions where appropriate and start funding your future. They don’t have to be large amounts, start small if you need — but be sure to start.”
Max Out Your Retirement Accounts
“For those lagging in their retirement savings by their 40s, there are a few things you can do,” said Andrew Rosen, a certified financial planner and president of Diversified LLC. “Max out your 401(k) and ensure that you’re getting any employer match, if they offer it. Think about opening a Roth IRA or a traditional IRA — a financial planner can help you to determine which would be better for your specific situation. In general, meeting with a financial planner at this stage is likely a good idea for you, as they can help you to assess your retirement goals, so you can come up with a savings plan to meet those goals.”
According to the IRS, in 2022 the total amount those in their 40s can contribute to an IRAs, both Roth and traditional, is $6,500. That number jumps to $7,000 when you’re 50 or older. Put as much money as you can into your retirement accounts each year, and don’t miss out on the chance to have your contributions matched by your employer.
For 401(k) accounts, the annual employee contribution limit is $20,500.
Cut Down on Major Costs
“You may need to make compromises, either now to save more or later in retirement if you cannot save enough,” Galstyan said. “If you’re serious about accumulating a big nest egg for retirement, you may need to consider making significant sacrifices. This could entail downsizing your home, moving to a less costly location to save money on housing, getting a second job and putting all that income into your retirement savings, or just reducing your budget to the bare minimum.
“If you are unwilling or unable to make financial adjustments now, you may need to investigate strategies to lower your retirement expenses. You may need to sacrifice pricey holidays or discover methods to amuse yourself at home rather than dining out or acquiring costly new hobbies. Considering these compromises now can drive you to save more money or help you mentally prepare for a change in lifestyle in retirement.”
Find Income in Your Insurance
You might not realize that you can use life insurance for something other than, well, insuring your life. However, many older Americans are using their life insurance policies to tap into tax-free income. Sure, withdrawals will lower death benefits, but there might be a point at which you don’t need to worry about keeping those numbers high.
Talk to your financial advisor about taking out a life insurance policy for this purpose — or about cashing in if you already have one.
Map Out Your Future
In our age-obsessed culture, turning 40 can feel like the beginning of the end. However, the truth is that most people in their 40s still have 20 to 25 career years to go. Rather than rely on your own fiscal savvy — or lack thereof — seek advice from a financial planner.
Sit down with a money planner and start building an investment strategy to generate dividends that can’t be matched by a simple savings or money market account. The goal is to invest wisely, yet aggressively.
Your financial advisor also can help you to determine a tax strategy for retirement savings, which differs whether you invest in a 401(k) or IRA.
“During your working years, you can choose between paying taxes on your retirement savings now — Roth accounts — or pay no income tax today but pay income tax on the withdrawals in retirement (traditional accounts). Since we have a progressive tax rate in the United States, the more income you max, the higher the marginal tax rate will be,” said Sam Zelinka, who runs a personal finance website for federal employees
“If you’ve been saving in one of these types of accounts on autopilot in your 30s, it’s time to run the number and see if those accounts are still giving you the best value in your 40s. If you’ve reached your peak income earning years and have relatively little saved for retirement, a traditional account may help you save money by deferring taxes until retirement. However, if you have a large balance in a traditional 401(k) or IRA, you may need to switch up your plan so that you are not in an extremely high tax bracket when you are forced to take minimum required distributions in your 70s.”
If you really want to boost your retirement fund, consider working past the standard retirement age. You can use the calculator on the Social Security Administration’s website to determine your retirement age based on your birth year.
Working longer and retiring later could allow you to earn more money and delay collection of your Social Security benefits. The longer you wait to start collecting your benefits, the more money you’ll have to enjoy your golden years.
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Paul Sisolak contributed to the reporting for this article.