Saving early for retirement has several advantages, but it is not always possible for everyone. Many people begin their careers later in life and may struggle to secure stable incomes in their early years, making it challenging to contribute to a retirement fund. According to data, the median 401(k) balance for Americans aged 40 to 49 was $38,600 as of the fourth quarter of 20232023. If your savings are nowhere near this figure, it may be time to act and start saving now. At age 40, you still have approximately 20 years to prepare for retirement, which provides you with a significant opportunity to build your nest egg.
Hiring a financial advisor can be beneficial at this point to help you start saving for retirement and to develop a personalized plan. This article will also discuss ways that can help you build retirement savings in your 40s.
Below are five tips that can help you build a retirement nest egg in your 40s:
1. Max out your 401(k) and IRA contributions to benefit from tax advantages and employer matches
Being 40 and having no retirement savings can be alarming, but with retirement accounts like the 401(k) and the Individual Retirement Account (IRA), there is a lot that you can still do. A 401(k) account is an employer-sponsored retirement plan, while an IRA can be opened on your own with a broker, bank, or mutual fund company. Here are the advantages of each account and steps to maximize your contributions:
a. 401(k): The 401(k) can be opened with the company you work for. While companies are not legally obligated to offer their employees a 401(k), many still do as an incentive to keep them productive and lower attrition rates. 401(k)s allow you to invest your money in a range of options like stocks, bonds, Exchange-Traded Funds (ETFs), etc. If your company offers a 401(k), you must start contributing up to the permissible limits, and if it does not, you can consider switching jobs to one that does. The traditional 401(k) is a tax-deferred account that allows you to contribute tax-free to the account. The withdrawals from the account are taxed in retirement. You can also consider a Roth 401(k), where you pay tax on your contributions, but your retirement withdrawals are tax-free.
The 401(k) account offers employer matches, where your company matches a percentage of your contributions, such as 25% or 50%. In some cases, employers may also match up to 100% of your contributions. These matches are essentially complementary funds that help increase your investments and enhance the potential returns from the account. As of 2024, you can contribute up to $23,000 to a 401(k) if you are under the age of 50. After 50, you can make additional catch-up contributions of up to $7,500 on top of the limit of $23,000, bringing the total to $30,500 in a year. The maximum allowable contributions from both employer and the employee for 2024 is $69,000, or $76,500, including catch-up contributions. Ensuring you meet these limits and contribute to the maximum can significantly enhance your retirement savings and help you make up for the lost time.
b. IRA: Just like the 401(k), the IRA is also of two types – traditional and Roth. A traditional IRA offers tax-deductible contributions, but your withdrawals are taxed. With a Roth IRA, your contributions are not tax-deductible, but your withdrawals are tax-free. The IRA is not an employer-sponsored plan, and you need to open it on your own. This also means that there are no employer matches. However, the account offers similar investment options as a 401(k), such as stocks, bonds, Certificates of Deposit (CDs), ETFs, and more. The IRA also has annual limits, which are much lower than the 401(k). The IRA contribution limits for 2024 are $7,000 for individuals below 50 years of age and $8,000 for those 50 and older. Even if your employer offers a 401(k), you can still open an IRA to speed up your savings rate and reach your retirement target.
2. Invest your money across asset classes to lower risk and enhance returns
Investing your money across various asset classes is essential to lower risk and enhance returns. While maximizing contributions to your retirement accounts is crucial, it is equally essential to go beyond and invest in diverse instruments that offer compounding benefits and inflation-beating growth potential to build sustainable savings that can last throughout your retirement.
Diversification is the key area to focus on when you build an investment plan for retirement. The principle of diversification means spreading your investments across various asset classes to reduce risk. When your investments react differently to market conditions, you achieve a more stable overall portfolio. For instance, your bond holdings might remain stable if the stock market experiences a downturn. This can balance potential losses from stocks.
A diversified portfolio should include a mix of stocks, bonds, and cash. Stocks are vital for earning inflation-beating returns and achieving significant growth over time. They provide the potential for high returns, although they come with higher volatility. Bonds, on the other hand, offer stability and a steady income stream. They are less volatile and can be your portfolio’s buffer against market fluctuations. Cash is important for liquidity and can be used to cover emergencies without having to sell other investments. Beyond these traditional assets, you can also consider investing in other options like real estate and gold. Real estate can offer capital appreciation and a hedge against inflation as property values rise over time. Real estate can also generate passive income through rent, which can be a reliable income source during retirement. Gold is another valuable asset. Since it is a commodity, its value increases over time with inflation and is highly liquid.
It is also crucial to diversify within asset categories. So, if you are investing in stocks, you can consider a mix of domestic and international stocks to spread risk across different markets. In the case of bonds, you can include both corporate and government bonds to balance the risk and return profile. While corporate bonds offer higher yields, they come with higher risk. On the other hand, government bonds are more stable but carry lower risk.
3. Put other goals and expenses on hold
If you find yourself at 40 with no retirement savings, it is crucial to prioritize your retirement planning over other financial goals and expenses to ensure a secure financial future. While you may have various goals and expenses, the time-sensitive nature of retirement savings makes it imperative for you to focus on this area instead.
For instance, if you are a parent, you might be saving for your child’s higher education expenses. While this is an important financial goal, it may be advised to redirect these funds into your retirement savings. Your children will have several options to fund their education, such as scholarships and student loans. Most colleges offer scholarships based on merit and co-curricular achievements, which can significantly reduce the financial burden on parents. You can encourage your children to apply for these opportunities. Additionally, student loans are readily available for younger applicants, and your children will have the means and time to repay these loans in the future.
If you are still concerned about your child’s education and want to keep a buffer, you can consider using an IRA instead of the 529 account. Both accounts offer tax advantages, but a 529 plan is limited to qualified education expenses. In contrast, an IRA can be used for both retirement and education expenses. It offers greater flexibility and keeps your options open. This allows you to secure your retirement while also supporting your child’s education if needed.
Lowering your expenses is another critical step in accelerating your retirement savings. Try to adopt a frugal lifestyle by cutting unnecessary costs. This might include downsizing your home to reduce mortgage or rent payments, avoiding frivolous spending, cancelling club subscriptions, and considering moving from urban areas to suburbs where the cost of living is typically lower. The money you save through these measures can be put into your retirement nest egg and significantly boost your savings over time. You can create a budget that can help you identify areas where you can cut back. In many cases, discretionary spending usually disrupts your savings progress. It is important to spot these. For example, if you are spending too much on food, consider avoiding dining out and cooking at home instead. These small steps can help you focus on the more important things and put away more money toward your retirement fund.
4. Minimize debt to safeguard your retirement goals
As you approach your 40s, avoiding debt becomes paramount to ensure your savings grow smoothly. Even if you diligently contribute to your retirement accounts, accumulating substantial debt can derail your savings growth. Debt repayments can hinder your ability to invest and result in lower returns and missed employer matches, along with reduced tax benefits. Moreover, debt can be incredibly taxing. The burden can lead to significant mental distress. Therefore, it is essential to take proactive steps to manage and reduce debt effectively.
It is particularly crucial to prioritize paying off high-interest debt, such as credit card balances. Ensure to make timely payments to avoid accumulating interest charges and fees. You must resist the temptation to max out your credit cards and instead adhere to a strict budget to curb unnecessary spending. Additionally, it is wise to avoid taking on debt for non-essential purchases. Car loans, for instance, can add unnecessary financial strain and divert you from your goal of accumulating retirement savings. Instead, you can consider alternatives such as purchasing a used vehicle or sharing a vehicle with other members of your family, if possible.
In the case of major purchases, assess whether taking on debt is truly necessary and beneficial in the long run. For instance, while loans for appreciating assets like a home may be justifiable as they offer financial security and potential appreciation, borrowing money to finance depreciating assets like a car may put a wrench in your retirement plan.
5. Speak to a financial advisor about starting late
Speaking to a financial advisor is essential if you are starting late in your retirement planning journey. A professional advisor offers clarity on your financial situation. They can explore overlooked opportunities and assets, such as an old life insurance policy with a cash value that you may have forgotten about that has the potential to contribute to your financial well-being. With their guidance, you can map out a trajectory for the next 20 to 25 years to ensure a comfortable retirement.
Financial advisors can help you create a suitable investment plan that is aligned with your risk profile, age, and income. They can focus on debt reduction, maximizing retirement account contributions, tax planning, and more to ensure a holistic and effective approach.
Additionally, a financial advisor can help you understand what happens if you have no retirement savings. Their realistic assessment of your present and future situation can keep you motivated and focused on your financial goals. They can be your constant reminder of the importance of staying on track and adhering to the devised plan to avoid setbacks.
To conclude
Is it too late to start saving for retirement at 40? While it may be a little late, you can still do a lot to catch up. With over two decades until retirement, you still have ample time at hand to enhance your retirement nest egg. Start diversifying your investments and leveraging employer contributions as soon as you can. With tax advantages and catch-up contributions in your 50s, you can bridge the gap effectively in the years to come. It is also essential to embrace a frugal lifestyle and eliminate debt to accelerate your savings growth. Ultimately, the key lies in maintaining a steadfast focus on your future goals and taking proactive steps to secure your retirement.
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