Many people start thinking about retirement savings later in life, often around age 40. At this point, retirement is only 20-25 years away. Is it too late to start saving and investing for retirement at 40? The short answer is no, it’s not too late, but you will need to make some adjustments to get your retirement savings on track.
How Much Do You Need for Retirement?
The first step is to estimate how much money you will need in retirement. Financial advisors often recommend having between 8-10 times your final salary saved by retirement age. For example, if you make $100,000 per year at retirement, you should aim to have between $800,000-$1,000,000 saved.
Some common rules of thumb for retirement savings goals include:
– Save 10-15% of your income for retirement each year
– Have 1x your salary saved by age 30
– Have 2x your salary saved by age 35
– Have 3x your salary saved by age 40
– Have 6x your salary saved by age 50
– Have 8-10x your salary saved by retirement age
So at 40, your goal would be to have around 3 times your current salary built up. If your salary is $80,000, you would aim to have $240,000 already saved. Use this as a benchmark to see if you are on track.
Assess Where You Stand
Take stock of what retirement savings and assets you have already accumulated:
– 401(k) or other workplace retirement accounts
– IRAs
– Investment accounts
– Pension plans
– Real estate
– Other assets
Add these up to see how far along you are at 40. Someone at age 40 with $200,000 saved would be in decent shape. However, someone with only $50,000 would need to do some catch up.
Be sure to calculate your projected monthly Social Security benefit as well, as this will provide a boost. You can check your latest statement or use the Social Security Retirement Estimator online.
Run Retirement Calculators
Use online retirement calculators to crunch the numbers. Input your current savings, monthly contributions, expected investment returns, income needs, and other details. This will estimate how much you need to save each month to end up with sufficient funds by retirement age.
Some popular calculators include:
– Fidelity Retirement Score
– Vanguard Retirement Nest Egg Calculator
– Schwab Retirement Calculator
– AARP Retirement Calculator
Here is a example result from a retirement calculator:
| Current Age | 40 |
|---|---|
| Current retirement savings | $150,000 |
| Annual pre-tax contribution | $10,000 |
| Expected annual return | 6% |
| Retirement age | 65 |
| Projected retirement savings | $650,000 |
Aim to run projections with different savings rates and rates of return to stress test your strategy.
Maximize Your 401(k) Contributions
One of the best ways to ramp up retirement savings is to boost your 401(k) contributions. The 401(k) offers tax-deferred growth and the ability to contribute a sizable amount each year.
For 2023, the contribution limits are:
– $22,500 for those under age 50
– $30,000 for those 50 and older
If you are not yet contributing the maximum, get as close as you can. If your employer offers matching contributions, be sure to contribute enough to get the full match.
You can also look into making after-tax contributions to your 401(k) and mega backdoor Roth conversions if your plan allows them. This can enable even larger contributions beyond the standard limits.
Sample 401(k) Acceleration Strategy
| Age | 401(k) Contribution Rate |
|---|---|
| 40 | 10% of salary |
| 41 | 12% of salary |
| 42 | 14% of salary |
| 43 | 16% of salary |
| 44 | 18% of salary |
This shows an example strategy of increasing your 401(k) contributions by 2% per year until maxing it out. Adjust based on your specific circumstances.
Open and Fund an IRA
In addition to your workplace plan, open and fund a traditional or Roth IRA. The IRA contribution limit for 2023 is $6,500 if under age 50. IRAs provide tax advantages and more investment options.
Try to contribute the max to both your 401(k) and IRA each year. Automate transfers from your checking account monthly or bi-weekly so you invest consistently.
Between maxing out these two accounts, you can contribute $29,000 per year in your 40s. This accelerated savings rate will help you catch up.
Review Your Budget for Savings Opportunities
To free up more money for retirement savings, review your budget for potential cutbacks. Look for discretionary expenses that you may be able to reduce or eliminate:
– Dining out
– Entertainment and leisure
– Unnecessary subscriptions and memberships
– Impulse shopping purchases
– Expensive vacations
Even modest reductions of $100-200 per month can make a difference. Direct these savings into your retirement funds.
Consider a Side Hustle for Extra Income
Another option is to start a side hustle to generate additional income that can be directed to retirement savings. Ideas include:
– Renting out a room on Airbnb
– Driving for a rideshare service like Uber or Lyft
– Doing freelance work in your field
– Selling crafts or other handmade products online
– Taking paid online surveys
Ideally, aim for around an extra $500-1000 per month from side hustle income. Invest this directly into an IRA or other investment account.
Invest Aggressively for Growth
To accumulate a sizable nest egg by retirement age, you need your investments to grow rapidly. This means investing primarily in stocks for greater returns.
As you enter your 40s, aim for an asset allocation of at least 80% stocks and 20% bonds and cash. This higher equity exposure will provide more growth potential.
Some stock funds to consider:
| Fund | Description |
|---|---|
| Vanguard Total Stock Market Index | Broad US stock market fund |
| Vanguard S&P 500 Index | Tracks the S&P 500 |
| Vanguard Total International Stock Index | International stock exposure |
| Vanguard Small Cap Value | Active small cap value stocks |
Avoid overly conservative investments like money market funds or CDs. You need stock funds for growth.
Work 5-10 Years Longer If Needed
One powerful lever is to extend your career by working several additional years. Delaying retirement from age 65 to 70 or 75 has several benefits:
– Allows 5-10 more years of savings compounding
– Reduces the number of retirement years you need to fund
– Boosts your Social Security benefits
Working part-time may be an option too. Analyze the impact of working longer on your retirement outlook.
Use Catch Up Contributions at 50
After reaching age 50, be sure to utilize catch up contributions to both your 401(k) and IRA:
– 401(k) catch up = $7,500
– IRA catch up = $1,000
This allows you to make even larger annual contributions in your 50s to accelerate your savings.
Consider Refinancing Your Mortgage
Refinancing your mortgage can potentially lower your interest rate and monthly payment. This frees up extra cash flow that can be directed to retirement savings.
Run the numbers to see if refinancing makes sense based on your situation, current rates, and closing costs. An online mortgage refinance calculator can help analyze scenarios.
Aim for at least a 0.5-1% reduction in your interest rate to make it worth the costs. The savings can really add up over time.
Evaluate Health Care Costs in Retirement
Rising health care expenses represent a wild card for retirement costs. As you get older, out-of-pocket costs for Medicare, medications, dental care and hearing aids can really add up.
Conduct research into these projected costs and factor a sufficient health care budget into your overall retirement plan. Budgeting an extra $5,000+ per year for a married couple is prudent.
Some cost reduction tips:
– Take advantage of preventative care now to improve long-term health
– Get cost estimates for larger planned expenses like dental work
– Compare Medicare Advantage plans carefully during open enrollment
– Ask about drug discounts from pharmaceutical companies
Consider Relocating for Retirement
Relocating to a lower cost location for retirement is a strategy to stretch your savings. Many retirees move to places like Florida and Arizona for the warmer weather and lower taxes and living costs.
Crunch the numbers to see if moving makes sense for you. Research costs for housing, taxes, food, utilities, health care and other spending. Also factor community, amenities and proximity to family.
If you can cut 25-30% off your living costs in retirement by moving, it may be worth considering. Just be sure to account for any relocation costs as well.
Purchase Annuities to Cover Fixed Costs
Using some of your savings to purchase an immediate annuity can provide fixed lifetime income to cover essential retirement costs like housing, food, and utilities. This insures you against running out of money for basic necessities.
With an annuity, you give an insurance company a lump sum up front in exchange for guaranteed monthly payments lasting either a set number of years or your entire life. Payments typically start right away.
Allocating 20-40% of your portfolio to an annuity-based income stream may give you more confidence in covering fixed essential spending. Shop rates from multiple insurers to maximize payouts.
Work with a Fee-Only Financial Planner
If you are feeling overwhelmed about getting your retirement finances on track, consider working with a fee-only financial planner. They can review your specific situation and provide a detailed plan and roadmap.
The upfront cost for a retirement plan is well worth the peace of mind of having an expert help optimize your savings strategy. They may also identify ways to improve your taxes, investments, and insurance coverage.
Ask trusted friends and family for advisor recommendations. Search sites like napfa.org and letsmakeaplan.org. Interview several advisors before selecting one.
Shift to a More Frugal Lifestyle
Adopting a more frugal lifestyle can open up more room in your budget for retirement contributions. This could involve downsizing your home, driving older paid off vehicles, buying less expensive clothing, and cutting back on vacations and dining out.
Frugality enables you to find joy in free and low-cost activities. It helps strip away excess consumerism and focus more on your priorities and values. Embracing a frugal mindset reduces spending and frees up savings.
Pay Off Debts and Loans
Carrying high interest debts like credit cards, auto loans and student loans into retirement will eat away at your savings. Aim to have all non-mortgage debt paid off by the time you retire.
List out all your current debts by interest rate from highest to lowest. Then create a repayment plan to aggressively pay down and eliminate this debt over the next several years. Automate extra monthly payments.
Having no debt payments in retirement will reduce your required income needs and enable your savings to last longer.
Delay Taking Social Security
You can maximize your Social Security benefit by delaying when you claim benefits. Every year you wait beyond your full retirement age (likely 67) earns you an 8% boost in payments. Benefits max out at age 70.
If you can wait until age 70 to take Social Security, your monthly benefit will be significantly higher. This increases your guaranteed income floor in retirement.
Of course you need other savings in the interim to hold you over. But this delayed gratification approach pays off with much higher lifetime Social Security payments.
Consider Downsizing Your Home
Many baby boomers enter retirement mortgage-free and sitting on substantial home equity. Downsizing to a smaller, lower cost home can free up major savings that can then be invested.
For example, the sale proceeds from downsizing a $500,000 home to a $300,000 condo equal $200,000 in capital to put to work. This home equity windfall can give your retirement savings a major boost in your 50s or 60s.
Crunch the numbers with a financial calculator to see if this strategy makes sense for your situation. Subtract real estate commissions, moving costs, and capital gains taxes.
Protect Your Health as You Age
Your health is your most valuable asset in retirement. Do everything you can to maintain your physical and mental health as you transition into your 60s and beyond:
– Annual checkups and preventative screening
– Eat a nutritious, balanced diet
– Stay physically active each day
– Challenge your mind by learning new skills
– Develop social relationships and community connections
– Manage stress through meditation, yoga, or prayer
– Get sufficient sleep and rest
– Avoid smoking, heavy drinking, and drugs
Adhering to healthy habits can help minimize medical issues and related costs in the future.
Review Different Withdrawal Strategies
As you transition into retirement, you will shift from savings accumulation to distributing income. It is crucial to develop a prudent and sustainable withdrawal rate strategy.
Some popular withdrawal methods include:
– The 4% rule – Withdraw 4% of assets the first year, adjust for inflation annually
– Required minimum distributions (RMDs)
– Annuitizing a portion of your portfolio
– Flexible goal-based withdrawals
– Variable percentage withdrawal strategies
Aim to develop a tax-efficient, stress-tested income plan that covers needs yet preserves principal. Work closely with your financial advisor to implement this.
Consider Long-Term Care Insurance
One risk for retirees is the potential for needing long-term care, which can cost upwards of $100,000 per year. This expense could quickly deplete your portfolio if not properly insured against.
Purchasing long-term care insurance by your 50s may make sense to cover this liability. Policies cover a portion of long-term care costs for a set period of time. This can protect your savings and allow you to leave a legacy.
The younger you are when buying coverage, the lower your premiums will be. Compare policy options carefully and consider inflation protection, duration of benefits and other features.
Conclusion
Despite starting later, you can absolutely still retire successfully if you begin saving diligently at 40. Boost your savings rate substantially and invest aggressively for growth. Take advantage of catch-up contributions at 50 and consider working a few years longer. Develop a detailed plan to maximize Social Security benefits. Seek help from a financial planner. With discipline and commitment, you can still build the retirement you desire, even with a late start. The key is taking action now, rather than resigning yourself to an uncertain future. You still have time on your side.