According to the Transamerica Center for Retirement Studies, only 1 in 10 people in their 40s are “very” confident that they will be able to fully retire with a comfortable lifestyle. Although this statistic may seem sobering, it is important to remember that investors in their 40s are approximately halfway between their high school graduation date and their retirement date. Think back to your high school graduation. Does it seem like a long time ago? Remember, you have that much time ahead of you before retirement. There is no reason to lose hope. A comfortable retirement is possible. By focusing on retirement planning now, you still have time to set yourself up for an enjoyable post-work lifestyle. Let’s get started.
Take inventory
For investors in their 40s, a financial inventory is less about how much money you have and more about spending and savings habits. Many 40-somethings struggle with debt, with 22% reporting that paying off credit card or other consumer debts is their greatest financial priority right now. Because those in their 40s are often juggling work, kids, and aging parents it is not uncommon to feel torn between saving and spending priorities. Understanding your saving and spending habits can help uncover opportunities to pay down debt or save more by creating a monthly budget.
Beyond saving and spending habits, your financial inventory should include post-retirement benefits. Does your employer offer a pension plan? Is it likely you will become eligible for a deferred-compensation arrangement or stock options as you advance in your career? Many larger companies have a benefits handbook. Share yours with your financial advisor so that these income sources can be considered when creating your financial plan.
Find a target
When you’re in your 40s, it’s not necessary to choose an exact retirement date. However, it is important to look at the age at which you’d like to be financially independent enough that retirement is possible. Many people in their 40s plan to work past the age of 65. People in their 40s should begin thinking about what working life will look like in 20 years. Would you like to work part-time? Begin consulting? Sell your business? Now is the time to begin considering the possibilities. You don’t have to be specific, but by getting some idea about what life in your 60s and 70s could be like, you can begin to think about your future expenses. For example, if you plan to cut back on work, it’s likely you will spend less on business attire, dry cleaning, and commuting to and from work. However, you might spend more on leisure activities such as golf or tennis.
Retirement savings contributions
Investors in their 40s often ask, “How much do I need to retire?” While there are ways to project your future needs, the best advice is to save as much as you can. We’ve never worked with an investor who complained about saving too much. Start with your 401(k). At minimum, you should be saving the amount your company matches. The goal is to max out contribution limits. If you are not maxing out your 401(k) contributions, begin incrementally increasing your contributions each year until you are. We recommend clients update their savings levels at the beginning of each year. See Year end financial planning advice for 2018 for more year-end ideas. If you’ve maxed out your 401(k), congratulations! Consider starting a Roth IRA. Contribution limits for a Roth IRA in 2019 are $6,000. Note that the ability to contribute to a Roth phases out for individuals with a modified adjusted gross income (MAGI) between $122,000 – $137,000 ($193,000 – $203,000 for married filing jointly) in the 2019 tax year.
Life insurance
If you’re married or have children, life insurance is an important piece of your retirement plan puzzle. During the financial planning process, we examine your current financial needs and often recommend life insurance to protect your loved ones from the impact of a catastrophic event. Although life insurance can’t be used for retirement, it can protect your spouse from the need to discontinue saving or take withdrawals from retirement accounts if you die prematurely. We can work with you to determine the amount and type of insurance needed for your particular situation, which will prevent you from being oversold when you go shopping for your life insurance policy.
Balance retirement with other goals
Typical 40-year olds are often more worried about funding their children’s college educations than they are about their own retirements. Other financial concerns can include paying off debt, life insurance, and a newer home or car. These are valid goals and must be considered in your total retirement picture. By examining all your goals, it will be possible to determine the answer to questions like, “Should I save for college or retirement?”
By reviewing your current financial situation and taking the time to plan ahead, you can feel confident knowing that your retirement plan is on track to provide you with the retirement you want.