Saving money is an important task at any age, but as you hit your 40s, the need to save for retirement grows. While savers in their 40s and 50s typically have a decade or two left to save for retirement given the traditional age of 65, emphasizing saving now can set you up for a dream-worthy retirement. So, let’s explore how to save for retirement in your 40s and 50s.
11 Tips on how to save for retirement in your 40s and 50s
If you want to save for retirement in your 40s, you aren’t alone. Many mid-career workers start to put the spotlight on saving for retirement. Below are some strategies to pursue as you start saving for retirement.
1. Pay off high interest debt
Before you start saving in earnest, evaluate your financial situation. According to Credit Karma, people ages 43 to 58 carry over $60,000 in debt, higher than any other age group.
If you have high-interest debt, it’s best to create a plan to pay it off as soon as possible. Not only can a big debt burden prevent you from saving for retirement, but it can also cost you thousands in interest payments.
2. Make funding tax-advantaged accounts a priority
Tax-advantaged accounts are specifically designed to help savers build their retirement nest egg. Some common tax-advantaged retirement savings solutions include your 401(k), 403(b), and SIMPLE 401(k) plan. (Find out more about the 403b vs 401k.)
When you contribute to your tax-advantaged retirement account like a 401(k), you’ll contribute pre-tax dollars. Once in the account, your contributions will grow tax-free. When you are ready to withdraw funds in retirement, you’ll pay taxes on the funds.
Also, the IRS sets limits on how much you are able to save in tax-advantaged accounts each year.
If you can contribute money to a 401(k) or similar option, consider making funding this account a priority. That’s especially true if your employer offers matching contributions, which can accelerate your retirement savings goals.
3. Focus on your spending
In a perfect world, you could save for retirement without any spending cuts. But that’s usually not possible. When it comes to saving for retirement, most of us have to make some tough choices.
Below are some options to consider.
Child’s education costs
Start by looking at your other big savings goals. Many parents who are saving for retirement might also want to pay for their child’s college education. But the reality is that you may need to prioritize saving for your own financial future.
If you are behind on saving for retirement, you might want to do some catch up savings before you pay for your child’s college tuition. Although it might be difficult to say, it’s better to be honest with yourself and your child as soon as you decide.
Annual spending
You should also consider your annual spending choices.
For example, you might have to prioritize saving for retirement over a luxury vacation budget. Or opt to save more instead of purchasing a more expensive home.
A honest look at your budget can help you determine where you can potentially cut back to contribute more to your retirement savings. While it’s difficult to pass up spending at the moment, it’s important to plan for the long-term.
Be honest with yourself about your spending and your retirement goals. Work to strike a balance that best suits your current situation without ignoring the future.
5. Save in an IRA
An Individual Retirement Arrangement (IRA) is a type of account designed for retirement savers, and it’s a great way to learn how to save for retirement in your 40s. While there are several types of IRAs, the traditional and Roth IRAs are the most common.
A traditional IRA is a tax-advantaged option through which your contributions are tax deductible.
In contrast, the contributions you make to a Roth IRA aren’t tax deductible, but qualified distributions are tax-free.
Whether or not you have access to a 401(k), an IRA is a valuable savings tool. Consider funding this account to the limit if you can. Keep in mind you can have both a traditional IRA and a ROTH IRA if you qualify based on the income restrictions.
6. Consider a taxable brokerage account
A taxable brokerage account offers another place to stash your retirement savings. Essentially, this account is a designated place for you to invest funds post-taxes.
For example, you might open a taxable brokerage account through a platform like Vanguard to build an investment portfolio.
While the funds you contribute to a taxable brokerage account come from post-tax funds, these accounts don’t come with the same restrictions as tax-advantaged retirement accounts. With that, you can pull funds out of these accounts on an as-needed basis, regardless of your age.
In general, it’s useful to invest through a taxable brokerage account after you hit your contribution limits for other types of accounts.
Keep in mind that when you pull funds out of these account you may have a capital gains tax obligation, so be sure to consult with a tax professional if necessary.
7. Keep an eye on asset allocation
Not all investments are created equally. As you build a portfolio for retirement, it’s important to strike the right balance of risk for your situation.
Of course, diversifying your portfolio is ideal, and it’s a big part of how to save for retirement in your 40s and 50s. But for many investors in their 40s and 50s, it makes sense to invest more heavily in stocks on the path to retirement.
In addition to stocks and bonds, other assets can make a useful addition to your portfolio.
Not sure how to invest for retirement at age 40? A straightforward investment portfolio might be the right solution. Check out our guide to the 3 fund portfolio.
8. Track your progress
Regardless of how much you need to save, you might not see too much progress initially. That’s because the power of compounding needs time to take hold. But don’t give up hope, and learn, “How does compound interest work?”.
As you move through the process, make time to track your progress along the way. You could do this with a simple spreadsheet or a straightforward money-planning app like Empower.
Consider setting a time to track your progress toward retirement savings goals regularly.
Personally, I choose to check in on my financial progress twice each year and use a simple spreadsheet. But you might choose to check in monthly or annually with a streamlined app to see where you stand. Find a strategy that works for you.
9. Make sure you have the right insurance
As you prepare for retirement, it’s important to confirm you have the right insurance policies in effect.
For example, as you age, you might consider buying long-term care insurance. This insurance can help cover the costs of paid assistance as you age.
On the other hand, it might be time to cancel other types of insurance.
For example, you might choose to end your term life insurance policy if you no longer have dependents. (Read about term vs whole life insurance.)
Without anyone relying on your income, you could eliminate that premium and redirect the funds toward your retirement savings. Knowing what insurance you need is an essential part of how to save for retirement in your 40s and 50s.
10. Determine how long you want to work
Building a retirement nest egg is a worthwhile goal.
But for many, it can take longer than expected to hit their retirement savings goals. If you are struggling to meet your savings goals for retirement, consider the possibility of working longer.
Choosing to work longer as a professional goal can give you the breathing room you need to save more money for your golden years. Working longer may also be a good strategy when wondering how to save for retirement in your 50s.
11. Build a flexible side hustle
A side hustle is my favorite financial tool, and it can help with how to save for retirement in your 40s and 50s. You can use a side hustle to build your income right now, which can help you save more for retirement. But a flexible side hustle also gives you more options as you age.
Those with a flexible side hustle might choose to drop their full-time job in retirement but continue on with their side business. With a side hustle, this means all of your income all of your earned income doesn’t have to be eliminated.
Instead, you’d be able to continue with a more flexible income stream to support some of your costs in retirement.
Want to build a successful side hustle? Read Bola Sokunbi’s book, The Side Hustle Guide.
Expert tip: Leverage catch up contributions and celebrate your wins as you save
According to the IRS, if you’re age 50 or older, you’re eligible to make catch-up contributions to your retirement savings accounts e.g. your IRA, 401(k), 403(b) etc, raising your contribution limit. So be sure to determine what the latest catch up contribution limits are on the IRS website.That said, knowing how to save for retirement in your 40s and 50s is a massive financial goal. Make sure to celebrate your progress as you save for retirement.
You can even treat yourself (within budget) as you hit big savings milestones. Remember to enjoy the process and look back to where you started and where you are now with your savings goals to see how much progress you’ve made!
How much to save when saving for retirement at 40+
As you save for retirement, it’s a good idea to determine how much you’ll need for a comfortable retirement. Below are some strategies to help you determine how much to save.
Look at the overall picture
Start by envisioning the type of retirement you want to have. If you dream of traveling the world, you’ll need a lot more money than if you are content to spend time in an affordable house. The reality is that you’ll need to save more if you want a more comfortable retirement.
In general, it’s better to overestimate your retirement expenses. While it’s true that some of your costs might go down, like lower food costs if your children leave the nest or more affordable housing costs if you downsize in a low-cost-of-living area, other parts of your life might get more expensive.
For example, medical costs might be higher as you age, which is something to keep in mind for how to save for retirement in your 50s, as well.
Use reliable calculators
You can find a suite of retirement calculators online, and they can help you know how to invest for retirement at age 40.
Take some time to play with the numbers to see how the changes you make now can have a big impact on your financial future.
Here are a few good retirement calculators to choose from:
Catch-up contribution details
The IRS has limits for the amount you can save in different types of retirement accounts. But when you hit a certain age, you can make additional catch-up contributions.
Below is a closer look at your contribution options.
401(k)
As of 2023, savers can contribute up to $22,500 to their 401(k), according to the IRS. If you are at least 50 years old, you can contribute an extra $7,500.
Contributing more to your retirement accounts can set you up for a more stable financial future.
IRAs
As of 2023, savers with an IRA can contribute up to $6,500 per year, but if you are at least 50, you can contribute $7,500 per year, according to the IRS.
Although you won’t be able to start saving more until 50, you could start to prepare your budget for the increased contributions. Consider where you would pull the funds from to maximize your contribution opportunities.
Is it too late to start saving for retirement at 40?
It’s never too late to start saving for retirement at 40. While starting earlier is generally a good idea, diligent planning, strategic investments, and knowing how to build discipline with saving can still make a huge difference in building a secure retirement fund.
Don’t get discouraged before you start. Instead, start saving for retirement now and learn how to invest for retirement at age 40+.
How much should a 40 year old have saved for retirement?
The amount you should have saved for retirement varies based on your unique situation.
However, some experts recommend saving between two to three times your income for retirement by age 40.
For example, if you earn $100,000 per year, then it’s a good idea to have between $200,000 and $300,000 saved for retirement in your 40s.
How much should a 50 year old save for retirement?
The exact amount you have for retirement as a 50-year-old should vary based on your financial situation.
However, many experts recommend that 50-year-olds should have at least 3-6 times their salary saved.
For example, if you earn $50,000 per year, then it’s a good idea to have around $150,000-$300,000 saved for retirement.
If you want to learn how to save for retirement in your 50s, the biggest difference is that you’ll have a more compressed timeline than a 40-year-old. That means you might need a more aggressive spending and investing strategy.
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Start saving for your retirement today!
Saving for retirement is a good idea at any age. If you are just learning how to save for retirement in your 40s and 50s, building a decent nest egg is entirely possible. Start by estimating your retirement spending needs and plan to build the nest egg you need.
Remember that it’s never too late to learn how to start investing or how to save money. Make your retirement plan, be diligent with following it, and you will do well financially!
Financial Independence | Clever Girl Finance. (2023-12-13 12:13:09). www.clevergirlfinance.com
