Highlights

  • 5 things you should do to prepare for retirement once you turn 40
  • Appropriate for couples or individuals
  • Relevant for those with savings and those starting from $0

Estimated read time: 5 mins

Saving for retirement is largely out-of-focus for most Americans in their 40s. It’s a decade marked with added expenses, such as saving or paying for your child’s college education, while you continue to pay down your mortgage and college debt. That said, you’re also reaching your peak earning years, so there’s increased potential to save for retirement.

With that in mind, here are 5 recommendations we typically advise our 40-something clients to do as they begin their journey toward retirement.

1. Have A Marathon Mentality

Remember, you’re approximately 20 to 30 years from retirement. Even if you’re behind, there’s still time to build your savings and benefit from compound interest. The key is to be consistent and disciplined, as if you’re running a marathon; a steady pace wins the race. For example, someone at age 40 with $0 in savings who puts aside $1,000/month will amass $1.1 million for retirement over 30 years, assuming a 7% average stock market return.

A few things to keep in mind as you plan how much you consistently set aside each month:

  • Don’t count on Social Security; it won’t be enough for most people
  • Take full advantage of your employer’s retirement match if offered one (it’s “free” money)
  • If you “max out” your annual retirement contributions, seek outside accounts for growth

Keeping with the marathon metaphor, you have a lot of ground to cover ahead of you, so you’ll want your retirement fund to have an aggressive asset allocation with a portfolio heavily weighted toward stocks (75% to 90%). Even if you “slip and fall” (i.e. we enter a bear market), your savings still has a lot of time to recover.

2. Build An Emergency Fund

While consistently increasing your retirement savings, you should also set aside a portion for unexpected events. This could be for a job loss, a temporary disability or extended medical leave, a new roof depending on the age of your house, etc. A sudden job loss is the most common, which is why we recommend having 12 months of earnings saved (6 to 9 months is okay too).

If 6 to 9 months of savings is still out of reach, the most important thing is to conscientiously set aside some money each month for this purpose. Having a fund that covers 1, 2 or 3 months’ worth of expenses is better than having nothing at all.

3.Prioritize and Settle Debts Quickly

Not all debt is created equal, so you’ll want to prioritize payment toward the debt with the highest interest rate, which is typically from credit cards. These should be paid with the greatest sense of urgency because the interest quickly dwarfs how much you owed to begin with.

Then there’s student loan debt. While student loan debt can be sizable, it’s typically more manageable because of lower interest rates (than credit cards) and flexible repayment plans.

One thing you should consider is consolidating both credit card and student loan debt if you haven’t already. Consolidation is a great way to simplify repayment and transfer high interest rates to lower ones. You can also consolidate using a Home Equity Line of Credit, if you have some equity in your home.

Another way to address student loan debt ─ and should be considered a measure of last resort ─ is by paying the minimum monthly amount required. Doing so frees up money to use now for retirement, credit card debt, and other (urgent) expenses that cannot be postponed. While doing this extends the life of your student debt, remember that you have the rest of your life to pay back student loans and they are forgiven/discharged upon your death━nor do they count against your estate and or get passed on to your spouse or children.

And finally, most Americans have a mortgage to pay throughout their 40s. This debt is acceptable and mortgage rates continue to hover at historic lows, which is about 3% for a 30-year, fixed-term mortgage. This is the lowest rate going back 40 years, so we encourage you to refinance if you haven’t already done so.

4. Prioritize Yourself Over the Kids

If you’re in a financial situation that forces you to choose between saving for retirement or your child(ren)’s college education, save for retirement. This is a tough decision and it may not feel good, but remember, there are no scholarships or federal loans provided for retirement. You have to put yourself first; your children will have support to help them finance their education.

5. Establish an Estate Plan

If you haven’t already done so, be sure to establish a will that states to whom you want to give your assets, including property (e.g. home, cars, etc.), bank and retirement accounts, life insurance policy, and personal items. It should also name guardians for your child(ren), if applicable. A simple will is often enough for most people.

Next, you’ll want a Durable Power of Attorney, which gives someone you trust the legal authority to make financial and healthcare decisions on your behalf should you become incapacitated.

Death and incapacitation are subjects no one wants to think about, but preparing for them ensures that your loved ones are taken care of and that your hard-earned assets don’t go to waste.

Final Thought

Your 40s are the years to develop a marathon mentality and to make consistent strides toward saving for retirement. This may seem like a long checklist, but it doesn’t need to be done at once. Start from the top, stay committed, and watch out for “lifestyle creep”; increased earnings may tempt you to spend more on vacations, expensive cars, or other luxuries.

And you don’t have to do it alone. Get the guidance you need from experienced wealth management, tax, estate planning, and insurance professionals along the way.

Brittany Albert Moran is a Certified Financial Planner® and a Chartered Retirement Planning Counselor. She is the lead financial planner and principal of Providence-based Lincoln Capital, a financial planning and wealth management firm.

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