saving for retirement at 40

Start Saving for Retirement at 40: Here’s a Guide

Time goes by too fast; one day, you are starting your first job, and the next, you are blowing out candles for your 40th birthday. As each day passes, it may feel that retirement draws nearer. 

If time has caught up with you, you might have fallen behind on retirement savings. According to a Vanguard study, you are not alone. The median balance Americans aged 35 to 44 had saved in their retirement accounts was $28,318. 

If you have no savings for retirement at 40, here’s a guide to help you start saving for retirement at 40.


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Is It Too Late to Start Saving?

The short answer is that it is never too late to save for retirement

The good news is…

Being in your 40s means you are in the middle of your prime earning years. All the hard work you did in your 20s and 30s to accumulate income will pay off. 

You have more time than you think. Starting at age 40 means you have more than 25 years to save, which means you can still greatly benefit from the compounding effects of investing.

Saving for retirement will likely not be as tricky or complicated as you might anticipate. With some hard work and planning, you can prepare to retire comfortably at your desired age. 

What to Consider Before Saving for Retirement?

Before saving for retirement, you need to know your end goal. The first consideration to getting your retirement on track is to set a clear target. Here are some questions to ask yourself to help you determine an estimated retirement annual budget

  1. What lifestyle do I envision during retirement, and what expenses will be associated with that lifestyle?
  2. What will be your financial situation, including your estimated income, e.g., Social Security and pensions, and expenses, e.g., daily living expenses and liabilities?

After estimating your annual budget, multiply it by 25. For example, if your yearly expenses are $48,000, you would need $1.2 million in retirement. Be aware that there are caveats to this calculation. However, it’s a good place to start calculating how much you will need for retirement. 

If, after crunching some numbers, you find that your original vision of retirement isn’t as feasible as you had hoped, you may need to adjust your expectations and redefine your retirement vision. 

If saving as much as you originally envisioned proves challenging, you can make slight adjustments. For example, you can retire later, giving additional time to bulk up your savings and receive more Social Security benefits. Another option is trimming the expenses associated with your retirement lifestyle, reducing the overall amount needed. Additionally, exploring opportunities to generate income during retirement could also be an option.

How To Start Saving for Retirement at 40?

If you find yourself in your 40s with no savings for retirement, you are not alone, and there are still viable options available. Here are five steps to help you get on track for retirement:


1. Pay Down Debt

The more debt you carry into retirement, the more money you will need to pay off what you owe, leaving you with less money to spend on things you enjoy. Before retiring, make a list of all your liabilities and determine how long it will take to pay them off. Paying off high-interest debt, such as credit cards, should take priority. If you have good credit, consider refinancing your home to a lower interest rate or make extra payments on your mortgage.

2. Make Retirement Savings A Priority

Don’t neglect your retirement savings plan to send your children to college. As a parent, you want to ensure your children have a bright future, but it shouldn’t compromise your financial stability. 

If you’re determined to help your child, look for compromises that may have less impact on your retirement savings, such as paying for tuition for a local community college or in-state school rather than an expensive private or out-of-state college.

3. Maximize Retirement Accounts

If you’re saving for retirement at 40, creating a savings plan to maximize your retirement savings is essential. Your current income and your desired income in retirement will determine whether you should invest in pre-tax accounts like IRA or 401(k) accounts or an after-tax account like a Roth IRA or Roth 401(k) accounts. 

For example, if your income is likely to increase as you move towards retirement, it may be best to take advantage of a lower tax bracket by going with Roth contributions. 

Here are some steps to help you get rolling on maximizing your retirement accounts:

  1. Take advantage of employer match
  2. Consider whether to contribute to a pre-tax or after-tax account
  3. Create a savings plan to contribute a certain amount each month
  4. Set up automated contributions through your employer and brokerage firms

Don’t forget to review and adjust your investment portfolio regularly. Many investors set up the accounts and forget it, resulting in an underperformance of their investment. Once everything is automated, check your account at least once a year. 

4. Diversify Investments And Manage Risks

Asset allocation and diversification are more critical than ever. You are still a long way from retirement, so don’t play it too safe, but you also don’t want to take on additional risks to make up for lost time.

Your investment portfolio should be measured based on your goals and age. People in their 20s can accept more significant losses because they have more time to recover. However, you can only handle a certain amount of risk as you get older.

As a rule of thumb, subtract your age from 120. The answer represents the percentage of stock funds in your portfolio, with the rest going into bond funds. If you want to have less risk, use 110 instead of 120.

5. Work With A Financial Planner

As you get older, the fewer mistakes you can make. Financial planners can help create a roadmap and personalized strategies for your ideal retirement. Engaging with a financial planner allows for a detailed assessment of your financial situation, delving into areas like retirement savings and portfolio allocations, as well as tax strategies, insurance, and your mortgage payoff rate. 

At 40, it’s okay not to have your retirement plans completely figured out, as it’s a journey many are still navigating. Working with a financial planner can be a meaningful starting point as you actively take steps to accumulate your savings for retirement.

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Financial Planner, Tax Professional at Spark Financials | Website | + posts

Danielle Miura, CFP®, EA, is the founder of Spark Financials, a life and financial planning firm specialized in helping those planning for retirement to organize, simplify, and empower them through every life turn. As a CERTIFIED FINANCIAL PLANNER™ professional, I help my clients protect their assets, manage their wealth, and dream about their future.

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