Even if they have good habits and a productive, busy life, it's often difficult for a young person to think about retirement at age 60, 65 or even 70 when so much of their energy is focused on what they are going to do today or even tomorrow. Most of their time is understandably spent figuring out how to meet current cash flow needs. As a result, it is not uncommon for someone to reach age 40 (or older) and have only minimal savings set aside for their retirement.
The good news is it's not too late to start saving for retirement. Here is how those in their 40s can still build a retirement nest egg:
You Still Have Decades Before Retirement
Time is one of the greatest assets when saving for retirement but just because time is not on your side, does not mean you should ignore saving. With people living and working longer and retiring later in life, at 40 years old you still have the opportunity to save for 25 or more years. The key to saving for retirement it to start as soon as possible and never let up. (For more, see: 6 Late-Stage Retirement Catch-Up Tactics.)
Maximize Contributions to Employer-Sponsored Plans
One of the best ways to save for retirement is through an employer-sponsored retirement plan. While contributing the minimum to obtain the full employer match may have been a strategy previously employed, consider increasing and maximizing all contributions, including Roth options.
Most employer-sponsored retirement plans use payroll as the mechanism to fund the accounts. Payroll deductions or direct deposit is the easiest way to place a retirement savings plan on automatic pilot. Once the direct deposit is set, the discipline of having to remember to make the deposit into the saving or investment account is rendered moot.
Increasing the annual contribution in a retirement plan is sometimes easier said than done. We usually acclimate to spending at a certain level, and saving in lieu of giving up something not be feasible. If you are not contributing the maximum to a retirement account, consider paying yourself first and giving yourself a raise. As you receive compensation increases from your employer, consider placing at least half or more of the increase into your retirement savings vehicle. As income increases, instead of increasing spending, keep the spending stable or slightly increase spending, but save the difference.
Another way to increase retirement savings is by managing debt. Many individuals between the ages of 25-45 may be drowning in debt (credit card debt, student loans, car loans or mortgages). This may cause them to focus on the debt in lieu of saving for retirement. The key with debt is to stay current, with a focus on paying debt with the highest interest rate quicker and not to incur new debt. (For related reading, see: How Working Longer Impacts Social Security.)
Just because the auto loan or the mortgage is paid in full does not mean you should look to purchase a new car or larger house. As debt is repaid, take those payments and apply the funds to savings. Again, this is positive cash flow that was not being used for discretionary spending and will not be missed if reallocated to retirement savings.
Balance Retirement and College Savings
We all want the best for our children and occasionally it is to our own detriment. Focus on saving for retirement, not solely on funding a child’s college education and other similar expenses. They will thank you later in life when you have the resources to finance your own retirement instead of moving in with your children during your retirement years. Young adults have time to pay back their student loans.
Avoid Excessive Risk As a Way of Catching Up
Finally, one of the most common mistakes we see in regard to retirement planning is people investing based on emotion. Starting a savings plan later in life may sometimes evoke panic and the feeling that more risk in a portfolio is needed to make up for lost time. Excess risk may also lead to more volatility and unanticipated losses that may discourage saving and result in sleepless nights.
Everyone needs some level of risk in their portfolio. The right amount of risk is a balance that will help achieve goals, but not so much that would make someone uncomfortable. Avoid compounding the mistake of starting late with another mistake of assuming more risk, resulting in disappointment and despair.
If you are in your 40s with little retirement savings you still have time to prepare. Be sure to maximize contributions to an employer-sponsored plan, automate savings and manage your debt. (For more, see: 6 Retirement Savings Tips for 45- to 54-Year-Olds.)
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