How to save for retirement in your 40s is really a mindset. You make up your mind that you will be in control of your financial future. This is the ideal period in your career to be making that commitment. You are in your peak earning years.
Once you have decided that you are in charge, you develop a plan for what lifestyle you want in retirement and when you will stop doing paid work. If you intend to maintain your current lifestyle in essentially the location you are now in, that will require about 70 percent of your present income. The amount could be more if you are relocating to a more expensive area or less if to a less expensive one. Even if you are determined to continue with paid work after 65, you will likely still need a substantial retirement nest egg. That is because human beings are living longer and longer. That makes it possible to actually run out of money.
Some financial planners recommend you save at least 10 percent from what you take home monthly. Others estimate 15 percent. Meanwhile, you should be paying off debts, especially student loans. According to the Federal Reserve Bank of New York, more than 2 million Americans age 60 and over still carry the burden of those loans. Since they cannot usually be discharged in bankruptcy, what is not paid off will be deducted from your Social Security payments and any tax refunds.
If you are employed and your employer provides a tax-advantaged 401(k) you should contribute the maximum. The fund grows quickly if the employer also contributes. In addition, you can open a tax-advantaged individual retirement fund (IRA). The self-employed have choices among a number of tax-advantaged retirement accounts. Some select two.
Both groups have to actively manage those investments. Fundamental asset allocation guidelines for those in their 40s are for a high percentage of the portfolios to be in equities. There is what is called the “110 minus your age” rule. The percentage of equities for a 47 year old would be 63. The risk inherent in equities can be reduced by choosing mutual funds instead of many individual stocks, including that of your company. The rest of the portfolio could include bonds, commodities, and currencies. Stick with what you understand but do not be too conservative.
Other ways of saving for retirement include savings accounts, money market funds, certificates of deposit (CD). and annuities. You also have to evaluate if you can depend on your house to be an appreciating asset. If so, it is in your financial self-interest to hold on to it. If not, when you can sell it at a break-even price, do that and consider renting. Residential property which is not a productive investment eats away at income. You can also invest in commercial real estate.
You will have more money to save if you can generate more funds coming in. You might consider getting a better job, finding a part-time job, starting a side business, expanding your current business, and selling unneeded possessions.
Financial emergencies do happen. Treat them as temporary setbacks and return to your original savings plan as soon as possible.
We hope you find that these tips helped you learn how to save for retirement in your 40s, or any other age.