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How to Start Preparing for Retirement at Age 40?

So, you’re looking at the big Four-Oh this year and it suddenly dawns on you that you’re getting older. You are one decade closer to retirement and don’t have any money set aside. In the United States, the typical retirement age is about 67 years old, so you still have 27 years left to start saving. 

You’ll need to be a little more aggressive about setting aside money, but it is possible to build a nice nest egg for your golden years. It will be important to establish concrete goals, such as getting the house paid off by the time you are 50 years old. Also, your investment strategies will be a little different compared to someone in their 30s who is starting to save for retirement. Let’s take a look at six ways you can start preparing for retirement at 40 years old.

1. Make Sure All of Your Retirement Accounts Are In Order

First of all, if not yet, it is time that you made sure all of your retirement accounts are in order. These are things that people usually ensure to set it up right in their 30s. You can learn the right strategies to start saving for retirement in your 30s here. Below are the summary of the key points:

  • Make sure to maximize your contribution to 401K or 403(b) or 457 retirement accounts at work. Or at least contribute to receive maximum match from your employers. This is free money for your retirement account. Select to invest in a portfolio of low-cost index fund or ETF, both stocks and bonds. Or even more simply, select a target retirement fund such as Vanguard Target Retirement Fund 2045 (VTTVX)
  • Open traditional IRA or IRA Roth account, if you are eligible, and maximize your annual contribution of $6,000. You can also select to invest in a target retirement fund such as Vanguard Target Retirement Fund 2045 (VTTVX) as in your 401K account.
  • Open a brokerage investment account at one of the top brokerage firms offering low cost index mutual funds or ETF such as Vanguard, Charles Schwab, or Fidelity. Set up monthly deposit from your paycheck to this account to invest in low cost index funds or ETF.

>>MORE: 5 Strategies to Save for Retirement in Your 20s

2. Make a Strict Budget

Budgeting will be key to setting aside enough money. Say you set a goal of having $1 million by the time you retire. If you earn $60,000 a year, you’ll need to set aside 20% of your income yearly at a modest 7% interest rate to reach your goal in time. 

Part of the way you can achieve this is by cutting back on your expenses. Go through your monthly bills and create a budget. The hardest part of building this budget is listing all of your expenses, especially the small things like a monthly Netflix bill or putting gas in the car. We’re not saying cut out all of the fun or necessary things in life either. Just be accurate about how much you spend and cut back where you can do so comfortably. 

It also helps to set up automatic transfers into your retirement accounts or other investments. This way saving becomes something you don’t even have to think about.

If you have a goal for how much savings you need to reach by the time you retire, use our calculator “How Much Month Savings Required” to figure out how much you have to save monthly to reach your goal:

>>MORE: Calculator: How Much Do I Need to Save Monthly for Retirement?

If you don’t know your goal of total savings you need to reach by the time you retire, use our calculator “How Much Total Retirement Savings Do I need to Have by Retirement Age?” to figure that out.


3. Pay Off Debts

Your debts may also be slowing you down. Look at really paying off debts, especially high interest loans that cost more money to hold onto than pay off early. For instance, the average credit card debt grows at a rate of about 15.99% annually, which is definitely costing you money. 

It may be beneficial to simply pay off the debt first with the extra money you’ve found through budget cuts. Then, you can put that monthly amount you were paying on a loan towards your savings.

As of July 2020, home mortgage rates were at a record low of about 3% for a 30-year loan. If your current home mortgage interest rate is higher, it might pay to refinance and save yourself a few percentage points. You’ll also be able to take that savings and put it into investments for the future. 

4. Adjust Your Investments

By your 40s, you absolutely should set up a retirement account. There are multiple options from the Roth IRA to the 401k to choose from for employees. Do a little research and pick the one that works well for your income levels and employment situation.

As far as how to allocate your investments, the value of money in hand starts carrying a little more weight than potential risks of certain investments. You might want to transfer some of the holdings in your retirement accounts to more stable bonds and mutual funds or ETF. Be sure to choose the ones with low expense ratio. Investing for long term (or retirement) is all about minimizing costs to maximize returns. There should still be exposure to stocks for high growth potential, but you’ll want to start making the transition to more conservative investments. 

Different financial gurus will have different rules of thumb for how much you want invested in stocks and bonds. Here are a few of the most common recommendations:

  • Subtract your age from 120 and make the remainder your percentage of investment in stock funds. The rest should go into bond funds.
  • Use your age as a guide to the percentage of bond funds you should hold. Forty years old should equal 40% in bonds.
  • Your portfolio should contain about 20 to 40 different stocks for diversity.
  • A conservative portfolio may hold 50% bonds, 30% short-term investments, 6% foreign stock, and 14% US stock.
  • An aggressive portfolio may hold 15% bonds, 25% foreign stock, and 60% US stock.

5. Reassess Life Insurance Policies

After 40 years old, it becomes more expensive to open new life insurance policies. However, this is still a viable method for growing wealth through the “cash-value” component of a permanent life insurance policy

You might want to avoid term life insurance policies, as the premiums will start rising sharply. It’s also not as important to have at this point in life as your children are nearly adults or may be in college already. 

Other permanent life insurance is still a good option, especially for the cash-value growth. You might want to consider:

  • Variable Universal Life: VULs allow you to invest part of the policy’s cash-value in the stock market through multiple sub-accounts.
  • Indexed Universal Life: An IUL allows you to tie the growth of your cash-value to the growth of a chosen market index.

If you are looking at using life insurance to grow money for your retirement, you’ll probably want to avoid a whole life policy at this point. It can provide a stable premium and large death benefit, but the cash-value won’t have as much time to grow since the interest rate is usually low, around 2%.

>>MORE: Should I Invest in S&P 500 Index Through an Indexed Universal Life Insurance Policy?

Ed Slott – a renowned tax expert – on tax benefits of IUL policies

Compare quotes of 30+ IUL products

6. Check Out Your Social Security Benefits

Last, but not least, look at your Social Security Account. At 40, you should really start paying attention to how your benefits are growing. This way you know how much your monthly SSA payment will be at retirement. It can also help you determine if you should try to work more hours as you get older to help build your Social Security Benefits. According to the Social Security Administration anyone born after 1960 can start taking partial retirement by 62 years old. If you are able to wait until you get to 67 years old, you can take the full retirement amount.

Your Social Security information is accessible online. All you need to do is create an account through the Social Security Administration’s website. Here, you’ll be able to view:

  • Estimates of Future Benefits
  • Your Latest Statement
  • Your Earning History

>>MORE: How Much Income Tax Do I Have to Pay in Retirement? A Case Study

Final Thoughts:

  • With a standard American retirement age of 67 years old, there is still plenty of time to save money in your forties.
  • The best way to start is by assessing your budget and making a plan to pay off debts.
  • Set up a retirement account with a diversified portfolio to start setting money aside. 
  • Consider dropping term life insurance in favor of permanent life insurance with a decent cash-value growth.
  • Set up an account with the Social Security Administration website so you can start keeping an eye on the growth of your SSA benefits.
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