Financial Literacy 2007 - Retirement
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Retirement savings tips for 40-somethings

By the time they hit their 40s, three out of four people have saved something for retirement. They're hitting peak earning years, and they should be well on their way to reaching their long-range savings goals, too.

Kick off retirement savings
  1. Hit your savings maximums
  2. Save independently
  3. Maintain the right mix
  4. Make tough decisions about other expenses
Except life gets in the way. Talk to planners and they'll tell you that while the typical 40-year-old is keenly aware that he or she should save, too few have taken the necessary steps to adequately prepare for retirement.

Many individuals still don't have a well-defined retirement strategy. Others save, but not enough. In fact, 35 percent of workers between the ages of 45 to 54 have less than $25,000 in retirement savings. And more than six out of 10 have less than $100,000. At the same time, they are paying for big-ticket nonretirement expenses, such as college tuition, which can throw a wrench into growing a considerable nest egg. It may be the time to switch into overdrive, but many 40-somethings are instead puttering along in first gear.

"People save what they can, do their best and figure they'll count their chips later," says Bill Baldwin, president of Pillar Financial Advisers in Waltham, Mass. "But they need to calculate what they need at retirement and how much they'll be able to draw from savings to support their lifestyle."

1. Hit your savings maximums

If you've saved a significant portion of your paycheck over the last 15 to 20 years -- in general, planners say that's at least 10 percent of your salary -- you may only need to tweak your habits. But, if you've neglected retirement, you're probably going to have to push hard to make it to your proverbial finish line.

A 40-year-old who wants $1 million when she's 67, for example, must save $10,000 annually and earn 9 percent a year to reach that goal, says Dee Lee, a Certified Financial Planner and author of "Women & Money." Impossible? Maybe not. But more than likely that means cutting back and making tough choices.

Top of the list: your 401(k), which should now be funded up to the maximum limit. For someone under age 50, that's $15,500 in 2007.

Hitting the maximum is an old habit for John Morris, 46, who has plowed as much as possible into a 401(k) for more than two decades. When he opened his first 401(k), Morris was a young salesman for IBM, and he admits he was eager to spend his new earnings, not save them.

"My Uncle Mike berated me throughout an entire family barbecue about getting into a 401(k) when I was 22 years old and got my first job. I didn't want to give away a chunk of my paycheck. When you're 22 you're thinking about buying a better car and getting real furniture instead of milk-crate bookshelves," says Morris.

But his Uncle Mike persisted, calling Morris the following week. "I relented under pressure and I'm glad I did. It was one of the smartest things I did," says Morris.


2. Save independently

Morris has to be smart about investing his money outside of work, too, so five years ago he hired an independent money manager to help him run his investments. "I have a business degree and I know about investments, but I wasn't able to spend the time to allocate them and figure it all out," says Morris, who commutes each week from his Chicago home to work in San Francisco, where he is president of a company called Pay By Touch.

Ideally, you're saving outside of work, too. In fact, it's worth noting that among individuals age 61 or older who returned to work after retiring, nearly half -- 46 percent -- said that if they could plan for retirement differently, they would have had more money outside their employer retirement plans, a study by Putnam Investments shows.

Not sure where to put that cash? Consider an IRA. Nearly half of individuals between 45 and 54 stash money in these accounts, according to the Employee Benefit Research Institute, or EBRI. That leaves plenty of others who may be missing opportunities to maximize savings by taking advantage of tax advantages that come with IRAs. For example, with a Roth, you'll never pay taxes on earnings. At this point in a 40-year-old's career, income may be too high to participate in a Roth IRA. If that's the case, consider a nondeductible IRA, which is open to anyone. If you love the idea of a Roth, be patient. Come 2010, anyone, regardless of income, will be able to roll assets into one, says Ed Slott, a CPA and editor of

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