If you’re in your 40s and are like most people, you have managed to put some money away for your retirement. You’re hitting your peak earning years, and you should be well on your way to achieving long-term savings goals.
Except that life can get in the way. Talk to planners and they’ll tell you that while the typical 40-year-old is keenly aware of the need to save, too few have taken the necessary steps to adequately prepare for retirement.
Many 40-somethings still don’t have a well-defined retirement strategy. Others save, but not enough. And it can be a time of managing big-ticket non-retirement expenses, such as college tuition, which can make it difficult to grow a considerable nest egg.
It may be the time to switch into overdrive, but many 40-somethings instead are puttering along in first gear.
“People save what they can, do their best and figure they’ll count their chips later,” says Bill Baldwin, managing director of Argent Wealth Management in Waltham, Massachusetts. “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.”
Here are four savings goals to meet during this important phase of your life.
1. Reach 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 the 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: funding your 401(k) up to the maximum limit. For someone under age 50, that’s $18,000 in 2017.
Hitting the maximum is an old habit for John Morris. By the time he reached age 46, he had already spent two decades plowing as much as possible into a 401(k). When he first opened a retirement account, 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. “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 needed to be smart about investing his money outside of work, too, so 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,” he says.
It’s best to have part of your savings outside of an employer-sponsored retirement plan. Not sure where to put that cash? Consider either a traditional or a Roth IRA. If you don’t have one, you 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 account earnings. But note that there are income limits for determining whether you’re eligible to save in a Roth IRA.
3. Maintain the right mix
Asset allocation and diversification remain as important as ever. At 40 you’re still a long way from retirement, so don’t rush to play it too safe, says Ellen Rinaldi, former executive director of investment planning and research at mutual fund company Vanguard and currently the firm’s chief security officer. As a rule of thumb, Rinaldi recommends scaling back stocks to 80 percent of your portfolio and putting the balance in conservative holdings like bonds.
Maintain a broad view of all of your holdings as you reallocate assets. It’s not just enough to focus on the 401(k). Take all of your investments into account.
Make sure you haven’t forgotten anything, either, like a 401(k) or other benefits you may have earned at previous jobs. If it’s an old 401(k), roll that into an IRA, which you can invest any way you want.
“It happens all the time, people leave money in a 401(k) and forget about it. They take more time on their vacation than they do on retirement planning,” says J. Michael Scarborough, president and CEO of Retirement Management Systems.
4. Make tough decisions about other expenses
Meanwhile, those with children need not be reminded about college. Ideally, you’ve been saving for their higher education since your kids were in diapers. If so, you’ll be able to keep chipping away without diverting huge sums of cash from your retirement savings.
If you’ve neglected to save for college, and your retirement savings are less than robust, you may not have enough money to fund both. As a parent you’ll more than likely want to take care of your kids. But financial advisers agree, retirement should be top priority. “The last time I checked there were no scholarships out there for retirement,” says Lee.
Many parents often sacrifice their own retirement planning to care for kids — even those who have already graduated from college.
“When forced to make a choice, people support their own children first. They’ll put themselves last,” says Merl Baker, principal at the financial consulting firm Brightwork Partners. “They’re reconciled to working longer than they planned or expected to. Or they accept a lower quality of life. It’s pretty powerful.”
If you’re determined to help your children, and money will be tight, look for compromises that may have less of a negative impact on retirement savings.
“Maybe it comes down to, you can’t send your kid to MIT. Maybe they have to go to a local, in-state school. Maybe there are loans for kids they’re eligible for, or they have to go to work. It’s not a fun conversation to have, but you need to determine what the numbers are,” says Dick Bellmer, past president of the National Association of Personal Financial Advisors.