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.”

Recognize your retirement priorities while in your 40s

Recognize your retirement priorities while in your 40s.

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

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, executive director of investment planning and research at mutual fund company Vanguard. 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). Look at the big picture, taking 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 Michael Scarborough, a money manager and author of “401(k) Knowledge.”

At the same time, be really clear about what assets will be available for your retirement. Many workers are banking on support that just won’t be available.

Consider this: Nearly two-thirds of wage earners between the ages of 35 and 54 believe they’ll get a defined-benefit pension in retirement. But only about 30 percent of the current work force is currently enrolled in one, says Craig Copeland at EBRI.

At the same time, 38 percent of wage earners expect employers to provide lifetime health benefits. They could be in for a nasty shock. Today, 33 percent of large companies offer retiree health benefits, half as much as the 66 percent that did so in 1988, according to Hewitt Associates.

If you’re not sure what you’re entitled to, contact your benefits office at both current and previous jobs. While you’re at it, get documentation so you can keep careful records of those benefits.

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’ve already graduated from college. Forty-five percent of working individuals age 45 and older who have an adult child over age 25 provide their offspring with financial support, according to a recent report from Putnam Investments and Brightwork Partners, a research firm.

But the long-term cost of such ongoing support is high. Twenty-nine percent of older parents delay retirement, and 38 percent are saving less for retirement because they’ve bankrolled an older child. “When forced to make a choice, people support their own children first. They’ll put themselves last,” says Merle Baker, president of 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, president of the National Association of Personal Financial Advisors.

John Morris agrees. A father of four kids, he’s been saving for their tuition over time, and he recently made his first tuition payment for his eldest son. “The experience of writing that first check to the university makes it real,” he says.

But Morris isn’t about to torpedo his own future, either. He had to work through college himself and says he believes that a kid who’s motivated and gets good grades can find a way. “If you haven’t gotten started with saving for yourself when you’re in your 40s, it’s hard to face past decisions and it’s easy to say, ‘I’m in trouble, I’m not going to do anything about it.’ But you’ve got to pay yourself first. Even if it’s a couple of hundred dollars a month. Even at 46. You have 20 years left until retirement. You can save an awful lot.”

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