It's never too early to start saving for retirement. Opening a savings account or allocating money for retirement investments at an early age allows more time for your money to grow through compound interest. According to the Transamerica Center for Retirement Studies, the median amount of retirement savings for Americans in their 40s is $63,000. However, the Economic Policy Institute alleges there are many workers in their 40s without any savings whatsoever.
Fortunately, it's also never too late to start saving for retirement. While of course the earlier you start saving the more you will end up with, it is still possible to start saving in your 40s and retire at a comfortable age—so long as you adhere to the following advice:
1. Don’t Panic
Panicking about your financial situation and lack of funds saved for retirement isn't going to help. Instead of focusing on what you haven't done, focus your energy on what you can do to put yourself in a position to retire at a relatively young age. This can be done by developing and following a comprehensive financial plan.
To start, create a weekly or monthly budget to track spending and limit unnecessary purchases. Knowing exactly how much you intend to spend in any given period can give you an idea of how much leftover you will have to allocate to retirement savings. Most experts suggest you need between 70 percent and 80 percent of your working income for each year of retirement. If you know how much you're able to save each month, you can begin implementing strategies or other complementary measures to reach that target at your desired retirement age.
For instance, a 40-year-old with no prior retirement savings can retire at 60 with $400,000 set aside so long as they put away $800 per month and generate an average annual return of 7 percent on their investments. Coupled with Social Security and other income sources, this might be enough for some to live a relatively comfortable post-retirement lifestyle.
2. Stretch Your Working Time
A late start to retirement planning might not be cause for panic, but it may mean you'll have to work a little longer to reach your goals, especially if you can't manage to set aside a more substantial amount of money each month. If you planned on retiring at 65, you might instead consider working an extra five years and saving a large portion of the money you'll earn in that time. Not only does this increase the amount of money you'll have for retirement, but it also decreases the time you'll need to use those savings.
3. Pay Down Debt
Paying off any debt you've incurred throughout your life, especially on high-interest payments, can make it easier to put aside money for retirement purposes later in life. Credit card debt and car loans, in particular, can be challenging obstacles in pursuit of saving for retirement. Making extra mortgage payments can also be beneficial if you've still got plenty of years left to pay off your mortgage. Conversely, if you're in the final years of your mortgage, it might be better to allocate that money to investments.
4. Invest—But Don't Assume Additional Risk
Investing is an important component of saving for retirement, whether it is through a brokerage firm or an employer-sponsored 401(k) plan. However, it isn't prudent to take on more risk to make up for the lost time when investing. While it's possible to generate higher average annual returns when assuming more risk, you're also more likely to lose money.
Taking on increased risk might be acceptable for individuals in their 20s, as they have more time to recover any lost money, but those in their 40s should follow this common asset allocation approach: invest the resulting percentage of 110 minus their age in stock funds and the rest in bond funds. For instance, a 48-year-old would invest 62 percent and 38 percent of their money in stocks and bonds, respectively.
5. Try a Roth IRA
A good complement to a 401(k) is a Roth IRA. Individuals younger than 50 can contribute up to $5,500 per year to this type of account. This money grows tax-free and can be withdrawn without penalty. However, a Roth IRA should be considered only after maxing out any 401(k) accounts, as those generally receive matching employer contributions. If your 401k plan allows for you to receive matching funds from your employer even if you designate all of your contributions to the ROTH side of the 401k, that is an even better long term plan, as all of the money will be tax-free for you upon retirement.
6. Consider Alternative Investment Avenues
Investment accounts aren't the only other methods of generating additional income outside of your full-time job. You can always get a part-time job to help meet retirement goals or even launch a part-time consulting business. Purchasing a property to rent out can also generate a monthly recurring income that can be used for investing. Moreover, you can even consider lowering the length of your mortgage to save on interest or look into refinancing options to reduce total interest, consolidate debt, and provide additional money for investments or other income-generating ventures.