When you’re in your 20s and 30s, retirement seems so far away that it’s nearly impossible to imagine. After all, when something is 30 or 40 years in the future, it barely seems real. When you hit your 40s, however, retirement suddenly seems like it is right around the corner.
So exactly where should you be financially, and how can you build wealth in your 40s? The answer is different for everyone and depends on a number of factors including your retirement goals, your income, and your lifestyle. A good starting point is to gain a clear picture of your current financial health, starting with your debt.
Managing Debt in Your 40s
A lot of people hit their 40s with more than their fair share of debt. This can include medical debt, credit card debt and even college loan debt. Additionally, you may have lines of credit, car debt and a mortgage. When you do the math, it might seem overwhelming and unmanageable. You owe it to your future self to take a closer look at your debt and create a plan for reducing it as quickly as possible.
Debt reduction is important because debt undermines your ability to save, which is what retirement planning is all about. So after you gather your debts and have a clear picture of your financial obligations, you can create a strategy for paying them down. How?
Start with the smallest debt balances
Pay off the lowest debts first so you can clear them more quickly. When you pay off one, take the payment you were making and add it to the next debt on your list. This is an efficient way to more quickly reduce your debts.
Get aggressive with high-interest debts
Whenever possible, pay more than the minimum due, especially on credit cards, which tend to carry the highest interest rates. Pay extra payments to more rapidly reduce the principle that you owe. Debts with higher interest rates should be aggressively tackled.
Pay mortgage early
Consider making just one extra mortgage payment a year. If you do this, your 30-year mortgage could be reduced by 5-7 years. You could also make your mortgage payments bi-weekly, which is roughly the equivalent of one extra payment over the course of the year. If you combined these techniques, paying one extra payment a year AND making mortgage payments bi-weekly, you could potentially have your home paid off in 20 to 22 years instead of 30.
Live within your means
Paying off debt is great, but you have to live within your means to keep it from piling up again. So alongside your debt reduction strategy, work on budgeting. Create a household budget that includes your debt payments, living expenses and savings. You can use this budget worksheet from the FTC to help you get started. You will also find a number of financial apps and calculators that help you build and maintain a budget. Don’t rely solely on technology, though. Consult with a financial consultant as well. We can look at your specifics to create a more customized approach to debt management and retirement planning.
How Much Should You Have Saved for Retirement by Your 40s?
This is a difficult question to answer because it can vary for everyone based on a few factors, like your income, lifestyle and retirement goals. Generally speaking, however, many experts suggest that to be on track for retirement you should have around three times your annual income in savings in your 40s. So if you earn $50,000 a year, you should have around $150,000 saved for the future by the time you’re 40. This includes the money you have in financial tools such as 401(k) and other long-term investments.
Of course, financial milestones at age 40 depend on your retirement goals. If you want to travel the world after retirement, you may need to save more. If your dream retirement involves gardening, you may be okay with less. If you want to leave a legacy for your children and grandchildren, you’ve got to consider that in your retirement strategy.
Talking with a financial consultant is critical in coming up with the right retirement savings goals for your unique situation.
How to Make Up for Lost Time and Build Retirement Savings
If you’re looking at your own situation and feeling a bit of panic, you’re not alone. Many Americans are quite behind in terms of retirement savings, with a recent FinanceBuzz survey finding that 35% of all survey respondents have no money set aside for the future.Those who do have savings tend to have far less than needed to comfortably retire when the time comes.
Fortunately, you can make up for lost time and set yourself up for retirement if you get aggressive with your savings.
- Take advantage of 401(k) match programs your employer offers by investing the max allowed. Check with your organization to learn more about what is available.
- Regularly increase your 401(k) contributions by a minimum of just $50. Most people barely notice the reduction in take home pay but over time, you can significantly increase how much you’re saving.
- Health care costs go up with age, so consider putting more money into your health savings accounts (HSA). This gives you tax deduction benefits and helps offset health costs.
- Do everything you can to increase how much you can put away each month, including cutting costs and increasing income. If a 40-year-old saves $650 a month, and they invest wisely, they can have up to $1 million in retirement savings by the time they reach 67, even if they start out with no retirement savings.
How to Start Saving for Retirement at 45
Financial planning for 40 year olds, especially when you’re trying to quickly gain ground for retirement, can be complicated. You can do it, especially if you work with a financial advisor who can help you identify your options so you can make smart choices.
It’s also important to note that a good financial planner doesn’t pass judgment. You are not the only American worker who hasn’t saved enough for retirement, and you won’t be the last. Our job is to help you find the right financial tools so you can make up for lost time.
How to Build Wealth in Your 40s
If you are among the 65% of the FinanceBuzz survey respondents who did set aside money for the future, and you would like to build on that, Lundervold Financial can help with that too. We understand that your financial goals in your 20s and 30s might vastly differ from what they are now. Makes sense. Let’s get together and talk where you should be financially at 40 and what you want the next few decades to look like.
Success requires more than simply reducing debt and saving; you have to make your money work for you. Instead of leaving it to chance, consider talking with a skilled financial planner with experience in retirement planning. They understand financial tools and know how to leverage them to more effectively reach those long-term savings goals.
Ramsey Solutions. March 1, 2021. “40 With No Savings? How to Retire a Millionaire.” Accessed June 20, 2021.
Kat Tretina. Finance Buzz. Sept. 26, 2020. “[Survey] 1 in 3 Americans Putting Off a Financial Decision Until After the Election.” Accessed June 20, 2021.
Federal Trade Commission. “Make a Budget Worksheet.” Consumer.gov. Accessed June 4, 2021.
Kevin Mercadante. Dec. 20, 2020. Investor Junkie. “10 Financial Milestones to Achieve in Your 40s and 50s.” Accessed June 1, 2021.
We are an independent firm helping individuals create retirement strategies using a variety of insurance products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic retirement income strategies and should not be construed as financial advice.
The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.
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