While in your twenties, the need to invest in your retirement may not have seemed urgent enough to earn your attention. Even in your thirties, you may have been too busy shopping for a house or planning a wedding to think about that far-off age of 65. But in your forties, investing in your future should be one of your top priorities. Even if you made saving a main concern in your twenties, you may still find it useful to reassess and redouble your efforts now. Fortunately, there is yet plenty of time to make up lost ground or to refine your investment strategy.
Reducing debt or paying it off entirely is one of the best ways to pave a path to a successful financial future. Eliminating debt allows you to free up a large swath of your income that you can redirect toward saving and investing for the future. Though you may be tempted to pay off your mortgage first because it is a large expense, other types of debt deserve your initial attention. “Focus on paying off debt with higher interest rates, such as credit card balances and parent college loans,” writes Sandra Block, senior editor at Kiplinger, in an April 2016 article. “If you still have money left over, consider accelerating your mortgage payments.”
Maintain a healthy cash reserve
Maintaining a healthy cash reserve is important at all stages of adult life and this continues to be true while investing in your forties. “The first step in any financial planning is to establish an emergency fund,” Michele Lerner writes in an April 2015 article for Bankrate.com. Investing for the long-term future is no good if you can’t afford to pay an unexpected bill in the short term and need to make an emergency — and taxable — withdrawal from a retirement account. “Two-income households may be safe enough with three months of expenses saved, while a single person might need six months of reserves,” Lerner advises.
Invest in a 401(k) and IRA
If you haven’t been investing up until this point, now is the time to start — and you will need to invest more to catch up. Fortunately, tax-deferred accounts can help ease the pain. “Money directed into a 401(k) or traditional IRA goes in before the IRS takes a cut and lowers your annual taxable income on a dollar-for-dollar basis,” says Dayana Yochim, personal finance expert, in an April 2017 article for NerdWallet.com.
You should aim to save at least enough in your workplace retirement plan to earn the full benefit of the company match. After that, how you split your investments between 401(k) and Roth IRA depends on your tax bracket. “Workers in lower tax brackets are better off diverting some of their savings to a Roth and taxable accounts because the immediate benefit of tax deferral is less valuable,” Block says. She also advises those in a high tax bracket to put as much into a tax-deferred account as possible because they will likely be in a lower bracket when withdrawing.
Find additional income
After having done the math and figured out exactly how much money you need to have saved by your retirement, you may find that you simply can’t afford to put enough money aside to meet your investment target in time. Besides delaying retirement, a viable solution for many, you can help grow your retirement by earning money on the side and taking a second look at your budget. “Small amounts make a big impact,” says Paula Plant, an award-winning finance writer, in a March 2018 article for TheBalance.com. “If you can earn an extra $100 per week — perhaps by mowing lawns, babysitting, consulting, teaching or freelancing — and you can also trim an additional $100 per week from your spending habits, you’ll save an extra $10,400 per year.”
It’s always better to start late than never, and though starting to invest in your forties puts you at a disadvantage compared to investing your twenties, it can still be well within your means to build a respectable retirement fund. For specific help preparing for your future, make sure to consult an expert at your preferred financial institution.