There are very narrow pension graphs that tell you how much you had to save for retirement. One figure frequently mentioned by Fidelity Investments says that by the time you are 40, you should set aside three times your annual income.
But let’s be honest: the number is ridiculously unrealistic for many people. If you lived the paycheck to the paycheck for long periods of time or had a substantial student loan debt, you probably could not afford to invest much in your twenties.
If you’re in your forties and your investments are lagging behind, you’ve missed these magical compilation years. However, you still have a lot of time to save, but it is important that you do it strategically if you want to retire comfortably. Follow these rules if you are a 40-year-old who is in catch-up mode.
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1. Get your 401 (k) match and then fund an IRA
Having access to a 401 (k) plan with an employer match makes a big difference if your retirement fund is lacking. Let your full 401 (k) company match your first priority if your employer offers one. If you decide between the positions, it gives a serious weight if one company is significantly more generous with 401 (k) matches, especially if you catch up in the 40s.
Once you have made enough contribution to complete the match, consider maximizing a Roth IRA before putting extra money into your 401 (k). (You can use a backdoor Roth IRA strategy if your income exceeds the limits.) You have more investment options and more flexibility, plus tax-free money when you retire. The maximum IRA contribution in 2020 and 2021 is $ 6,000 for people under 50 years of age. After maximizing your contribution, you can decide whether you want to make 401 (k) contributions or use a taxable brokerage account if you have extra money to invest.
2. Pay off debt selectively
The average credit card APR for users who have a balance is 16.61%, which is well above your expected investment returns. Paying off credit card debt takes precedence over investment – apart from getting your 401 (k) match – because it costs you more than you can consistently earn.
But not all debt is the same. With a mortgage rate well below 3%, it is much better to use extra money to invest instead of making extra payments on your home. Regardless of the type of debt you have, compare the interest rate you pay with your expected return. If your interest rates are low, it often makes sense to invest instead of paying off debt.
3. Obtain solid health coverage
Your health risks start creeping up in your 40s. To protect your savings, it is essential that you have adequate health coverage so that you do not have to tap into your nest egg for a huge medical cost.
The tax benefits of health savings accounts (HSAs) are unmistakable. But you can only fund an HSA if you have a high deductible health plan. If you have serious medical issues, or if you can not afford to pay a high deductible, it is wise to choose a plan with a lower deductible, even if your monthly premiums are higher. On the other hand, a study by the TIAA Institute found that employees who pay too much for health insurance are 23% more likely to skip their employer retirement contest.
If you are healthy, you can save more than your pension if you choose a cheaper plan. And if you use an HSA, you can supplement your retirement savings, as you can withdraw the money with impunity once you’ve 65.
4. Continue to take risks
You may feel that you can not afford to take investment risks in your 40s. But realistically, you’re still about two decades away from retirement. Only by taking sufficient risk can you generate the returns you need to grow your money. This means that you still want to invest primarily in stocks.
One good guideline to follow is the 110 rule: subtract your age from 110 to get your proper stock allocation. If you are 40, you want a portfolio with 70% shares.
5. Prioritize your retirement over university savings
Parents, this one is difficult. Of course, you do not want your children to be buried in their student loan debt. But your children have many options to make their education more affordable, including choosing a cheaper school, financial aid, scholarships, and part-time jobs.
Your opportunity to build up your retirement savings gets narrower by the year. You do not want to be financially dependent on your children in your golden years. So think about securing your own future as the best investment you can make in your children.