There are many scary retirement charts that show how much you should have saved for retirement. A number commonly quoted by Fidelity Investments says that at 40, you must have set aside three times your annual income.
But let’s face it: that number is ridiculously unrealistic for many people. If you have lived from salary to salary for long periods or have carried on significant student loan debt, you probably would not be able to invest much at age 20.
If you are in your 40s and are behind on investments, you missed some of those magical years of writing. However, you still have a lot of time to save, but it is essential that you do this strategically if you want a comfortable retirement. Follow these rules if you are a 40-something who is in catch-up mode.
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1. Get your 401 (k) correspondence and then fund an IRA
Having access to a 401 (k) plan with a compatible employer makes a big difference when your retirement fund is missing. Make your complete 401 (k) company match your number 1 priority if your employer offers one. If you’re deciding between jobs, give it a lot of weight if a company is significantly more generous with 401 (k) combinations, especially if you’re approaching 40.
As soon as you are contributing enough to get the full match, consider busting a Roth IRA before putting extra money into your 401 (k). (You can use a Roth IRA backdoor strategy if your income exceeds the limits.) You will have much more investment options and greater flexibility, as well as obtain tax-free money when you retire. The maximum contribution from the IRA is $ 6,000 for people under 50 in 2020 and 2021. After your contribution is over, you can decide whether you want to make unmatched 401 (k) contributions or use a taxable brokerage account if have extra money to invest.
2. Pay the debt selectively
The average APR of the credit card for users with a balance is 16.61%, which is well above the expected return on investment. Therefore, payment of credit card debt takes precedence over investment – in addition to obtaining your 401 (k) equivalence – because it is consistently costing more than you can earn.
But all debts are not equal. With mortgage rates well below 3%, using extra money to invest instead of making extra payments on your home is a much better bet. Regardless of the type of debt you have, compare the interest rate you are paying with the expected return. If your interest rates are low, it often makes sense to invest instead of paying off debt.
3. Get solid health coverage
Health risks start to increase at age 40. To protect the savings you have, it is essential to have adequate health coverage so that you do not have to beat your savings for a large medical expense.
The tax benefits of health savings accounts (HSAs) are undeniable. But you can only finance an HSA if you have a high deductible health plan. If you have serious medical problems or cannot afford 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 overpay for health insurance are 23% more likely to skip their employer’s retirement.
If you are healthy, choosing a lower cost plan can help you save more for retirement. And using an HSA can complement your retirement savings, as you can withdraw money without penalty for any reason when you are 65.
4. Keep taking risks
You may feel that you cannot take investment risks at 40. But realistically, you are still about two decades away from retirement. Only by taking sufficient risk will you generate the returns you need to make your money grow. This means that you still want to invest primarily in stocks.
A good guideline to follow is rule 110: subtract your age from 110 to get the proper stock allocation. Therefore, if you are 40 years old, you would like a portfolio with 70% shares.
5. Prioritize your retirement over college savings
Parents, this is difficult. Of course, you don’t want your kids to be buried in student loan debt. But their children have many options for making their education more accessible, including choosing a cheaper school, financial aid, scholarships and part-time work.
Your opportunity to increase your savings for retirement gets narrower each year. You don’t want to be financially dependent on your children in what their golden years should be. So think about protecting your own future as the best investment you can make in your children.