As someone who will soon be a 40-something, I’m concerned about having enough money saved for retirement. Though I have a 401(k) and a retirement account I actively fund, I still feel like I should be doing more. All too often I talk to people in their 50s and 60s who have inadequately saved for the future. Therefore, they have to keep working longer than they planned. I don’t want to be in that position. So, in the past couple of years I’ve done a deep dive into the world of financial education to better prepare for the future.
And if you’re my contemporary, I want to pass along the insight to ensure you’re as prepared as possible, too. Here are seven tips that may help you.
Unlearn Bad Habits
Your 40s are the time to unlearn bad financial habits that formed in your 20s and 30s. For me, I unfortunately learned some harmful financial habits from my parents and began replicating those as an adult. It’s important to recognize when you’ve adopted dangerous financial habits that may be detrimental to your financial health and retirement, and then change those habits right away. This may include not saving, paying bills late, incurring bank fees, relying on credit cards or even borrowing too much.
Identifying your bad financial habits and ensuring that you’re turning over a new leaf is critical in your 40s. If you haven’t already been doing it, start paying yourself first on payday. Shift your focus away from spending and borrowing to saving and investing for the next 10 years and beyond. Use this time to save more and become more financially savvy.
Make a Retirement Plan
Opinions vary about what constitutes a sound retirement plan. The point is to actually have a plan. Your retirement plan is your financial arrangement you create that will replace your employment income when you retire. The plan outlines your income goals and actions necessary to achieve them. Planning involves identifying income sources, estimating retirement expenses and the implementation of a tailor-made savings plan.
Typical employer-sponsored retirement programs include 401(k) plans for traditional companies, 403(b) plans for nonprofit employees, and 457 plans for employees of state and local municipalities. You can also boost your retirement savings with a Traditional IRA or a Roth IRA, which are explained below. Roll up your sleeves and get going on your plan. Be realistic about estimating how much money you’ll need annually based on your lifestyle and your cost of living.
Boost Retirement Contributions
By your 40s, you should be actively saving for retirement. But if you aren’t or if you are underfunding your account, then now is the time to get caught up. If you save in a 401(k), the maximum you can save in it annually is $18,000. Make sure that you are contributing the max amount, since every dollar you contribute to the plan is pre-tax money. A common company 401(k) matching contribution is 50 cents per dollar up to a specified percentage of pay, which is commonly 6%. Even if your employer doesn’t offer matching contributions, the tax advantage of a 401(k) still makes it a great retirement vehicle.
Traditional Individual Retirement Accounts (IRAs) allow you to make tax-deductible contributions up to $5,500 annually if you make less than $61,000 a year. While most savings plans offer up-front tax breaks, Roth IRAs are the opposite offering tax-free earnings and withdrawals in your retirement years. In 2015, single taxpayers can contribute up to $5,500 to a Roth IRA and married couples can each contribute up to $6,500 a year. There are participation restrictions if you earn more than $131,000 a year. Whichever retirement vehicles you prefer, be sure you’re taking full advantage in these critical money-saving years.
Hire a Financial Planner
Though there is much you can do to prepare for retirement on your own, the reality is you don’t know all there is about retirement investing. Enlisting help from a certified financial planner can protect your assets and increase your investment earnings. It’s crucial to have an expert safely coach you to your retirement years. Look for someone you can speak freely with about your retirement goals.
Unfortunately, not all planners are created equal, so it’s important to find one who is more interested in providing financial recommendations than one who wants to score a sale. It may be wise to set up interviews with a few planners to find one that best meets your expectations. Above all, make sure your planner has proper credentials, such as the C.S.A. credential signifying their membership with the Society of Certified Senior Advisors.
Don’t Put Kids’ Education Before Retirement
A common mistake many 40-somethings make is prioritizing their children’s college education over retirement savings. A recent Sallie Mae survey found that parents were saving for college tuition significantly more than retirement. This could be a problem, because 40-somethings are running out of time to sufficiently save for retirement. Also funding retirement via a 401(k) and other accounts provides an upfront tax savings. Plus, unlike funding a 529 college savings account, these accounts typically provide an employer match, meaning you likely end up with more money than you’ve invested.
Plus, the reality is, students have other options when it comes to funding their education. They can apply for scholarships, grants, work-study programs and loans. If a student can work part-time in high school and college, it teaches them the value of contributing to their education.
Trim Your Lifestyle
A lot of people get into their 40s and feel it’s time to upgrade to a lifestyle with a little more luxury. If they struggled through their early years, many people view this as the time to upsize to a bigger home, buy a more expensive car and take more vacations. But in actuality, this is the time to tighten your spending and catch up on savings.
Evaluate your spending habits to determine if you’re spending too much on dining out, shopping, entertainment and other unnecessary expenses. According to the credit bureau TransUnion, the average U.S. credit card debt was $5,249 in 2014. Make it your goal to be debt-free in your 40s! The key is to reduce your debts by paying consistently every month with a maximum contribution. Use, and stick to, a monthly budget. This is an opportunity to exercise more financial self-control and cut out impulse buying.
Refinance Your Home
Refinancing many not be a solution for homeowners across the board, but in many cases, it makes sense since it can significantly reduce your monthly payments. Most refinancing plans save the average homeowner about $200 a month, or $2,400 a year. More money per month means more dollars available for retirement savings and investment.
The big question is – do you refinance to a shorter-term loan or extend your mortgage term? It really depends on your specific situation and whether you plan to stay in your home for the long term. In your 40s, you aren’t exactly close to retirement but refinancing into a shorter term allows you to pay off your mortgage faster with higher monthly payments. Still, others prefer to extend their mortgage term into something like a 30-year fixed-rate loan to reduce their monthly payments. If you’re thinking of refinancing, use a refinance calculator to crunch the numbers or talk to a Home Loan Expert to explore more options.
Implementing these practices in your 40s should start producing results for you and your family. It takes a lot of discipline and focus to properly prepare for your 50s, 60s and beyond. With people living longer these days, you need your savings and retirement money to last longer. The good news is that it can if you take the necessary steps to get there. If you have more tips to share with 40-somethings on establishing future financial stability, please share them below.
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