Planning for retirement takes on a greater sense of urgency for many people as they enter their 40s. At this life stage, the questions for most people should no longer revolve around how to save for retirement. Instead, 40-somethings should ideally be well along the road toward building a nest egg that will help ensure that they enjoy a financially comfortable retirement.
Peak Earnings, but Also Expenses
The good news for many 40-somethings is that they are entering the peak earning years of their lives — especially for married couples where both spouses work full time. This could mean they have more money than ever to sock away for retirement.
At the same time, however, many of these individuals are also facing greater financial obligations and responsibilities than ever before. For example, they may have taken on a bigger mortgage so they could move into a better neighborhood, not to mention all the expenses associated with raising a family.
In addition, an estimated 9 million Americans are part of the so-called “sandwich generation” who are responsible for providing care for young children and aging parents at the same time. Many of these individuals and couples face the dual challenge of raising children, saving for their kids’ college educations and caring for and helping financially support parents who may need specialized medical care.
Fighting “Lifestyle Creep”
One of the keys to overcoming these challenges to saving for retirement in your 40s is to fight “lifestyle creep.” This occurs when the desire to “keep up with the Joneses” tempts people to buy a bigger house, driver fancier cars, eat at more expensive restaurants and take more exotic vacations than they can really afford.
Not only does this excess spending consume funds that you could be saving for retirement, but it also gets you used to a higher-end lifestyle that you may have to support in retirement. This, of course, means you must save even more money for retirement.
By avoiding the temptations associated with lifestyle creep, you can free up more cash in order to really pump up your retirement savings in your 40s. It may be smart to max out contributions to your retirement plan if you can. In 2020, you can contribute up to $6,000 to your traditional or Roth IRA (combined) if you’re in your 40s. You can contribute even more to your 401(k): up to $19,500 if you’re in your 40s.
Leave Retirement Funds Alone
Just as important as contributing to your retirement account is leaving these funds alone. It can sometimes be tempting to take early withdrawals from IRAs and 401(k)s to cover unexpected large expenses or pay for things like vacations and children’s educations.
However, there’s a 10% penalty and income tax on most early withdrawals from IRAs and 401(k)s. Also, tapping into your retirement account at this stage of life to pay for nonretirement expenses can severely jeopardize your financial security later. Instead of taking money out of your retirement account, it’s usually smarter to build up an emergency savings account you can easily access to pay for expenses like these.
Overcome the Challenges
No doubt, there are a number of challenges to planning for retirement in your 40s. Implementing retirement tips like these can help you meet these challenges and save for a financially secure retirement.
Disclaimer: The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice