Best Retirement Moves in Your 40s

Continuing to save for your retirement is important, but Sound Dollar’s Certified Financial Planner Elaine King shares four things you should also tackle.

Written by Elaine King / March 11, 2022

Quick Bites

  • With around 20 years to go before retirement, your 40s are a good time to reassess your finances and consider major purchases, like a home.
  • Look at your current cash flow and control your living expenses in order to increase your contributions to your retirement accounts.
  • Plan for your family’s future by saving for college for your children or nieces and nephews.
  • No matter how much money you’ve saved, check to make sure your investments are diversified.

Not long ago, people in their 40s were planning for their last decade of life. The average life span in the 19th century was 48 years for women and 46 for men.[1] The human race is new to living past our 50s and this is why a new syndrome was discovered: the midlife crisis.

It happens to all of us in our 40s and 50s—a time when we question if we are headed in the right direction because you know what? Even if you change direction in your 40s in terms of your career, or you change your source of income by, say, starting a business, you will most likely have the same amount of energy you had in your 20s to develop it well into your 60s. So if you are questioning your profession or income source, go ahead and make a change. But one thing is constant: the need to save for your retirement in your 40s!

Here I will share what I am doing to prepare correctly and not let my midlife crisis distract me from adding to my retirement. Let’s start in order:

Inside this article

  1. 1. Check your time horizon
  2. 2. Update your money needs
  3. 3. Remember your family
  4. 4. Diversify!

1. Check in on your time horizon

You are exactly in the middle of the retirement marathon and in your best earning years. Let me explain. I am assuming you started to earn money and contributed to your retirement in your 20s; considering the average person retires in their 60s, the middle of the road is exactly in your 40s.

Since your time horizon is 20 years, choose to make large purchases such as a house for your future now if you’ve been thinking about it but haven’t yet. (Although I don’t recommend it, you could also tap into your retirement accounts to qualify for a mortgage loan as long as it is for a home purchase, but it should be a last resource for your down payment or investment property.) Make big purchases now, while you have time to pay them off before or around the time you retire. If you can, get a 15-year mortgage so you can pay it off before you retire.

On a personal note, I am evaluating land outside the city to build a cottage in the next 10 years and spend part of my retirement years enjoying the outdoor life.

2. Update your projections for how much cash you need

This is the time to tweak, increase and determine ways to make it to the finish line faster. Look at your cash flow in terms of income now and projected in the next three years—consider any bonuses, salary increases, rental income, future business and spousal income. Make room to put money aside for retirement. In other words, control your living expenses to make room for your financial independence fund.

You can also try to pay off your mortgage faster by adding an extra payment, or increasing the payment amount, so you can live mortgage-free in your 60s. I refinanced my mortgage from 30 to 15 years to accelerate my projections.

Increasing your retirement contributions to your retirement accounts is also a good idea. Ideally, you should contribute the maximum amount you can to a 401(k) if you have one and complement it by maxing out an IRA if you can (always consult with your CPA to see if you qualify for accounts like Roth IRAs, as high earners sometimes don’t qualify). If your spouse does not work or does not have a retirement plan, open one for them and ensure you are each other’s beneficiaries. If you qualify for a Roth IRA (how much you can contribute to one depends on your income), consider this one over a traditional IRA as you will save on taxes when you retire because while you contribute with taxed dollars, you can withdraw money tax-free when you retire.

3. Remember your family and create a list for them of their needs

For example, if you have children or want to provide your nieces and nephews with the best gift, save for their college years. There are many ways you can do this. One that is common is to open a 529 plan in their name.

This plan has two types: One is a prepaid plan, offered by a handful of states and it is designed to pay the beneficiary’s education in the future with today’s dollars. For example, if you have a child today and want to have a prepaid plan for a college in Florida, it will cost you approximately $28,000 to pay for them to get a bachelor’s degree at a four-year college 18 years from now, as opposed to an estimated $66,000 in the future.[2] The assumption is that tuition will grow at 6%; thus, if you don’t save today it will most likely cost you more than double.

This prepaid plan is limited to state colleges and universities, and the face value (in this case, $28,000) can be used in case your child wants to go to a private university; you have the option to change beneficiaries if your child receives a scholarship. There are also 529 college savings plans, which allow the money to grow tax-deferred and be directed to education tax-free.

4. Update your asset allocation for more diversification and investments in nontraditional asset classes

No matter how much money you’ve saved at this point, check to make sure your investments are diversified. The rule of thumb is to allocate 20% to nontraditional asset classes. Let’s say you started saving in your 20s and put away $10,000 annually into your 401(k). You should have at least $100,000 saved, even with no earnings growth. With a growth of 7% annually, you should be closer to $200,000. Allocate 20% or $40,000 to nontraditional asset classes.

It is important to diversify your savings into an investment account that exposes your growth to different areas of the economy such as international, stocks, bonds, small business, large business. The thought process is that markets go up and down, but since different asset categories are not correlated, having many asset classes limits your risk to some degree and increases your odds of having a better return.

These are sometimes called alternative investments, and include real estate investment trusts, commodities, private equity and hedge funds (though these last two sometimes have high minimum investment requirements, like $250,000). Traditional asset classes are large companies such as Amazon, Google and Apple, and nontraditional investments could be a fund that just invests in water or gold or lumber. Look beyond large caps, at some of these alternative investments, and into mutual funds with international companies, as well as resources such as water, oil and gas, real estate and most importantly your own business as a complement to your sources of income. Think outside the box for growth and income generation.

Article Sources
  1. “Life Expectancy in the U.S.A.,” UC Berkeley, https://u.demog.berkeley.edu/~andrew/1918/figure2.html.
  2. “529 Prepaid Plan,” Florida Prepaid, https://www.myfloridaprepaid.com/prepaid-plans/plans-and-pricing.

About the Author

Elaine King

Elaine King

Elaine has served as the Family’s Financial Planner for over 1,200 families and 100 multigenerational family enterprises crafting actionable family financial plans.

Full bio

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