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Ask an Advisor: We’re in Our Early 40s and Haven’t Started Saving for Retirement. We Have Over $20k to Invest. Where Do We Begin?

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Ask an Advisor: We're in Our Early 40s and Haven't Started Saving for Retirement. We Have Over $20k to Invest. Where Do We Begin?

My husband and I are both in our early 40s, and he recently received a monetary gift from his deceased father of more than $20,000. We have nothing to speak of in regard to savings or retirement funds. As we’re in our 40s, what would you recommend we do? –Aubrey

First of all, I’d like to commend you for using this windfall to jumpstart your savings. It’s an incredibly smart thing to do, and not a move that everyone would make. If you’re starting from scratch, here are the two things I would do with that money: build an emergency fund and start contributing to a retirement account. (And if you need help finding financial advice, this tool can help match you with potential advisors.)

Build an Emergency Fund

An emergency fund is simply cash, sitting in a savings account, that’s available to help with unexpected expenses like medical bills, home repairs or even periods of unemployment.

A good emergency fund provides financial stability through the ups and downs of life. It’s one of the most fundamental and effective ways to secure your financial foundation.

I typically recommend starting with an emergency fund of between $1,000 and $2,000, which is enough to handle most unexpected expenses that could come up. Given that you don’t have savings right now, I would use a chunk of your windfall to hit this initial target.

A good longer-term goal would be building your emergency fund up to three months’ worth of expenses. This would provide a lot more security, but it’s something you can work toward over time rather than trying to accomplish all at once. (Whether you need help starting to build a nest egg or creating an overall financial plan, a financial advisor can help.)

Start Contributing to a Retirement Account

Ask an Advisor: We're in Our Early 40s and Haven't Started Saving for Retirement. We Have Over $20k to Invest. Where Do We Begin?

Next, I would look to start saving for retirement, and you have a few different options to do so. The best return on investment is contributing to a 401(k) or 403(b) up to your maximum employer match. This is typically an immediate and guaranteed return of 50% to 100%, which is far better than anything you’ll find elsewhere. 

The catch is that 401(k) contributions have to come out of your paycheck. You can’t contribute outside money, so you can’t directly use your windfall. There is a workaround though and it looks like this:

  1. Put your windfall into a savings account
  2. Increase your 401(k) contribution to max out your employer match
  3. When you receive your paycheck, offset the decrease in take-home pay due to your 401(k) contributions by transferring the difference from your savings account to your checking account

As an example, if your new 401(k) contribution reduces your take-home pay by $200 per paycheck, you would simply transfer $200 from savings to checking each time you are paid. You’ll get the match, and you’ll end up with the same amount of money in your checking account for your other monthly expenses.

If you don’t have an employer match, or if there’s money left over after maxing out your employer match, you can also contribute to an IRA. You can choose a provider, open either a traditional or Roth IRA for both you and your husband, and contribute up to $6,500 per year for each of you (subject to income limits).

The nice thing about IRAs is that you can make the entire contribution all at once, instead of the more gradual approach with a 401(k). (And if you need help in your search for financial advice, this tool can help match you with potential advisors.)

If you’re going this route, you might do something like the following with your $20,000:

  • Put $2,000 in savings as an emergency fund
  • Contribute a combined $13,000 to your IRAs for 2023
  • Put the remaining $5,000 in savings for now, and then contribute it to your IRAs in 2024

Bottom Line

Ask an Advisor: We're in Our Early 40s and Haven't Started Saving for Retirement. We Have Over $20k to Invest. Where Do We Begin?

If you follow the steps above, you’ll be laying a strong foundation that you can build upon as you move forward. Your emergency fund will help you weather the inevitable ups and downs. And your 401(k) and/or IRA contributions will help you start accumulating the resources that may eventually give you the freedom to stop working. If you can add consistent, monthly contributions on top of that, even if the amount you start with is small, you’ll be on your way.

Tips for Finding a Financial Advisor

  • Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have free introductory calls with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Consider a few advisors before settling on one. It’s important to make sure you find someone you trust to manage your money. As you consider your options, these are the questions you should ask an advisor to ensure you make the right choice.

Matt Becker, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Please note that Matt is not a participant in the SmartAdvisor Match platform, and he has been compensated for this article.

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