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How to Catch Up on Retirement Savings in Your 40s

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A couple remaining optimistic about their retirement savings after having caught up on their goals.

If you are in your 40s and behind on your retirement savings, you are not alone. While saving early will give you more time to grow your nest egg, it’s never too late to start. Let’s break down what you can do to catch up on your retirement savings in your 40s.

If you’re falling short on your retirement savings goals, a financial advisor can help you create the plan you need to succeed.

Limits for Saving for Retirement Each Year

“Catching up” on retirement savings refers to the amount of money that you can contribute to your retirement account in order to boost your savings to keep up with your retirement goals. This strategy might be particularly relevant for those who started saving later in life or those who encountered financial hurdles that hindered their savings. Part of effective financial planning involves understanding the annual limits for retirement savings, which will determine the rate at which you can catch up.

For 2023, the IRS allows up to $22,500 in contributions to 401(k) plans ($23,000 in 2024). If you’re over 50, you’re allowed an additional $7,500 in catch-up contributions. If you have an IRA, your limit is $6,500 in 2023 ($7,000 in 2024), and an extra $1,000 for those age 50 and older.

So how much could you save? Let’s take as an example a worker who starts saving at 40 and contributes the maximum amount every year. In this case, you could potentially accumulate around $1.2 million by retirement at 65, assuming a 6% annual return.

Ways to Catch Up on Your Retirement Savings in Your 40s

A couple estimating how much they will need to save to catch up on their retirement savings.

If you’re in your 40s and want to jump-start your retirement savings, there are several strategies you can use. These include maximizing employer 401(k) matches, funding an IRA, managing debt along with retirement contributions, securing health coverage and minimizing investment risk, among other options. Let’s take a deeper look at six common options:

  • Increase contributions to retirement accounts: Maximize contributions to retirement plans such as a 401(k), 403(b), or IRA. For those aged 50 or older, take advantage of catch-up contributions, which allow higher annual contributions beyond the standard limits set by the IRS.
  • Delay your retirement: Continue working past the typical retirement age to allow more time for savings to grow and reduce the number of years in retirement. This strategy allows for additional contributions to retirement accounts and delays the need to start drawing from those accounts.
  • Utilize health savings accounts (HSAs) for retirement: Contribute to an HSA if eligible and use it as a retirement savings tool. HSAs offer triple tax benefits (tax-deductible contributions, tax-deferred growth, and tax-free withdrawals for qualified medical expenses), and after age 65, withdrawals for non-medical expenses are penalty-free (though they’re subject to income tax).
  • Diversify investments: Review and potentially rebalance investment portfolios to ensure they align with retirement goals. Consider seeking advice from a financial advisor to optimize investment strategies and diversify across different asset classes to manage risk effectively.
  • Cut expenses and boost savings: Evaluate current spending habits and identify areas where expenses can be reduced. Allocate the money saved towards retirement savings. Small changes in spending can have a significant impact on savings over time.
  • Consider alternative income streams: Explore additional ways to generate income, such as part-time work, freelancing, rental properties, or starting a small business. Supplementing retirement savings with extra income can help increase the overall savings rate.

How to Make a New Retirement Plan in Your 40s

Creating a new retirement plan at age 40 involves several steps to assess your current financial situation, set goals and develop a strategy to build savings for retirement. Here are nine common steps to take at 40:

  • Assess current financial dituation:
    • Review your current income, assets, and liabilities (debts).
    • Evaluate existing retirement accounts (if any), such as 401(k)s, IRAs, or pensions.
    • Calculate your net worth by subtracting liabilities from assets.
  • Define retirement goals:
    • Determine your desired retirement age and lifestyle.
    • Estimate the amount of money needed for retirement based on your desired lifestyle and expenses.
    • Consider other financial goals, such as funding children’s education or purchasing a home, to incorporate into your retirement plan.
  • Understand retirement savings vehicles:
    • Research and understand various retirement savings options available, such as employer-sponsored plans (401(k), 403(b)) and individual retirement accounts (Traditional IRA, Roth IRA).
    • Learn about contribution limits, tax implications, and potential employer matches for retirement accounts.
  • Create a savings strategy:
    • Calculate how much you need to save regularly to reach your retirement goals.
    • Set a budget that prioritizes retirement savings while considering other financial obligations.
    • Aim to save at least 10-15% of your income for retirement, adjusting the savings rate as necessary to meet your goals.
  • Investment planning:
    • Determine your risk tolerance and investment objectives for retirement savings.
    • Develop an investment strategy aligned with your risk tolerance and long-term goals. Consider diversifying your portfolio to manage risk.
    • Review and rebalance your investment portfolio periodically to ensure it remains aligned with your goals and risk tolerance.
  • Take advantage of employer benefits:
    • Maximize contributions to employer-sponsored retirement plans, especially if your employer offers matching contributions. Contribute enough to receive the full employer match to take advantage of this benefit.
  • Consider additional savings vehicles:
    • Explore other savings options beyond retirement accounts, such as Health Savings Accounts (HSAs) or taxable investment accounts, to supplement retirement savings.
  • Stay informed and seek professional advice:
    • Stay updated on changes in retirement laws, tax regulations, and investment options.
    • Consider consulting a financial advisor or planner to assist in creating a comprehensive retirement plan tailored to your specific circumstances and goals.
  • Regularly review and adjust the plan:
    • Reassess your retirement plan periodically to account for changes in income, expenses, goals, or investment performance.
    • Make adjustments as needed to stay on track with your retirement savings goals.

Bottom Line

A middle-aged couple reviewing strategies to catch up on their retirement savings.

Catching up on retirement savings often requires a combination of strategies that are tailored to your individual circumstances and financial goals. And if you have to start a new retirement plan at age 40, you could still have enough time to make meaningful progress, but you’ll need to be diligent and proactive in building your nest egg.

Tips for Retirement Planning

  • A financial advisor can help you properly plan your finances for the long-term impact that retirement requires. They have the experience that can help you not only manage your investments so you have enough wealth to make it through retirement, but also help you think through other financial aspects that are necessary when you’re planning for your golden years. 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 a free introductory call 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.
  • A retirement calculator can also assist you in your retirement planning as you can estimate whether you’re saving enough money to hit your long-term financial goals.

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