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How to Save for Retirement at 40

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How to Save for Retirement at 40

Everyone has a different journey when it comes to saving for retirement. Some start early with a job that offers 401(k) matching right out of school. Others get a later start. If that’s you and you’re just starting to save for retirement, there are certain steps you need to take so your money is ready to go when you retire. Here are six tips on how to start saving for retirement at 40. A financial advisor can also help you save and plan for retirement.

1. Take Advantage of Employer Matching

If you have an employer that offers 401(k) matching, it’d be foolish not to take full advantage of it. It’s essentially free money. If your employer offers a matching contribution of up to 5%, and you’re contributing 15%, you’re actually saving 20% of your income for retirement. That means if you make $100,000, $20,000 a year is going into your 401(k) plan, but you’re only putting in $15,000, with $5,000 coming from your employer.

2. Pay Off Your High-Interest Debt

How to Save for Retirement at 40

According to Experian, the average 40-year-old American carries $7,067 in credit card debt. Interest rates on credit cards currently average around 20%. Using our credit card payoff calculator, it will take you until 2055 to pay $7,067 off by making the minimum payment. You’ll pay $37,908 in total interest, and that’s assuming you don’t accrue any more debt.

It’s going to be hard to save enough for retirement if you’re carrying around credit card debt. Auto loans, personal loans and even some student loans may come with high-interest rates, too. For you to start leaning hard into saving for retirement, you need to eliminate this high-interest debt. You’ll also need to address your spending habits, which may have led to this debt. Saving for retirement is hard because it’s an exercise in delayed gratification. But if you’re living within your means, you’ll have an easier time doing it.

3. Invest 15% to 20% of Your Income in Your Retirement

If you’re wondering how to start saving for retirement at 40, this is it. You’ll need to contribute at least 15% to 20% of your income to a retirement account. The more you can save and the sooner you can do it, the better off you’ll be. Remember that you’re starting later in life, which means that you can’t depend on your 401(k) compounding the same way it would have if you started in your 20s.

The good news is that hopefully, you’re making more money than you were in your 20s. That means you can make up ground. If you can cut your expenses and prioritize saving for retirement, you can build your savings and make retirement a reality.

For example, say you earn $100,000 per year at age 40 and start saving 15% of your salary in a 401(k), plus a 3% employer match. By the time you turn 65, your 401(k) could be worth over a million dollars if it grows by an average of 5% per year. And that’s assuming you don’t increase your annual contributions, which would also boost your total savings.

4. Invest in IRAs

Say you’ve been stashing away money in your 401(k) and hit your contribution limit ($22,500 in 2023). That doesn’t mean you should stop saving. Consider opening an individual retirement account (IRA). Traditional IRA and a Roth IRAs both come with a $7,500 contribution limit in 2023.

The main difference between a traditional and Roth IRA is how they’re taxed. A traditional IRA uses pre-tax money, much like your 401(k). Contributions to it are tax-deductible, but you’ll need to pay income tax on withdrawals. A Roth IRA uses after-tax money. Contributions aren’t tax-deductible, but your money can grow tax free and compound without you having to worry about taxes when you withdraw it.

5. Save or Invest Unexpected Cash

How to Save for Retirement at 40

If you come into a lump sum of money perhaps through a work bonus or an inheritance – consider putting it all in your retirement savings. While it can be tempting to splurge on a vacation or buy something for yourself, the money is better used to invest in your future.

If you don’t want to put the money toward your retirement, consider other investments you could make with it. For example, if you have a large amount of money, you could use it as a down payment on some real estate. Whether it’s a new house for you and your family, a vacation home or an investment property, having an asset that will appreciate in value can be something you rely on come retirement.

6. Prioritize Yourself

If you and/or your spouse want to retire together, you need to make it a priority. This means that your retirement savings come before saving for things like your kids’ college fund or their wedding. Especially if you’re starting to save for retirement at 40, you don’t have as much time. Your kids will have opportunities in the future to save, pay off their tuition and save for their own retirement.

Bottom Line

If you’re wondering how to start saving for retirement at 40, there’s no magic formula. Pay off your credit cards, don’t accrue unnecessary expenses and start stashing as much money away. If your employer offers a 401(k) match, take full advantage of it. If you can, max out your 401(k) contributions and save in IRAs too.

Don’t think that, because you’re starting late, it won’t matter and it’s pointless to save. In 25 years, you’ll thank your past self for having the foresight to invest in your retirement. Even if you won’t be able to fully retire, having the financial cushion to slow down will do wonders for your well-being.

Tips for Saving for Retirement at 40

  • A financial advisor can help you invest your money so it serves you when it’s time to retire. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • When planning for retirement, you need to estimate how much you’ll need to retire comfortably. Use our free calculator to get a reliable estimate, accounting for your income, inflation and your location. Also, our Social Security calculator will help you estimate how much you can expect to receive from the government each year.

Photo credit: ©iStock.com/Dean Mitchell, ©iStock.com/cokada, ©iStock.com/BartekSzewczyk

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