Once you reach your 30s, you have likely been working for a few years, but retirement is still off in the future. Perhaps you are married, and you may even have kids.
In your 40s you are likely established in your career. Retirement is still out there in the future but is creeping ever closer. You may be married and have kids approaching college age.
Whatever your situation — married or single, kids or no kids — saving and investing for your retirement in your 30s and 40s is critical. Here are some tips.
How Much Should You Have in Savings?
- At age 30 they suggest you have one-half of your annual salary saved for retirement.
- At age 35 this jumps to one times your annual salary.
- At age 40 they suggest two times your annual salary.
- At age 45 it’s four times your annual salary.
- At age 50 they suggest six times your salary.
Putting this into perspective:
- A 30-year-old earning $50,000 should have $25,000 saved for retirement.
- A 40-year-old earning $80,000 should have $160,000 saved for retirement.
- A 50-year-old earning $125,000 should have $750,000 saved for retirement.
While everyone’s situation is different, these numbers illustrate how important your 30s and 40s are in terms of accumulating a sufficient retirement nest egg.
Financial Planning Is Important
This is a great time to sit down with a fee-only financial planner to get some expert, third-party advice. While a definitive look at your retirement years is probably a bit premature, a qualified financial planner can help you chart a course to ensure you are on track toward a comfortable retirement.
For do-it-yourselfers, there are plenty of calculators on the web. For example, major financial services providers, such as Schwab, Vanguard, Fidelity and T. Rowe Price, as well as many other sites, have them. Not all are created equal; be sure you understand the underlying assumptions. It makes sense to use more than one and note major differences in the answers provided.
Either way, by the time you reach your 30s you need to become a financial grownup. Financial planning is not about being obsessive, but rather about charting a financial course, getting your financial life on track, reviewing your progress at least annually and making changes when needed.
Ramp Up Your Retirement Savings
For most of us, our 401(k) plan or other workplace retirement plan, such as a 403(b) or 457, is our main retirement savings vehicle. Defined benefit pension plans are becoming increasingly rare, and we are on our own as far as saving for retirement.
For those of you in your 30s and 40s, this is the time to ramp up your savings for retirement.
The salary deferral limits for 401(k) plans is $18,000 for those under 50. This level remains in effect through at least 2017. While the quality of 401(k) plans differs in terms of the investments offered and the plan’s expenses, for most of us it makes sense to contribute as much as possible.
If you can’t hit the limits right away, make an effort to increase your contributions each year. Some employers offer an auto increase feature that allows you to automatically increase the amount of your salary deferral each year. You won’t miss an increase of one or two percentage points, and over time these extra contributions will go a long way toward building your retirement nest egg.
Don’t ignore IRAs, taxable investments or a self-employed retirement plan such as a SEP IRA or a Solo 401(k) if you work for yourself.
Avoid 401(k) Loans
One of the features of many, but not all, 401(k) plans is the ability to take out a loan against your account balance. This is a good option in that you know your money is accessible if needed for a good reason. Some of these might include a home purchase, college expenses or excessive medical costs.
That’s all well and good, but a 401(k) loan should be your last-resort source of funds for several reasons:
- There are opportunity costs. The amount borrowed doesn’t have the chance to grow during a rising market.
- These loans have fees associated with them.
- The interest is not tax-deductible.
- There is no flexibility in the repayment terms should you run into financial difficulties.
- The loan can become due immediately if you leave your job. If you can’t repay the entire amount, you may get hit with a taxable distribution, as well a 10% penalty on the amount still outstanding.
Contribute to an HSA
A health savings account (HSA) is a medical savings account associated with a high-deductible health insurance plan. Your contributions are made pre-tax, and withdrawals for qualified medical expenses are tax-free.
The retirement savings aspect is that the funds contributed can be carried over from year to year. There is no “use it or lose it” feature as with a flexible spending account (FSA). HSA funds can be invested in mutual funds and other investments for long-term growth.
HSAs are considered to be another type of IRA by some. If you can pay for out-of-pocket medical costs from other sources while working, this money can be used to cover qualified healthcare costs in retirement. Fidelity currently estimates a couple aged 65 can expect to spend $260,000 in healthcare costs in retirement, and this number keeps growing.
For 2017, a single person can contribute $3,400 and a married couple, $6,750. Keep this in mind during your company’s open enrollment period if you are employed.
One of the best ways to find money for retirement savings in your 30s and 40s is to reduce your spending. Life is busy; this can easily be put on the back burner. We all waste money. Reducing some of these expenses can yield extra money for 401(k) contributions or perhaps to contribute to an IRA.
Focus on Retirement Savings Before Saving for College
If you have kids, you want a better life for them. This often includes college. Helping your kids get a college education is a great goal, but focus on your retirement first. There are many ways to pay for college; you get only one shot at retirement. Your kids will thank you for doing this in the long run.
Your 30s and 40s are busy years. A focus on your career growth, marriage and children and many other life activities takes precedence. You’ve been out of school for a while and you are officially a grownup. One of the key things you need to focus on is saving for retirement. Money contributed during this time period has a long time to grow and compound. Make the most of these years.