How to Power Up Retirement Planning in Your 40s

By Taylor Gordon

Retirement. It’s the stage in life Charles Kendrick has started to look forward to, even though he still has 20 years to go until then. Much like in the movies, Charles pictures himself driving a red convertible on the coast with his wife and stopping in every small town along the way, taking it all in. Of course, it sounds cliché, but to him this image means one thing - freedom.

Although Charles is still 45, he feels a bit uneasy about retirement inching closer and closer. He and his wife are saving, but not as much as he’d like because they have other financial responsibilities. They would like to pay for two college educations (or at least part of it). They also have some credit card debt from their 20’s and 30’s to pay off, plus he occasionally offers financial support to his parents.

These other priorities have taken most of the Kendricks’ attention in the last decade and sometimes they worry they won’t have enough savings to enjoy the freedom Charles envisions. They are just starting to shift focus towards retirement but wonder if it’s too late to build a sizable nest egg.

Can you relate to the Kendricks’ story?

How to Get on The Right Path for Retirement in Your 40's

According to a retirement survey, administered by Transamerica, only 10% of people in their 40’s are very confident they’ll be able to fully retire comfortably. Another 22% say that paying off credit card debt and other consumer debts are their biggest priorities.

These stats are alarming considering retirement is not as far away anymore - but not entirely surprising. Mid-life responsibilities like taking care of aging parents, paying for a child’s college education and providing for a family can take your focus away from investing in your future.

Fortunately, even if you’re facing competing priorities, there are a few steps you can take to stay on track (or get back on track) in your 40’s. Remember, retirement planning is a marathon. You can’t expect to sprint at the end to win the race. Instead, a consistent approach to saving early on is what will improve your chance of living the dream in your golden years.

Although retirement planning isn’t one-size fits all, here are a few steps you should take in your 40’s:

1. Know Where You Stand With Your Retirement Savings

Do you know how much you’ll need for retirement? Have you estimated how much you’ll have based on your current savings? You should. Understanding exactly where you stand is the only way you can set the right goals to move forward.

Use a retirement calculator to enter your age, the amount of savings you have, income and other related savings. It’ll tell you how much you need to put away in the next 25 years. Or if you can’t save that much, you can learn about different options to retire later or use alternate sources of income in your calculations, such as Social Security, your Home Equity, etc.

2. Prioritize Retirement Over College Savings

There’s no doubt education is important for your children. However, the cost of it can’t be your full responsibility if you’re not on track for retirement. After all, you won’t be able to help yourself (and you may even become a financial burden to adult children) if you struggle in retirement.

Your first priority should be your retirement. First, if you can't afford to make maximum contributions to your retirement accounts, at least make sure you're saving enough to get the full employer match into your 401(k). Then, you can put money into a college fund. You can also enlist the rest of the family to help out with college savings: Encourage your children to choose affordable in-state schools, and save the money earned from their summer jobs into their college fund. Encourage grandparents to replace Christmas or birthday gifts with contributions into the children's college savings accounts — regardless of how small the amount, every bit counts.

3. Pay Off Credit Card Debt

Who wants to enter retirement with credit card debt hanging over their head? No one. Your 40’s is the perfect time to put a major dent in any consumer debt you’re sitting on from younger years.

Start budgeting now and commit to small, consistent changes to your spending habits to find more money to repay debts. If you have trouble managing your debt, try the snowball method. First, pay off your smaller debts and tackle your larger ones after you gain momentum. That way, you can feel accomplished every time you pay something off and motivated to keep going.

You can also do a credit card debt consolidation using a balance transfer deal to kickstart debt repayment. Transfer your existing credit card balances to a new card that’s offering low-interest or 0% interest for an introductory period. Look for introductory deals that last at least 12 months. Use this time to chip away at principal before the interest kicks in.

4. Refinance Your Mortgage for a Lower Rate

Mortgage rates across the board are at a low. You’ve spent a lifetime building a strong credit history. Why not use it to get a better rate? Lower interest can cut your monthly payments significantly and save you a lot of money over time. Of course, more money saved is more money you can dump into your retirement funds.

Although, you should make sure the refinance is worth the cost. Crunch the numbers to see how long it’ll take the money you save in interest to cover the cost of refinancing. Refinancing may not be as cost-effective if you plan to sell your home before you break-even. But, it’s worth the money if you plan to stick around and the refinance will pay for itself within the next few years.

5. Manage Your Investments for Maximum Returns

Your investments should become more conservative as you get older, but in your 40’s your money still has a lot of time to grow. You have over 20 years to be exact, so don’t miss out on any opportunities to increase your returns and make your money work harder for you.

The old rule to subtract your age from 100 to arrive at your target stock holdings percentage is outdated. (i.e. at age 45 you should have no more than 55% in stocks). Longer life expectancy and other risk factors have led advisors to reconsider that guideline. Talk to a qualified financial advisor or call your retirement plan provider if you’re not sure how to manage your allocations for maximum returns.

An advisor will come up with an allocation strategy based on your personal goals. If you don’t have a financial advisor’s number in your back pocket, ask your friends and family for trusted referrals and set up interviews. Take care to hire someone legitimate and professional to help you manage your investments - not your neighbor’s cousin who is just "really good with money".

6. Get Enough Insurance Protection

When was the last time you reviewed your insurance protections and policy rates? Did you pay attention to the types of insurance that are offered by your employer during the last open enrollment? Double check to make sure you have the right amount of health insurance, homeowner’s or renters insurance, auto insurance and umbrella insurance coverage. Do some calculations to estimate how much you really need and make sure you are not buying too much insurance or paying too much for health insurance plans that your family doesn’t need.

You should also shop for rates once a year to see whether or not your current insurance plans are still competitive. Insurance companies want your business, so you should negotiate your rates. If you find an opportunity for savings elsewhere, you may even want to consider changing your provider.

7. Prepare for a Change in Income

According to the Social Security Administration, any man who reaches 65 today can expect to live until 84. And any woman who reaches 65 today can expect to live until 86. That’s a whopping 20 years post retirement that your nest egg will need to give you a steady source of income.

How can you make sure your money lasts as long as you do? Stick to a budget and get a handle on your personal finances. If you start adjusting your budget to a lower income level now, you won't experience too much of a shock when your budget tightens in retirement.

  • Avoid lifestyle inflation — Don't increase your spending at the same rate as your salary increases.
  • Slowly teach yourself to live on less now to practice stretching your income.

How to Beat Overwhelm in Retirement Planning

Preparing for retirement can feel like a race against time. If you feel apprehensive about the future remember this: slow and steady wins the race to retirement. Keep retirement at the top of your to-do list and you’ll be ready for your own figurative ride in the red convertible.

So, what does Charles Kendrick plan to do to realize his own retirement dream?

He and his wife are coming to terms with the fact that fully funding a college education for both kids is unrealistic. They don’t want their children to have to take care of them financially in the future like Charles is experiencing now with his own parents. They plan to help the kids a bit, but at this point retirement plan is starting to take precedence. He and his wife are also committed to repaying debt and plan to be credit card debt free by 50.

Don’t worry if your finances are also in limbo. It’s something we all experience in life. Be proactive and take small steps each day that will lead you on a path to the retirement you envision. aboutLife can help you get the retirement you want. One step at a time.