Retirement Planning in Your 40s

If you started your retirement planning early in your career, then you should be in pretty good shape by the time you're in your 40s.  If you're thinking about retirement planning for the first time, then you've got some serious catching-up to do.  That being said, retirement planning in your 40s is perhaps the single most important step you can take to prepare yourself for those retirement years.

Retirement Planning Opportunities

We're going to use an analogy from the game of football.  Let's face it; working in your 40s is like halftime in a football game.  Your career is about half over and it's time to stop the game, assess where you are, and rethink your opportunities and plans.

You've got twenty years of work behind you and roughly twenty years of work ahead.  If you haven't been saving for retirement, it's time to get started.  If you've been socking money away for years, it's a good time to reassess where you are and what you need to do over the next twenty years.

Time and Retirement Planning

Since you're at the half way point, we're going to make a couple of comparisons using our retirement savings calculator so that you can see some of the different scenarios you might be faced with in the future and right now.

For example, we are going to illustrate what the retirement plans might look like for a 45 year old that had been saving through the years versus one that is just starting to save for retirement.  We're also going to demonstrate what happens if you decide to wait another ten years before setting money aside for those retirement days.

Retirement Savings Examples

So in this particular example, a 45 year-old that has already saved $75,000 needs to save about $5,300 annually to meet their desired income replacement rate of 70% when retired.  But a 45 year-old that has a minimal amount of retirement savings needs to save at more than double that rate - nearly $12,000 per year.

More importantly, if that same 45 year-old waits until age 55 to start saving for retirement, then they need to set aside over $18,000 a year!  Saving that much money each year will truly present that individual with a lifestyle challenge.  That's roughly 20% of their pre-tax income that needs to be set aside each year until the day they retire.

Saving for Retirement in Your 40s

We strongly suggest that you run through some retirement scenarios yourself using our retirement calculators.  In our example above, we're counting on Social Security and a pension plan to help close the retirement income gap.  Those assumptions may not be true in your situation.

Once you've figured out exactly how much you need to save each year, then your next stop should be our retirement investing guide.  That publication walks you through a series of questions aimed at helping you to decide where to start, or continue, your retirement savings.  Most of us have two options when it comes to retirement savings - IRAs, and employee sponsored savings plans such as 401k plans and 403b accounts.

Employee Sponsored Retirement Savings Plans

Usually, your first recommended course of action will be to start funding a 401k plan or 403b especially if your employer offers such a plan and they are matching your contributions.  So depending on how much you've got saved, whether or not your employer offers a 401k plan and the generosity of the plan itself, this type of account is usually your best bet - especially if you're playing catch up.

Individual Retirement Accounts

Now depending on what your employer is offering you, and how much you need to save each year, you may find yourself supplementing your employer's 401k plan with an individual retirement account.

For example, let's continue with our scenario above of a 45 year-old with minimal retirement savings.  If their employer matched 50% of their first 8% in contributions to a 401k plan, then they'd be saving $9,600 via that plan.  But they've still got a $2,000 savings gap, and at this point their next best option might be a Roth IRA.

The point here is you really need to look at our guide and run through some scenarios to see what the numbers are telling you.

Retirement Planning Strategies in Your 40s

If you've been thinking about retiring, planning and saving all along, then you may find yourself on autopilot by the time you reach your 40s.  Holding the course and working your original retirement plan might be all you need to do at this point - especially if your original assumptions were accurate.

If you've been ignoring retirement for some reason or simply delayed facing the reality that you may one day be retired, now is the time to act.  It's halftime.  It's time to regroup and prepare yourself for the second half of your career.  As mentioned in our article on retirement planning in your 30s, the plan, do, check, act approach works best in creating a retirement strategy:

• Plan - At this point in your career, you should have an excellent feel for when you'd like to retire, how much you need in those retirement years and where your current career is likely to take you.  For that reason, you should be able to create a very accurate retirement plan.
• Do - At 40-something there is simply no time to waste.  Once you've figured out what you need to do, then just do it.
• Check - If you're playing catch up, then you're going to need to check your retirement plan every two years or so.  Because of the relatively short time between now and when you retire, you need to pay close attention to things such as the return on your investments to make sure they agree with your planning assumptions.
• Act - As you check your plan, you may need to make adjustments to things such as retirement age and your rate of savings.  Since you've got half your career behind you, at this point you should only be tweaking your retirement plan during each of these cycles.

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