Editor’s Note: This article is part 2 in a 3 part series about saving for retirement. Read part 1 here.
Preparing for Retirement in Your 40s
You’ve opened the IRA. You’ve prioritized paying down your debt. What’s next?
Last month, we talked about starting to save for retirement and how it’s never as far away as it seems. In this article, we are gearing the conversation towards our middle aged readers: those who are already well into their saving-for-retirement journey.
First things first. If you’re in your 40s or older and haven’t even thought about saving for retirement, much less begun to sock money away, go back and read our first installment. We cover important concepts like setting goals, being consistent, paying down debt, and investing over time. Thanks to the wonders of compound interest, it’s never too late to start saving for retirement. Today can be the first day toward financial independence in your golden years!
If you’ve already started saving – whether recently or long ago – your 40s and 50s are when you can leverage more disposable income to get aggressive and safeguard your future. It’s an exciting time to watch your nest egg grow and take actions that will lead to rewards for your future self.
Consider Recalibrating Your Goals
Advisors like Dave Ramsey recommend dedicating 15% of your gross income to retirement savings if you make $55,000 a year. But don’t be afraid to shoot higher if your situation allows! 15% could be considered a minimum, and there’s truly no maximum if you have disposable income and want to prioritize your future. Consider recalibrating your savings goals yearly or biannually. Get out a notebook and a calculator and assess how your savings journey is going and what you can do to make small improvements here and there. Life is never straightforward, so be flexible and ready to adapt!
Keep in mind other income sources during your retirement. You’ve spent your adult life paying into Social Security, for example, and you can use the government’s SSA estimator here to get a sense for monthly payments once you retire. Some companies and government employers also offer pensions, so look into your specific employer and make sure you are enrolled in any relevant programs. Anticipating other money you’ll have access to during retirement can help you more accurately set savings goals now.
The Shifting Dynamics of Paying Down Debt
Last month, we talked about the importance of paying off debt first so that you’re wasting as little capital as possible on interest. The repayment plans for most loans have you pay off interest first, and it can be frustrating to not see your total debt number go down as quickly as you’d like. However, if you’re consistent over time, you cut through interest and start paying more and more principal – the meat and potatoes of your debt. Take a home mortgage, for example. Smart Asset states that even for an interest rate as low as 3% on a 30-year fixed mortgage, 52% of your loan is interest. But with a rate of 4% that number balloons to almost 72%! Nearly three quarters of what you will pay over the life of a 30-year mortgage at 4% interest is, well, interest. The article by Smart Asset also shows that a 30-year fixed rate mortgage at 4% interest takes 153 payments (12 years and 9 months) to reach the tipping point between interest and principal. In this scenario you spend over a decade paying mostly interest, but once you start digging away at principal your debt number will go down much more quickly – until it hits zero. If you’re in middle age, get excited because that tipping point (if not already passed) should be fast approaching on most of your debt! Crunching these numbers also illustrates the importance of low interest loans. If you’re forced to take out new debt at this stage in your life, aggressively pursue the lowest interest rates possible to save yourself money. Shop around at banks and credit unions until you find a reasonable rate for the state of the market. A financial advisor from First Light can help.
As you hit middle age, make sure you are getting close to paying off your outstanding debt. Get as aggressive as possible to pay it down. Remember: every dollar you don’t have to spend paying off debt can go right into your retirement funds!
Catch up on Your Contributions
Use this period of your life to max out contributions to your various retirement accounts. If your place of employment offers a 401(k), 403(b), 457, or similar plan, make sure you are hitting the limit each year. As Investopedia points out, non-Roth accounts have the unique advantage of not making you pay taxes on your money until you withdraw it in retirement. For Roth accounts, you pay taxes now but will enjoy tax-free withdrawals later. Take advantage of “catch up contributions.” While there is a traditional limit on how much you can contribute to certain accounts in a year ($23,500 in 2025), those thresholds increase when you hit the age of 50 (+$7,500) and again when you turn 60 (+$11,250). Talk to a First Light financial advisor today if you have questions about the different types of retirement accounts or what the contribution limits are at your age.
Balance Life Expenses and Saving for the Future
In our first installment, we discussed cutting extraneous expenses to prioritize retirement savings. But what do you do when you want to both save for retirement and put money in a college fund for your kids, or pay important medical bills that seem to pile up quicker the older you get? First of all, be realistic about your priorities. It would be pointless to put money in a retirement fund if you have to take on medical debt now because you aren’t paying your bills on time. No one can prioritize your expenses for you: sit down (with your spouse, if applicable) and make a list of what needs to be paid immediately, what can wait, and where retirement fits in. While consistency is key, it’s okay to take a break for a month if something big comes up. The beauty of putting your money in a mutual fund or other solid investment is that it keeps growing even when you temporarily forget about it!
DON’T BE TEMPTED BY YOUR RETIREMENT SAVINGS! There are few expenses in life worth dipping into your savings for. While it’s tempting to have a sum sitting in a bank somewhere when day-to-day needs arise, put your retirement accounts out of your mind completely. You don’t want to spend time rebuilding; continue making headway and leveraging the power of interest without looking back.
Excitement, Not Dread
The closer some people get to retirement, the more they start to worry. But luckily for you, you’re already taking your future seriously – or you wouldn’t be reading this article! Let excitement, not dread, be the guiding light of the process. Every day you’re getting closer to reaping the rewards you’ve been building for your entire professional career. Retirement means more time to spend with your loved ones, more things to see, more adventures. It’s a beautiful time to rest and try new things, and diligent financial planning will complement all your plans.
With the time and effort you are putting into saving for retirement, stop and write down some things that are a bit more personal. Put down the calculator and think about what you want to accomplish once you finish working. Maybe there’s a place you’ve always wanted to visit, a hobby you’ve always wanted to try. Remember that retirement will afford you the time to do those things, and saving will afford you the resources. Remember that saving for the future isn’t a goal in and of itself. It’s in service of something greater!
How First Light Financial LLC Can Help
If you haven’t yet started saving for retirement, please visit our website to learn how you can take steps toward securing future financial freedom today. But if you’ve already started and are approaching middle age, congratulations! You’ve done more than most people. Now is a great time to connect with one of our financial advisors to discuss what’s next. Don’t get complacent just because you see your retirement accounts growing or because a big source of debt is finally paid off. Here at First Light Financial, our vision is to give people access to high quality financial planning and client services, regardless of net worth. That doesn’t change the closer you are to retiring. A member of our team can work with you to develop a personalized plan for where you are right now.
Thanks for reading!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss.