Currently, the average Social Security benefit is about $18,000 in annual income. Unfortunately, this is not enough money for retirees to live on alone. Most people need to think about Social Security as a supplement to their savings rather than the other way around.
Furthermore, pensions have fallen out of favor (except in a few notable exceptions), so people are more dependent on their savings than ever before. This fact becomes scary when looking at recently published data. According to a TD Ameritrade survey, about two-thirds of individuals between the ages of 40 and 49 have less than $100,000 saved for their retirement. What’s worse, about 40 percent of people had less than $50,000 saved, which will make it extremely difficult for them to retire.
Luckily, being behind on retirement savings at the age of 40 is not the end of the world. Many people in this position have been able to get themselves on the right track and meet their retirement goals. If you are in your 40s and you have not paid much attention to your retirement, now is the time to make saving a priority. After all, catching up on savings becomes more difficult as you get older.
Some key steps that individuals in their 40s should take to get on the right track for retirement include the following:
1. Make sacrifices to reach your retirement goals.
Those in their 40s who have little saved for retirement will likely need to save hundreds, if not thousands, per month to reach their goals. Often, this involves significant budget cuts, from downsizing housing to making vacations less frequent.
Sometimes, you can save a lot of money by cutting out everyday expenses. You can even download a budget tracking app so that you can see where your money goes each month. You may be surprised to find out how much you spend on things like coffee, dining out, or online shopping.
Another approach to saving money involves lowering essential costs. Homeowners, for example, may want to invest in sealing their windows and doors to cut down on the costs of heating and cooling. While these ideas involve some degree of upfront investment, they can often save a lot of money in the long run. With investments of this nature, it is important to figure out the break-even point so that you can be sure the investment is worth the cost. Another option is to pick up a side hustle to bring in additional income. If you choose this route, it is critical to make sure the extra money goes toward retirement savings rather than other goals. This decision involves a sacrifice of free time.
2. Adjust lifestyle expectations when it comes to retirement.
Another reality of getting a late start is the fact that it may be impossible to meet your goals. Instead of trying to increase savings upfront, it sometimes makes sense to reduce your budget for retirement. You can make several adjustments during retirement to reduce your annual savings now, which means you won’t have to save as much to relieve some pressure. However, you should make sure that you do not trim the budget too much—basic living expenses still need to be covered. You can always cut your travel budget or reduce your living expenses by moving to a cheaper area or settling for less space.
Along the same lines, you can choose to take a non-traditional approach to retirement. In fact, a recent survey demonstrated that more than 60 percent of people in their 40s plan to take an “unretirement” approach, which means working past retirement age but taking miniature retirement breaks every few years. This approach stretches out working years to allow more time for saving while still giving people a period of relaxation to pursue interests and then return to the workforce refreshed. With this approach, it is important to ensure that you have some sort of employment lined up so that you don’t feel forced into permanent retirement at some point.
3. Take advantage of the right accounts for saving.
People today have a variety of options when it comes to saving for retirement, so it is important to make the right choices. In general, you should max out contributions to your 401(k) before considering other options, especially if your employer offers a matching benefit. For virtually everyone, contributing enough to take full advantage of the employer match is first priority, as this is basically free money that can really boost savings. Failing to take advantage of the match will ultimately result in thousands of dollars lost down the line, especially when one takes into account compounding interest with investments over time.
Some people may not have access to an employer-sponsored account, so they will need to rely on a traditional or Roth IRA. Even people with a 401(k) should consider opening one of these IRA accounts to take full advantage of tax breaks. These accounts are the next best option once your 401(k) has been maxed. With a Roth account, you save after-tax money and then you can withdraw down the line without paying taxes, which can help you make the most of your money once you retire by helping you get in a lower tax bracket. Importantly, you must meet eligibility requirements for opening a Roth IRA.