5 strategies for 40-year-olds who are behind on retirement savings

There are many scary retirement charts out there that tell you how much you should have saved for retirement. A figure frequently quoted by Fidelity Investments says that by age 40 you should have three times your annual income set aside.

But let’s face it: this number is ridiculously unrealistic for a lot of people. If you’ve lived paycheck to paycheck for long periods of time or have significant student loan debt, you probably can’t afford to invest much in your 20s.

If you’re in your 40s and falling behind on your investments, you’ve missed out on some of those magical years. However, you still have plenty of time to save, but it is essential that you do so strategically if you want a comfortable retirement. Follow these rules if you are in your 40s in catch-up mode.

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1. Get your 401 (k) match, then fund an IRA

Having access to a 401 (k) plan with an employer match makes a huge difference when your retirement fund fails. Get your 401 (k) business to be your # 1 priority if your employer offers one. If you’re deciding between jobs, give it serious weight if a company is much more generous with 401 (k) matches, especially if you’re catching up in your 40s.

Once you contribute enough to get the full match, consider maxing out a Roth IRA before putting extra money into your 401 (k). (You can use a Roth IRA backdoor strategy if your income exceeds the limits.) You will have many more investment options and greater flexibility, and you will get tax-free money when you retire. The maximum IRA contribution is $ 6,000 for people under 50 in 2020 and 2021. Once you have maximized your contribution, you can decide to make unmatched 401 (k) contributions or use a taxable brokerage account if you have extra money to invest.

2. Pay off debt selectively

The average credit card APR for users with a balance is 16.61%, which is well above your expected ROI. So paying off credit card debt takes priority over investing – beyond getting your 401 (k) match – because it costs you more than you can earn on a regular basis.

But not all debt is the same. With mortgage rates well below 3%, using the extra money to invest instead of making extra payments on your home is a much better bet. Whatever type of debt you have, be sure to compare the interest rate you are paying against your expected returns. If your interest rates are low, it’s often a good idea to invest instead of paying down debt.

3. Get solid health coverage

Your health risks start to increase in your 40s. To protect the savings you have, having adequate health coverage is essential so that you don’t have to use your savings for a large medical expense.

The tax advantages of health savings accounts (HSAs) are undeniable. But you can only fund an HSA if you have a high deductible health plan. If you have major medical issues or can’t afford a high deductible, it is a good idea to choose a plan with a lower deductible, even if your monthly premiums are higher. On the other hand, a study by the TIAA Institute found that employees who overpay for health insurance are 23% more likely to skip their employer retirement match.

If you’re in good health, choosing a lower-cost plan can help you save more for retirement. And using an HSA can supplement your retirement savings, as you can withdraw the money without penalty for any reason once you’re 65.

4. Keep taking risks

You might feel like you can’t afford to take the risks of investing in quarantine. But in reality, you are still about two decades from retirement. Only by taking enough risk will you generate the returns you need to make your money grow. This means that you will always want to invest primarily in stocks.

A good guideline to follow is the 110 rule: subtract your age from 110 to get your correct inventory allocation. So if you are 40, you would want a portfolio made up of 70% stocks.

5. Prioritize your retirement over college savings

Parents, this one is tough. Of course, you don’t want your kids to graduate under student loan debt. But your kids have plenty of options to make their education more affordable, including choosing a cheaper school, financial aid, scholarships, and a part-time job.

Your ability to build your retirement savings is shrinking year after year. You don’t want to be financially dependent on your kids in what should be your golden years. So think about securing your own future as the best investment you can make for your children.