How to seize control of your financial future in your 40s

Retirement

May 16

If you’re approaching (or are already in) your 40s, take a moment and consider the following statistics recently published by 401(k) Specialist magazine:

· About 37% of non-retired Americans say they won’t be able to retire until they’re at least 75 years old, and 23% say they won’t be able to do so until at least age 80.

· Forty-four percent (44%) of retirees say they struggle to afford basic living expenses.

· Nearly half of retirees (48%) believe they’ll outlive their retirement savings.

Future generations like yours will likely encounter even more significant challenges regarding retirement than previous generations. That's because many young professionals are saddled with student debt, lack access to the pensions many Baby Boomers and some early Generation X workers have, and could eventually see cuts in Social Security benefits unless Congress addresses funding shortfalls.

As distant as retirement may seem at this point, it’s important to start planning right now to enjoy the future you envision. This post will show you how to do just that.

Pay off your debt

You already know that paying off debt requires a lot of discipline and likely won’t happen overnight. It’s important to realize, however, that the funds you allocate to debt ultimately impact your future.

Let’s assume your monthly debt—excluding mortgages—is $400 (we use this number as Lendingtree.com data claims millennials average $402 in monthly debt payments and Gen Xers pay, on average, $441 a month).

If you were to invest this $400 over the next 20 years and your investment yielded a 5% return rate (a conservative estimate, considering S&P returns averaged just under 7% from 2000–2023), you’d end up with over $205,500!

With recent Bureau of Labor Statistics (BLS) data claiming retiree households (led by someone age 65 or older) spent an average of $57,818 in 2022, every dollar counts—especially since average spend will be significantly higher when your retirement rolls around.

Save for a rainy day

While investing for the long term is important, it’s also essential to put money into an easily accessible savings account (e.g., a high-yield money market account) to prepare for life’s unexpected expenses. Doing so will put you ahead of your peers; a recent Bankrate.com survey indicated nearly 22% of U.S. adults have no emergency savings.

Those with a fair amount of non-mortgage debt may need to start smaller, but we recommend having a minimum of 3–6 months of living expenses in this account (more if you work in an unstable industry); anything left over can be added to your retirement fund later on. This practice can save you from financial challenges primed to derail your long-term goals if you do in fact need this money, and establishing a direct deposit or automatic transfer with each paycheck is one of the easier ways to accomplish this.

Maximize your 401(k) contributions

If you have access to an employer-sponsored retirement plan such as a 401(k) or 403(b), maximize your contributions to begin accumulating wealth.

401(k) plans offer several tax advantages. For example, your contributions (up to $23,000 in 2024) are made with pretax dollars and thus lower your taxable income. For example, if you earn $100,000 a year and contribute $15,000 annually to your 401(k), only $85,000 of your earnings are subject to tax. As a result, your 401(k) contributions can ultimately drop you into a lower tax bracket. Another 401(k) benefit is tax-free growth, meaning resulting gains will grow tax-free provided you don’t withdraw money from the account before hitting the minimum age requirement.

As for how much to sock away in your 401(k) plan, this ultimately depends based on individual investment needs; a one-size-fits-all scenario doesn’t exist. However, you do need to prioritize your employer match as this is essentially “free” money; if you earn $100,000 and your company match is 5%, you should contribute a minimum of $5,000 annually to your 401(k).

Consider a Roth IRA

A Roth IRA is an account designed specifically to help fund your retirement. After establishing this account, you’ll need to consider corresponding investments—such as stocks, bonds, ETFs, and mutual funds—and then add money into the account. Roth IRAs are typically funded with after-tax dollars (you can contribute up to $7,000 a year, as of 2024), meaning you won’t get taxed on withdrawals made in retirement provided you’ve had the account for at least five years (known as the “five-year rule”).

Roth IRA benefits are available to all but especially advantageous for younger workers. Why? Because if you fall within this age demographic, you’ll likely move up into a higher tax bracket as you progress in your career and earn a higher salary; you can therefore potentially save more on taxes via a Roth IRA than a traditional IRA, which is funded with pre-tax dollars.

Another Roth IRA benefit, though don’t recommend it, is that account holders can withdraw sums equivalent to contributions they’ve made—both penalty and tax-free—anytime and for any reason.

If you’re already investing in a 401(k) but aren’t sure how to allocate money between both investments, here’s a popular approach to consider:

Step #1: Prioritize employer match. If your employer offers a 401(k) match, first contribute enough to secure the full match percentage and thus not let this “free money” slip through your fingers.

Step #2: Max out your Roth IRA. After securing your employer match, turn your attention to a Roth IRA and aim to contribute up to the annual limit. Why? A Roth IRA allows your investments to grow tax-free, delivering substantial long-term benefits.

Step #3: Return to your 401(k). If you still have funds left to invest after maxing out your Roth IRA, it's time to circle back to your 401(k) and contribute the remaining amount to this account.

Take some risk with your investments

It’s typically wise to invest more aggressively when you’re younger via a large proportion of equity holdings (stocks) within your retirement accounts. Why? Because you’re still years away from retirement—with the luxury of awaiting a market bounce-back after a dip—and stocks offer the quickest way to accumulate wealth (your primary focus at this point).

While the actual number varies based on everyone’s individual situation, a general rule of thumb is to subtract your age from 100 to pinpoint the percentage of your investment portfolio to keep in stocks. “Safe” assets—such as bonds and CDs—should round out your other investments. Thus, if you’re currently 40, 60% of your investment portfolio should be in equities.

Protect your assets

You’ll also need to identify which type of insurance coverage you need.

Let’s start with life insurance. If you own a home, are married, or have kids, you should have a life insurance policy to ensure your loved ones won’t struggle trying to make ends meet should something unexpected happen to you.

While there are many options in this respect, a term life policy is an excellent choice if you need coverage and are seeking the most affordable premiums. You should also consider a term policy if you need coverage for a specific period of time: such as when paying off a mortgage, putting kids through college, shouldering costs for a wedding, or replacing income.

If you’re eligible, consider complementing your health insurance with a health savings account (HSA) to pay for qualified out-of-pocket healthcare expenses including deductibles and copays. While many benefits are associated with this type of account, the biggest is that—unlike with a flexible spending account (FSA)—you don’t need to spend your balance every year as any leftover money automatically rolls over to the next one. In fact, HSA funds continue to do so on an annual basis and will remain in your account indefinitely until used; should you need funds to cover a hospital stay or expensive treatment, you can dip into this account rather than your savings.

Finally, identity theft protection is another option to consider knowing that a new victim pops up every two seconds and the odds of becoming one are one in fifteen. While we don’t advocate rushing out and buying an expensive policy, it’s important to maintain at least some level of security in this respect; many options are in fact available for free or a very low cost.

Partner with a financial advisor

Despite what you may think, financial advisors work with all types of clients—many of whom are by no means rich. We recommend enlisting the help of a CFP® professional, which is the top credential in the industry. One of the main benefits of doing so? He or she will provide you with the clarity and guidance you need to make smart financial decisions on an ongoing basis. For your convenience, here is a handy guide on how to choose the best financial advisor for your needs.

In sum: seizing control of your financial future in your 40s

Saving for retirement is much more challenging now than it was for previous generations. However, achieving a secure financial future is still there for the taking; you just need to start planning for it!

Want to make exemplary financial and investment decisions consistently? Check out our advice subscription package, which offers ongoing guidance from a CFP® professional and much more!