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5 Strategies for 40-Somethings Who Are Way Behind on Retirement Savings

By Robin Hartill, CFP® - Jan 1, 2021 at 6:35AM

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You still have time to build that nest egg.

There are a lot of scary retirement charts that tell you how much you should have saved for retirement. One commonly cited figure by Fidelity Investments says that by the time you're 40, you should have three times your annual income set aside.

But let's face it: That number is laughably unrealistic for a lot of people. If you've lived paycheck to paycheck for long stretches or carried significant student loan debt, you probably couldn't afford to invest much in your 20s.

If you're in your 40s and you're behind on investing, you've missed out on some of those magical compounding years. You still have plenty of time to save, though, but it's essential that you do so strategically if you want a comfortable retirement. Follow these rules if you're a 40-something who's in catch-up mode.

A middle-age man with a pensive expression.

Image source: Getty Images.

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 is lacking. Make getting your full 401(k) company match your No. 1 priority if your employer offers one. If you're deciding between jobs, give it serious weight if one company is significantly more generous with 401(k) matches, particularly if you're catching up in your 40s.

Once you're contributing enough to get the full match, consider maxing out a Roth IRA before you put extra money in your 401(k). (You can use a backdoor Roth IRA strategy if your income exceeds the limits.) You'll have way more investment options and greater flexibility, plus you'll get tax-free money when you retire. The maximum IRA contribution is $6,000 for people under 50 in 2020 and 2021. Once you've maxed out your contribution, you can decide whether 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 who carry a balance is 16.61%, which is well above your expected investment returns. So paying off credit card debt takes precedence over investing -- beyond getting your 401(k) match -- because it's costing you more than you can consistently earn.

But all debt isn't the same. With mortgage rates well below 3%, using extra money to invest instead of making extra payments on your home is a much better bet. Regardless of what type of debt you have, be sure to compare the interest rate you're paying with your expected returns. If your interest rates are low, investing instead of paying off debt often makes sense.

3. Obtain solid health coverage

Your health risks start to creep upward in your 40s. To protect the savings you have, it's essential to have adequate health coverage so you won't need to tap your nest egg for a big medical expense.

The tax benefits 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 you couldn't afford to pay a high deductible, choosing a plan with a lower deductible is smart, even if your monthly premiums are higher. On the flip side, 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 healthy, choosing a lower-cost plan can help you save more for retirement. And using an HSA can supplement your retirement savings, since you can withdraw the money penalty-free for any reason once you're 65.

4. Keep taking risks

You may feel like you can't afford to take investment risks in your 40s. But realistically, you're still about two decades away from retirement. Only by taking sufficient risk will you generate the returns you need to make your money grow. That means you'll still want to invest in stocks primarily.

One good guideline to follow is the 110 rule: Subtract your age from 110 to get your proper stock allocation. So if you're 40, you'd want a portfolio that's 70% stocks. 

5. Prioritize your retirement over college savings

Parents, this one is tough. Of course you don't want your kids to graduate buried in student loan debt. But your children have plenty of options for making their education more affordable, including choosing a less expensive school, financial aid, scholarships, and working part time.

Your opportunity to build your retirement savings gets narrower by the year. You don't want to be financially dependent on your kids in what should be your golden years. So think of securing your own future as the best investment you can make in your children.

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