If you’re one of the millions of forty-year-old Americans with retirement savings floating somewhere between insignificant and nonexistent, it’s time to start thinking strategically. The bad news, of course, is that you’re short on time. The good news is that by acting now you may still have enough working years left to plan a successful retirement.
Here are some tried-and-true ways to get things started:
- Treat Your Retirement as Debt
At age forty, you may have credit card payments, mortgage payments, car payments, and lingering student loan payments eating away at your salary every year (and, if you have children, you may be paying for—or are about to start paying for—at least some of your children’s college tuition). In any case, you have financial obligations that can make saving for retirement seem like a far-off dream.
One solution? Avoid thinking in linear terms. Instead of trying to settle all of your debt before saving for retirement, approach your retirement fund as just one more debt you have to pay. You can start moving money around to make room for monthly contributions toward your retirement. If you’re currently paying $300 each month toward your credit card debt, for example, you could drop that payment to $200 (so long as the $300 payment wasn’t the minimum!) and put $100 a month into a savings account or a retirement savings and investment plan.
Not every financial obligation can get reduced in this way (it would be tricky, though not impossible, to reduce your student loan payments), but the point is to think of your retirement fund as a debt you owe to yourself. Putting money toward that debt should be no more negotiable than paying off your mortgage or student loans.
- Estimate How Much Money You’ll Need
This is a tough one. When you retire, you’ll likely receive social security benefits, but those payments won’t match your current salary (even if by 2050 the government is actually paying out 100% of benefits, which isn’t likely). The wisest move, in my view, is to treat future social security benefits as icing but not the cake. If you can save enough money to fund your retirement without relying on social security benefits, you’ll have a better chance of preserving your current standard of living when or if those benefits become available to you.
The common wisdom is that retirees need to save at least ten times their current annual salaries to live comfortably through their retirement years, so start your calculations there. If, for example, you currently earn $40,000 per year before taxes, start by assuming you’ll need at least $400,000 in savings if you retire between the ages of 67 and 70.
These simple numbers aren’t solid. They don’t factor in messy reality (rising healthcare costs, economic downturns, or inflation), but even if the purchasing power of your savings gets greatly reduced by the time you retire, the purchasing power of $400,000 remains vastly greater than the purchasing power of an empty savings account.
What you need to find out, ultimately, is the inflation-equivalent of ten times your current salary thirty years from now. Thankfully, there is no shortage of online inflation, wage, and retirement calculators to help you along.
- If Your Employer Offers a Retirement Plan, Sign Up
But saving that kind of money won’t be easy, and tossing your money into a simple savings account likely won’t do the trick. The best existing solution is to start contributing toward a retirement investment account that will grow each year.
If you’re lucky enough to work for an employer that offers a traditional pension, good for you (and you can probably just stop reading). Many of us, however, work for employers that sponsor optional retirement plans, such as the Simple IRA and 401(k) plans, and it isn’t rare for people to ignore those plans entirely. If you’re one of those people, it’s time to readjust your vision.
With the Simple IRA, for instance, you can elect to defer a pretax portion of your compensation into a retirement account, and your employer will usually match those contributions (to up to 3% of your annual salary). If you earn $40,000 per year and contribute $100 a month (around 3% of your salary) for a total of $1,200 per year, your employer will match that 3% contribution, and you’ll store away $2,400 toward your retirement. Since retirement accounts of this kind are also investment accounts, you can usually expect the money you’ve stored away to grow each year thanks to the wonders of compound interest.
Different retirement plans, such as the 401(k) and SEP-IRA, offer different advantages and disadvantages, but the basic idea is always the same: put some of your money out of reach, let it grow, and let it help fund your retirement in the future. And if your employer doesn’t offer a retirement plan at all, don’t fret. Set up your own individual retirement account (IRA) instead.
As you adjust to the effects of putting some of your money away, moreover, you can start adding larger and larger percentages of your annual income to your retirement account to make it grow faster. Start small (at maybe 3%) and work your way toward contributing at least 10% of your annual compensation within just a few years.
- Put Together an Aggressive Budget
If you aren’t used to saving a large part of your income, you’re also going to need a detailed, aggressive budget. You don’t need to destroy your present life to save for the future, but at age forty you can no longer afford the luxury of a budget-less existence. Ask yourself which of your monthly expenditures actually matter and get rid of those that don’t.
Think “slash and burn.” Start eating out less. Make coffee at home instead of shelling out a couple of bucks every day on the way to work. Go to the library instead of buying new books. Collect grocery store coupons and actually use them. Party less (if you party). If you’re a smoker, stop. If you don’t really go to the gym, then cancel your membership. Preserve what you cherish and actually need, in other words, and let the rest go.
You might even discover that the annual savings you need are already tied up in relatively worthless, mindless expenditures. Even if they aren’t, spending money consciously is a crucial ingredient to saving money responsibly, and that means making sacrifices for the sake of the future. Trust me, the future you is going to love you for it.