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Whether you’re struggling to make ends meet or dealing with unexpected financial challenges, turning 40 without any retirement savings is far from ideal.
Before diving into what steps you should take, here’s something that may bring a little comfort: you're not alone. According to the Federal Reserve’s latest Report on the Economic Well-Being of U.S. Households, nearly half of respondents admitted they have no retirement plan, while U.S. News reports that around 36 percent of American workers have saved less than $1,000 for retirement.
No matter your circumstances, it's never too late to assess your financial situation, create a solid plan, and start building your savings. Here’s a step-by-step guide to get your retirement funds on track.
Step One: Calculate Your Needs and Create a Basic Retirement Strategy
To develop a retirement plan that will direct your future decisions, you’ll need four essential figures:
the age at which you intend to retire
the number of years you’ll rely on your retirement savings
an annual estimate of living costs during retirement
your current savings.
Because these numbers are crucial to your retirement plan, let’s explore how to determine them.
Although many consider 65 the "standard" retirement age, it’s not set in stone. With longer life expectancies, many opt to work into their late 60s or even beyond. By factoring in your age, salary, living expenses, and life expectancy, you can estimate a more realistic target retirement age.
Be sure to factor in any potential income you may receive in retirement. Do you have a pension, or will you rely on Social Security? To estimate your Social Security benefits, input your birthdate and current salary into this Social Security calculator from the U.S. Department of Labor. Try out different retirement ages to see how waiting or retiring earlier could impact your monthly benefits. For instance, a 40-year-old earning $50,000 annually can expect $1,517 per month if they retire at 65, or $1,766 if they wait until 67.
Now use the AARP's Retirement Calculator to run your figures. Enter your age, salary, and lifestyle details, and it will generate a graph that estimates your retirement income, projected living expenses, and any gap between them. Adjusting your desired retirement age shows how delaying by a year or two might impact your savings.
Let’s consider an example: a 40-year-old, single woman earning $50,000 annually with no retirement savings. She’s facing a significant gap between her retirement income (only Social Security) and expected living expenses. Even if she postpones retirement until age 67, the gap remains — she’ll need to depend on savings as well.
How much should you be saving? Morningstar's Retirement Savings Calculator takes your age, salary, and current savings into account to suggest how much of your annual income should be dedicated to retirement savings. Get ready for a reality check: a 40-year-old earning $60,000 should aim to save 17 percent of their income — assuming they already have $10,000 saved.
If you’re uncertain about where the money will come from, it’s time to move on to Step Two.
Step Two: Evaluate and Cut Down on Your Living Expenses
Realizing there’s a gap between your projected retirement income and living expenses can be a wake-up call. To begin bridging that gap, it's time to take a close look at your spending habits.
Start by categorizing your expenses into "needs", "wants", and "savings". Needs cover essential items like food, housing, and utilities. Wants include non-essentials like clothing, travel, or entertainment — these are the first areas to target for cuts.
Reduce your spending in the "wants" category by identifying and cutting out unnecessary expenses. These will vary for everyone, but for inspiration, check out the responses from Mytour readers when we asked what people typically cut back on first.
Be firm but not overly harsh, as eliminating all luxuries isn’t sustainable in the long run. You might not give up your daily Starbucks, but perhaps you can brew their coffee at home instead of stopping by every morning.
Next, examine your "needs" and see where you can make cuts. Use this bill-by-bill savings guide to find opportunities to save on everything from your cellphone bill to your utilities. Consider smaller changes as well, since they can add up. Could you mow the lawn for a reduced rent? What about opting for more affordable meals (like those in Leanne Brown's Good and Cheap cookbook)? Have you checked your property assessment for a chance to lower your property taxes?
If you're ready for a significant change, consider downsizing your home. Buying a more affordable home can free up extra money and typically reduce your monthly expenses, just like Steve Gillman discovered when he swapped his house for a less expensive condo. Plus, not everything will fit in your new, smaller space, and that could be a blessing. Sell what you don’t need for some extra cash, or donate it for a potential tax deduction.
Savings aren’t off-limits either. While you may not have set aside money for retirement, you might have been saving for a vacation or a new car. Reroute those funds toward your retirement savings instead.
Lastly, if you're still financially supporting your adult children, it might be time to let them handle their own finances. It may sound tough, but as U.S. News highlights, they have more time to plan for their future.
Add up the amount you’ll save each month from these changes. This is your first contribution to retirement.
Think you've already trimmed your expenses to the bone? Then it’s time to move on to Step Three.
Step Three: Explore New Ways to Increase Your Earnings
While trimming expenses can help free up some extra cash for retirement, most budgets only have so much flexibility. Once you've made all the reasonable cuts, the next step is to focus on boosting your income.
How can you do that? Start with your current job. Request a raise or look for a higher-paying position (or one with better perks, such as 401(k) matching).
Then, think beyond your 9-to-5. Rent out a room or an entire unit in your home, or launch a side hustle. Consider switching to a credit card that offers cash-back rewards on your purchases. For even more ideas, check out this extensive post on earning extra money in your free time. Funnel any additional income straight into your retirement accounts (we'll cover those shortly).
Another possibility is to take on a part-time job after retirement, according to Trent Hamm of The Simple Dollar. He suggests that the extra earnings can strengthen an underfunded retirement account, and the social interactions and sense of purpose can help retirees stay engaged with their communities.
Think about whether there’s an opportunity to continue working in your field after retirement, such as offering consulting services to your previous employer or sharing your expertise at a local community college. If you're more inclined to try something new in retirement, consider some of these ideas from Money Magazine. Referring back to our example of the 40-year-old female investor, we can see how part-time work after she retires at 65 could help her maintain financial independence.
Add up all the 'extra' income you anticipate each month. It’s easier to estimate regular income, like a raise or rent payments, compared to unpredictable earnings, such as from a side business. Make an initial rough estimate based on your earning potential and adjust as you start bringing in more money. Keep in mind, every bit counts toward growing your retirement savings.
Now it's time to make sure your money is working for you in the right retirement account.
Step Four: Maximize Your Retirement Contributions
Many employers offer 401(k) matching contributions up to a certain percentage. If yours does, you should take full advantage of this 'free' money. Unsure? Book a meeting with your HR department to confirm.
If your employer offers a match, direct the savings from your reduced expenses and new income streams into your 401(k) up to the matching amount. Calculate the contribution needed each pay period to hit the match by year-end, and arrange automatic transfers from your checking account after each paycheck.
If your company doesn't provide a match, you might be better off prioritizing an IRA. However, don't disregard your 401(k) completely, as personal finance and behavioral psychology expert Ramit Sethi suggests.
Although investment experts make compelling cases for both traditional and Roth IRAs, the decision ultimately hinges on whether you prefer to pay taxes on your contributions now or later. As a general rule: if you expect to be in a higher tax bracket during retirement than you are currently, opt for a Roth IRA. If you're earning more now than you will after retirement, consider a traditional IRA. Explore this beginner's guide to IRAs and use Charles Schwab's IRA calculator to assist with your decision-making.
No matter which IRA you select, set up automatic transfers from your checking account. This ensures that you won’t notice the 'extra' money saved by cutting back on bills; it will be directly transferred to your retirement account. Even small contributions add up: you can open an IRA with just $10, and that amount will grow over time.
Once your retirement account is set up, it's time to focus on growing your savings.
Step Five: Select and Strengthen Your Investments
Not sure where to start with investments? Here's a guide to choosing investments for your retirement accounts. Since you’re only about 25 to 30 years away from retirement, you won’t want to take the same aggressive approach a 20-year-old would, but you still need a solid mix of options. Index funds are a great choice, but don’t forget to balance your portfolio with safer options like bonds or certificates of deposit. While they might not yield as high returns, they’ll provide protection if the market gets volatile.
As you continue to contribute to your accounts each month, speed up the growth of your savings by adding any extra cash you can. Windfalls like birthday gifts or tax returns? Funnel those into your retirement accounts to boost your progress. If any of your investments pay dividends, consider reinvesting them to accelerate the growth of your savings.
Ready? You’re not done yet; it’s time to review your progress.
Step Six: Review Your New Retirement Plan
Now that you've set your retirement plan in motion, test it out to ensure you’re on the right path.
Update your figures using the AARP Retirement Calculator. If you've successfully closed the gap between your projected retirement income and expenses, well done! If not, take a month or two to adjust your original plan, then revisit Steps 2 and 3 to find further ways to save and earn.
Let’s revisit our example of a 40-year-old, unmarried woman earning $50,000 annually. By saving 10% of her income each year ($5,000) and working until age 67, she’ll be far closer to her retirement goals.
Retirement planning can be complicated, especially if you’re starting in your forties. But remember, the earlier you start, the better your outcome will be.
