Your Complete Guide to Planning for Retirement in Your 40s

Many Americans may be further away behind their retirement savings than they realize. According to a recent GOBankingRates survey, nearly 63% of American adults have less than $50,000. The same survey revealed that more than 37% think they need less than $500,000 for retirement, and 30% think they need between $500,000 and $1 million.

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While the exact amount you need to save for retirement depends on your personal needs and living expenses, many financial experts recommend saving at least $1 million — or more if you live in a more expensive area.

How early you start saving can also affect how well you prepare for retirement. More than 41% of respondents said they started saving before age 30, but nearly 17% started between 31-40 and 12% didn’t start until 41-50. Nearly a quarter of adults have not yet started.

If this is where you find yourself today, it’s never too late to start saving for retirement. GOBankingRates spoke with financial experts to find out the best ways people in their forties can approach retirement planning.

Don’t rely on Social Security alone

More than 20% of GOBankingRates respondents said they plan to rely entirely on Social Security in retirement, and more than 30% plan to rely on it for more than half of their income.

However, others are more skeptical of Social Security. More than 23% do not rely on it at all, and 25% expect it to make up less than half of their retirement income. The majority believe that Social Security will either not exist at retirement (23%) or that it will offer much less than it does today (46%).

Jason Noble, certified financial planner at Prime Capital Investmentswarns of excessive reliance on Social Security.

“With the pressure on Social Security, it is expected to be exhausted by 2035, according to the 2022 annual report of the Social Security Board of Trustees,” Noble said. “There could be a 20% reduction in Social Security benefits, which means someone in their 40s would really need to save more to offset the risk.”

Here’s more information about Social Security:

Evaluate your cash flow

When working with someone in their forties who is just starting to save for retirement, the first thing Noble does is figure out their cash flow. This means knowing how much money you earn, how much you spend and how much you have left.

This exercise can help you gauge how much you can reasonably save. After all, planning for retirement in your forties is feasible, but you’ll need to save more.

“For example, a 25-year-old who saves $15,000 per year and has an annual return of 8% and retires at age 60 will have approximately $2.79 million by the time they retire,” Noble said. “A 45-year-old with 8% annual revenue would need to save $95,195 per year to reach $2.79 million by 60 years.”

Here’s more information about saving for retirement:

Reduce your spending

You may find that you need to cut back on your spending so that you can save more. Noble encourages clients to list their expenses and mark them with an E or D for essentials and discretion.

“A 41-year-old couple I work with did this exercise and put a D next to Starbucks, which was $435 a month,” he said. They bought a coffee maker and now they save an extra $400 a month. With an annual return of 8% and retirement at 65, that’s an additional $317,596, which has a huge impact on their retirement plan.”

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Start paying off debts

Next, Noble helps his clients figure out how to pay off their existing debts. He recommends first paying off any debts with an interest rate of 6% or higher before paying the rest.

“We will at least save [enough] to me [get] their company [401(k)] While putting the rest toward that high-interest debt,” Noble explained. “After the high-interest debt is paid off, we take the same amount they were paying and put that money into their retirement savings to get them on track toward their long-term goals.”

Diversify your investments, but focus on tax efficiency

The best way to invest, according to experts, is to start young and invest in a variety of assets. Here are some of the most popular ways that Americans invest, according to a GOBankingRates survey:

  • 401(k) or IRA: 52%
  • Stores: 39%
  • Real estate: 24%
  • Encoder: 21%
  • Bonds: 21%
  • Annuities: 11%
  • He went: 10%
  • Index funds and ETFs: 10%

If you don’t start early, you can still invest in assets beyond your usual IRA.

Mike Schudel, financial advisor at SMART retirement. “Focusing on tax efficiencies in places where wealth is accumulating is going to be very important.”

Assets such as real estate, farmland, and rental property are all tax-effective ways to increase your wealth until retirement.

Schudel also advises those in their 40s to contribute to a Roth IRA. Unlike a traditional IRA, your Roth IRA contributions are not tax deductible. But you can withdraw tax-deductible money in retirement, which may save you money on taxes in the long run.

Here is some additional information about taxes in retirement:

More from GOBankingRates

Methodology: GOBankingRates surveyed 997 Americans aged 18 and over from across the country between August 9 and August 11, 2022, asking sixteen different questions: (1) How much money do you currently save for retirement?; (2) How much money do you think you will need for retirement?; (3) Realistically, at what age do you want to retire? (4) At what age did you start saving for retirement? (5) What worries you financially about retirement? (select all that apply); (6) Are you planning to work in retirement? (7) What assets do you have in your retirement portfolio? (select all that apply); (8) How has the current inflation affected your retirement plans?; (9) How much of your retirement do you plan to fund through Social Security? (10) How do you feel about the future of Social Security in retirement? (11) What percentage of your salary are you currently investing for retirement? (12) Are you planning to move after retirement? (13) Where is your ideal place to retire? (14) What government programs do you plan to use in retirement? (select all that apply); (15) Do you have a pension? And (16) in your opinion, what is the amount of the average American saving at the time of his retirement? GOBankingRates used the PureSpectrum survey platform to conduct the survey.

This article originally appeared GOBankingRates.com: Your Complete Guide to Planning for Retirement in Your 40s

The opinions and opinions expressed here are those of the author and do not necessarily reflect the views and opinions of Nasdaq, Inc.

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