A worker turning 40 today has 25 years to prepare for retirement by age 65. This may seem like a long time, but in terms of retirement preparation, it represents a swiftly closing door.
Compound interest is most powerful when it has a longer term in which to work its magic, and workers who fail to practice good financial habits early in their career may find they run out of time to correct mistakes prior to leaving the workforce. That doesn’t mean you can’t still retire comfortably if you start preparing later in life, says Rande Spiegelman, vice president of financial planning for the Schwab Center for Financial Research. However, those who start younger have an easier path before them. “If you start [retirement planning] right out of college, you could set it and forget it,” Spiegelman says. “The longer you wait, the tougher it is.”
To avoid making your savings situation any more difficult than necessary, finance experts say you should do the following 10 things prior to blowing out the candles on your 40th birthday cake.
Create a written plan. Whether you use an app, Excel spreadsheet or an old-fashioned pen and paper, Spiegelman says having a plan is one key to a successful retirement. Workers should go beyond simply writing down their retirement savings and spending goals. They should also have a written budget to ensure they stay on track throughout their career.
Open a 401(k) or IRA. To maximize retirement savings, save in an account that provides tax incentives. Employed workers often have access to 401(k) accounts as part of their compensation package. IRAs are an option for many self-employed workers as well as those who have maxed out their 401(k) contributions.
Shop for low-cost funds. 401(k) and IRA accounts offer a number of fund options for workers to consider. In addition to their rate of return, pay close attention to the fees attached to each fund, says Yoav Zurel, CEO of FeeX, which analyzes retirement accounts to find lower-fee options. “If you can minimize these fees, you’ll end up with a larger nest egg,” he says.
Look for Roth accounts. Both 401(k)s and IRAs come in traditional and Roth options. A traditional account gives workers a tax deduction at the time of their contribution and then taxes withdrawals.Contributions to a Roth account are subject to tax, but all gains and withdrawals made after age 59 ½ are tax-free. “If you’re younger, chances are the Roth makes more sense [for greater tax savings],” Spiegelman says.
Contribute at least enough to get your 401(k) match. Many employers will match employee contributions to a 401(k) plan. That match may be dollar-for-dollar or cents-on-the-dollar, up to a certain amount. Either way, workers should be contributing enough to their 401(k) to be eligible for the entire match offered.
Buy life insurance. Damon Gonzalez, a certified financial planner and founder of Domestique Capital in Plano, Texas, says everyone should have an individually purchased life insurance policy by age 40. Individual policies can provide great benefits at a low cost if people buy them while they are young and healthy.
Spend less so you can save more. “The best advice is to live below your means as early as possible,” Spiegelman says. Doing so can free up cash for retirement savings and avoid the necessity of going into costly debt in case of an emergency.
Be content with your current lifestyle. Similarly, Gonzalez says people should be wary of what he calls “lifestyle creep.” Rather than trying to continually strive for bigger and better houses and cars, he recommends people practice contentment with where their lifestyle stands by age 40. “[Otherwise], instead of needing $6,000 a month in retirement income, their new lifestyle requires $10,000 a month,” he says.
Opt for the 15-year mortgage. “You just barely pay any principal off in the first 10 years of a 30-year mortgage,” Gonzalez says. For people who will be moving in five to six years, getting a 15-year mortgage can be a smarter financial choice. Plus, with interest rates so low, you can still buy plenty of house with a shorter loan term.
Stop assuming the government or a former employer will pay for your retirement. Baby boomers may have the assurance of Social Security benefits to pad their personal savings, but Millennials and young Gen Xers could have a smaller safety net. Already they have to wait until an older age, 67, to claim their full Social Security benefit. And most companies no longer provide traditional pension plans to former employees.
“As a 38-year-old, I would say we’re probably going to be on our own,” Gonzalez adds. To be sure you’re ready to go it alone in retirement, make it a priority to cross these 10 items off your to-do list before mid-life begins.