Retirement Checklist: 5 Things You Need to Do in Your 40s

It’s never too early — or too late — to start saving for retirement. According to a Gallup poll, the average expected retirement age in the United States is 66, while the average male and female life expectancy is 82 and 85, respectively. Many will live well beyond these ages, meaning they need a considerable amount of savings to cover expenses and sustain a comfortable lifestyle. The standard advice is for individuals to begin saving as much as 10 percent of their income before taxes at the earliest opportunity and have savings of three times their annual salary by the age of 40.

However, this isn’t feasible or realistic for everyone. If you’re 40 and don’t have hundreds of thousands of dollars in savings, you can still set yourself up for a comfortable future. Here are five steps you can take to begin preparing for retirement.

1. Consider Time Horizon and Retirement Lifestyle

At 40, you have a retirement time frame between 20 and 30 years, leaving plenty of time to catch up on savings, especially since you’re in your prime earning years. You may, however, intend on working longer or taking on a part-time job in retirement, which will reduce the amount of money you need to save. Conversely, you might wish to retire early, which will require a more aggressive saving strategy.

You also need to consider what type of lifestyle you want in retirement. Many advisors suggest saving enough to survive on 70 percent of your annual working income for each year in retirement, but this might not be enough if you plan to travel frequently or own a summer vacation home. Alternatively, you may be comfortable downsizing and spending below your means to save more money for future generations. Regardless, it’s important to start thinking about how you want to live in retirement and develop a plan accordingly.

2. Adopt a Strict Budget

To make sure you have sufficient money to save or put in investment accounts, you first need to adopt a strict budget to track spending and avoid making unnecessary purchases. Separate expenditures into fixed and variable expenses and find ways to cut back on the latter, which includes groceries, gas, and dining out.

The 50/30/20 rule is another good guideline for saving money. This involves dedicating half of your net income to vital expenses, such as rent or mortgage, utilities, car payments, and groceries. Thirty percent of your net income should go toward wants, such as shopping and traveling, and the other 20 percent should be put into investment accounts or used to pay off debt.

3. Pay Outstanding Debts

“Debt has a negative impact on free cash flow, so it is important not to bring these financial obligations into your retirement years,” notes financial planner Martin A. Scott. “One pillar of retirement planning involves evaluating and creating streams of income for the retiree. Debt can create unnecessary stress and will not allow you to completely enjoy this income during your retirement years.”

Credit card debt can be particularly damaging to your savings potential as credit cards usually have high interest rates. Start working to eliminate all debts by creating a list of all obligations and paying down those with the highest interest rates first. Pay more than the monthly minimum if you can.

If you find yourself with excessive debt, there’s no need to panic, as there are viable options available, such as exploring bankruptcy or considering debt consolidation. These are far from preferred options but can help you eliminate or pay down debt quicker, freeing up money to allocate toward investment accounts. You can also refinance your mortgage, for example, if you own a home, to consolidate debt and reduce total interest.

4. Disciplined and Consistent Investing

Investing with the support of a financial advisor is the most efficient way to build your retirement savings, but you need to do so consistently and with a disciplined approach. Directing the same amount of money — or more — each year into an investment account, whether employer-sponsored or an IRA, can help you take advantage of compound interest. For example, even if you have no savings at 40 but start investing $10,000 per year into an IRA, you could have $1 million in savings within 30 years, assuming a 7 percent annual growth rate. Committing to saving and investing all or a portion of raises received along with way, is a painless method of increasing your savings over time.

Putting money into a health savings account (HSA) is also a shrewd retirement planning move, especially for those with a high-deductible health plan. Contributions to HSAs are tax-deductible, account growth isn’t taxed, and withdrawals are tax-free as long as they’re for qualified medical expenses. This is especially smart considering the average retiree between the ages of 65 and 74 has annual healthcare expenses of about $13,000.

5. Build Emergency Cash Reserves

As important as it is to maximize your retirement savings, you’ll also need to make sure you can afford to cover any unexpected expenses, such as job loss, and home and vehicle repairs. By regularly contributing to an emergency savings account, you can potentially cover these financial obligations without affecting your retirement savings accounts, or using high interest rate credit cards to address these short term emergencies or needs.