Editor's Note: This story originally appeared on The Penny Hoarder.
By the time you turn 40, you are more than aware of the importance of saving for retirement.
In fact, it might seem like every magazine and personal finance website, and even chats with friends, raises the issue.
The problem is that some of the advice out there is less than helpful, and sometimes downright depressing, because it will tell you that you should have started saving in your 20s.
This can lead to a vicious cycle, in which (slightly) older people feel guilty for not planning sooner for retirement, and then end up ignoring the issue.
This is a particular problem for women because, according to the U.S. Department of Labor, women are likely to work part-time jobs that don’t offer a retirement plan of some kind. And even if they are working full time, women tend to invest more conservatively than men. And unlike men, they tend to have about 20 years of retirement.
The truth, however, is that there are plenty of people who only start saving as late as their 40s, and go on to have a comfortable retirement.
And, while you may have to make up for a little lost time by boosting your retirement savings, as long as you understand how to save for retirement it’s never too late to start planning for it.
Check out The Penny Hoarder’s ultimate guide to saving for retirement from your 20s to your 60s.
In this guide, we’ll take you through a plan to start working toward a comfortable retirement, from setting your goals to structuring your accounts.
1. Don’t Lose Hope
First and foremost, let’s get one thing out of the way. At 40, or even at 50, it is not too late to start saving for retirement, no matter what some pension products will claim.
To see why, it’s worth running the numbers.
Assume that you are 40 years old and have no savings. At this age, in 2021, you can save up to $19,500 in a 401(k) plan, and this increases to $26,000 once you turn 50.
If you are able to invest the maximum in this account, and get a (more than reasonable) 7% rate of return, by the time you are 63 you will have $1 million.
That’s a lot of money, of course, but when it comes to retirement savings it might be less than it seems. With $1 million, you’ll still have to live frugally in retirement.
On the other hand, with a good chunk of capital like this, you’ll continue to see significant returns long into your retirement.
2. Planning to Save
Paying the maximum amount into a 401(k) might, of course, be easier said than done. Ultimately, your ability to save for retirement depends on the amount you can save each month during your working years.
Increase this amount, even by a little a month, and you’ll see a big difference in your eventual retirement savings.
Increasing the amount you save can be done in several ways. It might be cutting out an expensive indulgence, shopping in a supermarket that offers better value, or even getting an additional job.
Today, there are plenty of online platforms that will allow you to explore freelance and remote work that can fit around your other commitments.
Research shows that 75% of people working remotely make just as much money freelancing as they did when they were working full time. Taking on a second job, and pouring all of your earnings into a retirement fund, can be a neat and effective way of saving.
Looking for a second job to pad your retirement savings? Here is The Penny Hoarder list of the 25 best side hustles for 2021.
3. Open a Roth IRA
If you are in a position where you can save more than the maximum allowed amount in your 401(k), the next logical step is to take out a Roth IRA.
These funds allow you to put extra money toward your retirement each year, and come with significant tax breaks.
In fact, your contributions to a Roth IRA will grow tax-free, and you can withdraw a certain amount each year tax-free as well.
Roth IRAs are just one option at this point, though, and you should make sure you explore all the options available to you.
You can use a retirement calculator to work out how much you will need in retirement, and how much you will need to save to realize this.
4. Make Sure You’re Insured
Many people forget about insurance when they are planning for retirement, but this is a big mistake. Most bankruptcies are caused by unexpected accidents or illnesses, and a disaster of this type can wreck the most carefully planned retirement plans.
In your 50s, it might be too late for whole life insurance to make financial sense. However, you can still reduce your financial risk by making sure you have the best health and disability insurance you can afford.
You can also look at term life insurance, which will provide for your dependents should the worst happen.
5. Plan Your Risk
Don’t be tempted to take on extra risk because you feel that time is running out. Most retirement funds will pay about 7% in annual returns, and in your 40s this is an acceptable rate.
Younger people can go for riskier options, because they have more time left in which to recover from the inevitable losses, but you really don’t want a stock crash just before your retirement date.
That’s not to say that you can’t get creative. Online trading can be relatively safe as long as you don’t put your entire retirement fund into high-risk stocks.
An acceptable risk level when it comes to investing in stocks is to subtract your age from 120, with the resulting figure being the percentage of your portfolio that you invest into the stock market.
6. Pay Down Debt
Another often-forgotten aspect of saving for retirement is making sure that you are not carrying undue debt. Though credit and store cards can seem pretty inconsequential in comparison to the sums you are looking to save for retirement, most experts recommend that you pay off all your debts before you start to save.
The reason for that is the same reason why a small contribution to your pension can grow to $1 million in 20 years — the miracle of compound interest.
And in fact this advice goes beyond saving for retirement, because getting into the habit of paying down debt is also one of the top money-saving tips for a frugal retirement.
Check out how this Penny Hoarder writer paid down $12,000 in debt in 12 weeks.
7. Set Your Priorities
Last but definitely not least, be honest about what your retirement savings are for.
Don’t be tempted to use them to send your kids to college, for instance, because ultimately your kids have more opportunities, and more time to save for their own retirement, than you do.
You should, in other words, be a little selfish. When you’ve worked hard for your retirement savings, you should be able to enjoy them.
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