Anyone that started their retirement planning early in their career should be in very good shape by the time they reach their 40s. Individuals planning for the first time may be faced with serious catching-up to do. That being said, starting a plan in your 40s is perhaps the single most important step someone can take to prepare themselves for the future.
Retirement Planning Opportunities
We're going to use an analogy from the game of football. Let's face it; working in our 40s is like halftime in a football game. Our career is about half over, and it's time to stop the game, assess where we are, and rethink our opportunities and plans.
We have twenty years of work behind us, and roughly twenty years of work ahead. If we haven't been saving for retirement, it's time to get started. If we've been putting money away for years, then it's a good time to reassess where we are, and what we need to do over the next twenty years.
Time and Retirement Planning
Since we're at the half way point, we can make several comparisons using a retirement savings calculator. This allows us to see some of the different scenarios we might be faced with in the future.
For example, we are going to illustrate what retirement plans might look like for a 45-year-old that had been saving through the years, versus one that is just starting to save for retirement. We're also going to demonstrate what happens if we decide to wait another ten years before setting money aside for those retirement days.
Retirement Savings Examples
Current Age | 45 | 45 | 55 |
Desired Retirement Age | 65 | 65 | 65 |
Annual Household Income | $80,000 | $80,000 | $90,000 |
Anticipated Income Growth Rate | 3.0% | 3.0% | 3.0% |
Desired Income Replacement Rate | 70% | 70% | 70% |
Current Retirement Assets | $75,000 | $4,000 | $4,000 |
Expected Return on Investments | 6.0% | 6.0% | 6.0% |
Expected Pension at Retirement | $33,000 | $33,000 | $33,000 |
Social Security at Retirement | $30,000 | $30,000 | $30,000 |
Ongoing Annual Savings Required | $5,354 | $11,544 | $18,310 |
In this example, a 45-year-old that has already saved $75,000 needs to save about $5,300 annually to meet their desired income replacement rate of 70% when retired. But a 45-year-old that has a minimal amount of retirement funds needs to save at more than double that rate, nearly $12,000 per year. For instance, an individual in Indiana has a monthly average retirement income of $21,774while D.C. has a monthly average of $43,744.
More importantly, if that same 45-year-old waits until age 55 to start saving for retirement, then they need to set aside over $18,000 a year! Saving that much money each year will truly present that individual with a lifestyle challenge. That's roughly 20% of their pre-tax income that needs to be set aside each year until the day they retire.
Saving for Retirement
It's a good idea to run through some retirement scenarios using our retirement calculators. In the example above, we're counting on Social Security and a pension plan to help close the retirement income gap. Those assumptions may not be true in all situations.
Once we've figured out exactly how much we need to save each year, then our next stop should be a retirement investing guide. This particular publication walks through a series of questions aimed at helping to decide where to start, or continue, retirement savings. Most of us have two options when it comes to retirement accounts: IRAs, and employee sponsored savings such as 401(k) plans and 403(b) accounts.
Employee Sponsored Retirement Savings Plans
Usually, the first recommended course of action will be to start funding a 401(k) plan or 403(b), especially if our employer offers such a plan, and they are matching our contributions. Depending on how much we have saved, whether or not our employer offers a 401(k) plan, and the generosity of the plan itself, this type of account is usually our best bet; especially if we're playing catch up.
Individual Retirement Accounts
Depending on what an employer is offering, and how much we need to save each year, we may find ourselves supplementing the employer's 401(k) plan with an individual retirement account.
For example, let's continue with the scenario above using a 45-year-old with minimal retirement savings. If their employer matched 50% of their first 8% in contributions to a 401(k) plan, then they'd be saving $9,600 via that plan. But they still have a $2,000 savings gap, and at this point their next best option might be a Roth IRA.
Planning Strategies
If we've been thinking about retiring, planning and saving all along, then we may find ourselves on autopilot by the time we reach our 40s. Holding the course and working our original retirement plan might be all we need to do at this point, especially if our original assumptions were accurate.
If we've been ignoring retirement for some reason, or delayed facing the reality that we may one day be retired, then now is the time to act. It's halftime. It's time to regroup and prepare ourselves for the second half of our career. As mentioned in the article retirement planning in your 30s, the plan, do, check, and act approach works best in creating a strategy:
Plan: At this point in our career, we should have an excellent feel for when we'd like to retire, how much we need in the future, and where our current career is likely to take us. For that reason, we should be able to create a very accurate retirement plan.
Do: At 40-something there is simply no time to waste. Once we've figured out what's needed, then we'll just do it.
Check: If we're playing catch up, then we're going to need to check our retirement plan every two years or so. Because of the relatively short time between now and when we retire, we need to pay close attention to factors such as the actual return on investment to see how they align with our planning assumptions.
Act: As we check our plan, we may need to make adjustments to assumptions such as retirement age and our rate of savings. Since we have half our career behind us, during each of these cycles we should only be tweaking the retirement plan.
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