Saving for retirement can be challenging. Many of us struggle to cover today’s bills, never mind putting cash aside for our old age. And if you’re in your 40s, you might worry that it’s already too late.
The good news is that you still have time. Indeed, every dollar you put aside now can make a big difference. Plus, there are tax benefits that can help you boost your nest egg. Here are three steps you can take today to kick-start your retirement savings.
If you’re in your 40s, you probably have a lot of financial fish to fry. That might include a mortgage, paying down credit card debt, and building up savings. If you have kids, you might also want to save for their education. Even so, if you’re worried about retirement, the most important thing you can do is find a way to start saving.
Right now, you may have 20 to 25 years before you retire. That’s time for compound interest — essentially earning interest on your interest — to work its magic. Experiment with a compound interest calculator to see how different scenarios might play out. For example, here’s how much a monthly contribution of $250 could grow over time if you left it alone earning 8% a year.
| Time | Value of your investment |
|---|---|
| 5 years | $17,600 |
| 10 years | $43,460 |
| 15 years | $81,460 |
| 20 years | $137,290 |
| 25 years | $219,320 |
Data source: Author’s calculations
If you’re not sure where to start, you might talk to a financial adviser. Or learn about the basics of investing, open a brokerage account, and get started on your own. Set some goals about how much you want to save, and think about what investment strategies would suit you.
If the words “investment strategies” fill you with dread, it’s OK. It doesn’t have to be complicated. Your strategy might start with buying and holding an exchange-traded fund (ETF) that gives you exposure to a mix of stocks.
2. Make the most of tax breaks
When it comes to retirement planning, the tax man is on your side. There are a couple of different tax-advantaged accounts worth knowing about:
- 401(k): This is an employer-sponsored retirement account. Find out if your company has one, and ask whether it will match your contributions. Some employers will match a dollar amount or percentage of the cash you put in.
- Individual retirement accounts (IRAs): Different types of IRAs suit different types of workers. Broadly speaking, a traditional IRA will reduce your taxable income today. A Roth IRA lets you contribute after-tax funds and then make tax-free withdrawals once you’re retired.
The IRS sets maximum annual IRA and 401(k) contribution limits. For 2024, you can put up to $7,000 into your IRA (or $8,000 if you’re 50 or older). The limit for 401(k)s is much higher. To give you a quick illustration of why they matter, let’s say you’re in the 24% tax bracket. A $7,000 contribution to a traditional IRA could reduce your tax bill by $1,680.
One final note on 401(k)s: Sometimes people forget to do anything about their retirement funds when they leave their jobs. As a result, research by Capitalize estimates that there’s $1.65 trillion sitting in lost 401(k) funds.
If there’s a chance some of that money is yours, claiming it could give your retirement fund a serious leg up. Look through your paperwork or reach out to old employers to find out.
3. Increase the gap between what you earn and what you spend
This is easier said than done. The bigger the gap between your spending and your income, the more money you can contribute to your retirement. The only surefire way to increase that gap is to look at your finances. You can do it. I did.
Here are some steps to take:
- Set aside a couple of hours and look at where your money goes. Accounting is one of those chores I always put off, but it’s never as bad as I think it will be. Budgeting apps can make it easier. I prefer to use a spreadsheet, as it helps me get up close and personal with my spending.
- Look for areas where you can make some cuts. Perhaps there are some subscriptions you’re not using, or some takeaway meals you could skip. This isn’t about cutting back on all the fun things. It’s more about trimming a little of your nonessential spending so you can put more money toward your autumn years.
- If you’re struggling to make enough cuts, see if there’s a way you can increase your earnings instead. Perhaps you can take on a side hustle or rent out space, or even sell unwanted items.
Once you’ve worked out how much you can contribute, consider setting up an automatic monthly transfer to your retirement account. That way, there’s no risk you’ll spend the money on something else or forget to make the payment.
Key takeaway
It is never too late to start saving for your retirement. The real trick is to understand what’s been stopping you and address it. If you think you don’t have enough money, see if you can squeeze even a small amount from your budget. If you worry you don’t know enough, talk to an adviser or look online for beginners’ investment advice. Your future self will thank you for overcoming those hurdles today.
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