12 Rules for retirement planning for people in their forties

40th birthday cake

Your 40s could be the most important decade when it comes to preparing for retirement . For one thing, you have probably reached your highest earning years. Several studies show that pay tends to increase flattening for most people around the 40. Year of life . If you've been waiting for a big increase in income to start saving, you may be out of luck.

Once people reach 40, they are likely to have ticked off some other important items on their financial to-do list, z. B. The repayment of student loans and the purchase of their first home. That means they should be free to devote both their attention and financial resources to preparing for what happens when they stop working. And with about another 20 to 25 years before they say goodbye to the office, people in their forties still have time to accumulate a significant amount of money for retirement.

However, many 40-year-olds aren't sure they're taking the right steps toward retirement planning. You may wonder if you're saving enough, investing too cautiously (or too aggressively), or if you have enough time left to reach your savings goals. Whether you've contributed to your 401 (k) for years or are just starting out, here are 12 retirement planning rules 40-year-olds should follow.

1. Taking stock of your situation

'The first thing people need to do is take stock of where they are,' chris cooper, certified financial planner based in san diego, told the cheat sheet. This means making sure you have a good handle on your income, expenses and liabilities. Once you have this information at your fingertips, you can make smart decisions about how much to save and invest for your future.

2. Don't guess your savings goal

Retirement savings documents with graphs and glasses

You need a retirement plan if you don't already have one. | istock.Com

Deciding how much you need to save for retirement shouldn't be a guessing game. Just as many americans, however, are getting closer to setting retirement goals. More than half of generation xers – many of whom are over 40 – said they picked a random number when setting a retirement savings goal, a 2016 survey by retirement plan provider transamerica found. Guessing how much to save is a problem, however, as it can lead to not saving enough or not investing in a way that enables a saver to reach their goals.

A better approach for people in their forties is to set a clear retirement planning goal. 'They should know how much money they actually need to have for retirement,' herb white, certified financial planner and president of life-determined wealth strategies in greenwood village, colorado, told the cheat sheet.

It's not always easy to determine how big of a nest egg you need, as it depends on your desired retirement lifestyle, your income, when you plan to stop working, your life expectancy, projected investment growth and other factors. Financial advisors can help you project what you need to save, and there are plenty of rules of thumb you can use to get a picture of a reasonable goal.

Fidelity suggests aiming for eight times your final salary in savings by your 60s. And the center for retirement planning says most people should save about 15% of their current income to have a comfortable retirement.

3. Save as much as possible

Row of piggy banks with hand inserting coin

Boost your retirement savings in your forties. | istock.Com/andreypopov

People in their forties should focus on setting aside as much as they can for retirement, especially if they haven't yet made saving a priority. If your employer makes 401 (k) matching contributions on your behalf, you should contribute at least up to the matching amount, white said, and up to the maximum contribution amount if possible. This is 18.000 dollars in 2017 . It might also be a smart move to contribute as much as you can to an IRA – 5.$500 in 2017 -, he added.

Still, many people don't seem to get the message about the importance of saving for retirement. 39 percent of workers ages 35 to 54 are not saving for retirement, according to a survey by the U.S. Government employee benefits research institute . And 45% of people in this age group had less than 25.000 US dollars saved.

4. Prioritize

Husband and wife work on finances with calculators and laptops

Make a list of your financial priorities. | istock.Com/tomwang112

Should you save for the kids for college or put the money in your IRA? Upgrade to a bigger house or maximize your 401 (k) contribution? Use your bonus to take a vacation or save for the future? In your forties, you might find yourself and your money pulling in different directions. Since you cannot do everything, you must decide what is most important.

Many experts say your retirement should come before most other financial goals. Some people want to focus on paying off a mortgage or student loans instead of saving, but that can be risky if it holds you back on your savings, according to certified financial planner denton olde . If you're having trouble deciding what comes first, it's best to meet with a financial planner who can keep an objective eye on the situation.

5. Pay off high-interest debt

Credit card and bill

Is credit card debt keeping you from saving for retirement?? Istock.Com

You may be able to balance paying off low-interest debt like mortgages or student loans with your retirement goals. However, there is one type of debt that should probably take priority over most retirement plans: credit card debt. If you're interested in mastercard or american express and paying double-digit interest on your debt, throw everything you can at those bills (after you've put enough in your retirement account to get your match).

The return you get from reducing your credit card or other high-interest debt likely exceeds the return you'd get in the stock market. And if you're aggressive about what you owe, you could be debt-free sooner than you think. Then you can switch back into retirement savings mode.

6. Don't let emotions drive your investment decisions

Wall Street Sign

Don't get too caught up in the day-to-day action on wall street. | stan honda / AFP / getty images

Make changes to your investment portfolio every time the market goes up or down? In this case, you could be setting yourself up for a mistake. 'Don't pay attention to the headlines in the newspaper or the people on TV,' investor extraordinaire warren buffett has said . "When people get scared, other people get scared, and when they get excited, [other people] get excited. Emotions are contagious, and emotions have nothing to do with investing. " In other words, let logic, not your emotions, guide your retirement investing decisions.

Of course, that's easier said than done. Reacting emotionally is understandable, especially when it comes to your life savings. But most people in their forties shouldn't let the market's natural ups and downs keep them from investing. 'When you're this far away from retirement, it's good to stay invested,' white explained. 'In the long run, you have time to recover'.' And cooper reiterated this advice. 'You need to be able to roll with the punches,' he said.

7. 'Don't treat your retirement accounts like an ATM machine'

Bank of America ATMs

Your 401 (k) is not an ATM. | istock.Com/snyferok

Your 40s will likely be your highest earning years, but this decade can also lead to increased financial challenges. Many people in this age group are trying to balance saving for retirement with paying for a child's college education, covering a mortgage and other debts, and meeting current expenses. Some people might cut their retirement contributions to balance their household budget, although it's difficult to make up for the lost years of savings. Even worse, however, is making early withdrawals from retirement accounts.

'The biggest mistake I see is people not keeping their retirement money,' cooper said. Whether it's cashing out instead of switching a 401 (k) when they change jobs or borrowing from savings for other expenses, draining retirement accounts puts people at a big financial disadvantage. Thirty-three percent of workers in their forties cashed out their retirement savings when they changed jobs. Bloomberg reported you took an average of 17.212 with when they left, and potentially lost tens of thousands of dollars in tax deferred investment growth.

8. Think about future taxes when investing

Tax forms

Taxes are important when you want to retire. | scott olson / getty images

Having a 401 (k) is great, but that account shouldn't necessarily hold all of your retirement assets. White recommended that people consider "fiscally diversified investments".

In other words, allocate retirement savings to tax-deferred accounts such as 401 (k); accounts that generate tax-free retirement income, such as roth iras and roth 401 (k) s; and even taxable investment accounts, which might be a good place for investments that are taxed at capital gains rates rather than the higher ordinary income rate. 'With this strategy, you can really control how much you pay in taxes in retirement,' white explained.

9. Fight lifestyle creep

Man walking on shopping street with many shopping bags

Don't let your expenses increase with your income. | istock.Com/twinsterphoto

In your 40s, you're probably earning more than you ever have in your life. They've been working hard for decades and feel they've earned some rewards. 'Before you know it, you'll be spending money on a bigger house in a nicer neighborhood, a fancier car, a cleaner to keep your place looking great, and fancier vacations. You can afford all these things today, but if you spend money now instead of saving, you might get a downgrade in retirement.

'Rising lifestyle expenses not only mean there's less money left to save, but also that higher lifestyle expenses mean we need even more to retire in the first place,' financial expert michael kitces explains. If you can limit your spending now, you'll not only have more to save, but you'll also have to live with a little less, so you'll need less money in retirement – a win-win situation.

10. Plan for the unexpected

Entrance to the ER

Are you prepared for a financial emergency? | istock.Com

You have your future planned out, but life may have some surprises in store for you. Here's why you want to plan for the unexpected, especially when you reach middle age. You have less time now to recover from a financial setback before retirement, and you probably have more responsibilities (like a family and a mortgage) than you did in your 20s or 30s.

Stashing some money in an emergency fund is the first step to preparing for the unexpected. Try to save three to six months of expenses – enough to get you through a brief bout of unemployment. However, an emergency fund alone is not enough.

Disability insurance replaces part of your income if you suddenly can't work – an event more likely to happen than you might think statistics from the council on disability awareness . Life insurance for you and your spouse replaces lost income when the unthinkable happens. You may also need other types of insurance, z. B. An umbrella insurance policy or long-term care insurance policy.

11. Prepare to work longer hours

Businessman smiling

Working longer could mean a more secure retirement. | istock.Com/monkeybusinessimages

The average age for retirement in the U.S. Has been rising slightly for years and is about 64 for men and 62 for women, according to the U.S. Center for retirement research . But many people still retire too early, even though it often puts them in a financially precarious position. 'Working longer is key to a secure retirement,' center report says.

Not everyone has a choice about when to retire. Layoffs and health issues force some people out of the workforce sooner than they would like. But people who continue to work and yet might choose to retire early run the risk of having no money later in life. 'We have to accept that it's good to live until 70'. Work until the age of 70 and keep social security until 70. 'Putting off a year of life,' cooper said. 'It's not a mistake'. A mistake kicks in at 62 if you're not ready. '

12. Get educated

Businessman shows a document to sign to a couple

A couple meets with a financial planner. | istock.Com/minerva studio

Not taking the time to educate yourself on basic financial concepts is one of the biggest retirement planning mistakes white sees. 'People don't take the time to be financially savvy,' he said. 'It's your future and it's important to be actively involved in the success or failure of your future.'

Financial advisors can be helpful for people who aren't sure what their next step toward retirement planning should be, white explains, as can online resources, books and information from your employer or retirement plan provider. It can also be valuable to get advice from people who have been there and done that. 'Sometimes it's very helpful to talk to someone who's already retired'. They can tell you what they would have done differently, " white said.