Dave Ramsey's Blunt Warning About 401(k)s That People in Their 40s Don't Want to Hear

If you're in your 40s and not sure whether you're on track for retirement, Dave Ramsey has some suggestions to help you stop working on time. Some people claim that Ramsey's advice is too blunt, but the steps he teaches have helped millions of followers become debt-free and wealthy.

Over the past few decades, Ramsey has shared his thoughts about the most effective way to build a long-lasting retirement plan, even if you feel like you're behind. Here is what Ramsey wants people to know about preparing for retirement, even if they're in their forties and feel like there's not enough time left to build adequate savings.

Your 40s are your make-or-break decade for retirement savings

Ramsey has said, both on his website and on radio calls, that it is still possible to build a $1 million nest egg by the time you retire, even if you're starting at 40 years old. To put it another way, time is still on your side when you're in your 40s, but it's dwindling.

He says what will make this possible is getting out of debt, prioritizing savings, and taking advantage of workplace retirement plans. However, he has also said that having a 401(k) is not enough on its own. People will need to have multiple streams of income and a withdrawal strategy in order for their nest egg to last decades.

Social Security won't be enough

As of right now, the OASI Trust Fund states that by the year 2032, the trust will only be able to pay out 78% of Social Security benefits, unless new laws improve this gap. As it stands now, the average Social Security monthly benefit is around $2,071. Because of this uncertainty, people in their 40s now need to take steps to ensure they have additional retirement savings beyond Social Security benefits.

He is a big proponent of taking advantage of 401(k) employer matches, paying catch-up contributions once you turn 50, and prioritizing your own retirement before paying for your kids' college.

If you're not debt-free at 40, Ramsey says to pay it off first

Ramsey is a proponent of investing in a 401(k) and a Roth IRA; however, he only wants people to invest once they are completely debt-free. 

In fact, according to his 7 Baby Steps, he recommends that people save a $1,000 emergency fund, pay off all non-mortgage debt, save a three- to six-month emergency fund, and then invest 15% of their growth income into retirement accounts.

Diversify your retirement accounts once you're debt-free

According to Ramsey, once you're debt-free and you have invested enough in your 401(k) to get your employer match, the next step is to invest in a Roth IRA. Ramsey actually prefers Roth IRAs because you fund them with after-tax income.

That means that once you're in retirement, you can withdraw your money tax-free. Another benefit is that, unlike 401(k)s, Roth IRAs do not have required minimum distributions (RMDs). That means that your money can grow in your Roth IRA for as long as you want.

Ramsey says to avoid early withdrawals from your retirement account

If you are in your 40s and have a retirement account balance, Ramsey says taking money out of your 401(k) is a mistake. That's because when you withdraw money from a 401(k) before age 59 1/2, you will have to pay a 10% penalty. Additionally, the money you withdraw will be added to your annual income, which can change your tax bracket.

The biggest drawback to withdrawing money early from your 401(k), however, is the loss of compound income. Once the money is gone from your account, it can't work for you in the market.

How to increase your 401(k) balance in your 40s

If you feel like you're behind on your retirement savings in your 40s, there are a few ways you can increase your 401(k) balance. The first is to develop a monthly budget and spending plan. Finding out where your money goes is the first step to increasing your cash flow, which you can use to add more money to retirement accounts.

Additionally, working to get pay raises or change jobs to earn a higher income can help you maximize your 401(k) savings. Increasing your automatic contributions each year is another simple way to grow your 401(k) balance without significantly affecting your paycheck.

Ramsey's advice has helped millions

Dave Ramsey has an extremely popular radio show and podcast. He has also written several New York Times bestselling books. Over the past several decades, he has grown his company, Ramsey Solutions, to have over 1,000 employees.

Though there are many people who criticize his approach, there are also many happy customers who credit Ramsey with helping them become debt-free.

Bottom line

Ultimately, Ramsey's message to people in their 40s, especially those who haven't started saving yet, is that it's not too late to have a stress-free retirement one day. 

However, now is the time to start on a plan to crush your debt and invest for your future, as time is of the essence with respect to compound interest.

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