Retirement seems a lot closer after you turn 40. I turn 42 this year and for the first time in my life, I’m thinking ahead to what comes after my youngest child leaves the nest in five years. I only have about $10,000 in my 401(k). This will continue to grow until I retire, but the estimated amount I’ll have by retirement will not be enough to live on.
It turns out I’m not alone. According to the 19th Annual Transamerica Retirement Survey, published in December 2019, the average amount that U.S. working adults currently have saved for retirement is $50,000. Those who earn $100,000 or more per year average about $222,000 in retirement savings, whereas working adults who earn less than $50,000 annually have saved around $3,000 for their golden years. Those who fall in the middle have saved about $47,000.
No matter where you fall in this matrix, there are some financial goals we should all aim for by the time we turn 40. Here is a look at five important — and attainable — milestones you can work toward achieving as you approach the big 4-0, even if you’re a little late to the party.
Have a robust emergency fund
If 2020 has taught us anything, it’s the value of having an emergency fund to tap into when times get tough. You should generally aim to have enough money to cover three to six months of expenses. So if you’re spending $3,000 a month for rent, utilities, food, and other bills, you would want to have no less than $9,000 and up to $18,000 in your emergency fund.
An account of this size will help if you’ve lost your job and can’t pay the bills, if you have unexpected medical expenses or home repairs, or if you have to handle costly vehicle repairs or even replacement. When you use money from this fund, make sure you replenish it as soon as you are financially able and get it back up to its previous balance.
Saving thousands or tens of thousands of dollars might seem daunting, especially if you’re already close to 40. Slow, smart, and steady is the best strategy. You can start with opening a high-yield savings account, which will earn interest and grow your balance even when you’re not adding to it. Your bank might have an option to automatically move money to your savings account from your checking, which is a great way to ensure you’re putting money away consistently. Even if it’s a small amount, consider setting an automatic transfer each time you get paid.
If your budget is already tight and you don’t think saving is possible, take a look at your spending and see where you could cut back. Apps like Trim and Rocket Money can help you lower your bills or identify unnecessary spending. You can then move whatever amount you end up saving on your bills into your high-yield savings account.
You could also consider working a side hustle and stashing all your earnings right into savings. Small amounts of dollars and cents add up over time and can keep you on track to build the emergency fund you need.
Have no credit card debt
Monthly payments are structured so you pay more in interest and very little on the balance. Then new interest charges are added to your account every month until you pay off the total amount owed.
All of this means you end up paying many times more than the amount you originally charged when you keep an interest-bearing balance on your credit cards. That is money that could be better spent on other things, such as building an emergency fund or saving for retirement.
If you haven’t already started trying to pay off your credit cards, here are some strategies to help you get started:
- Transfer balances. Take advantage of credit cards that offer an introductory 0% APR for balance transfers. You can transfer your interest-bearing debt to this card and no longer have to pay interest charges for as long as the intro period lasts. Create a plan for how much your monthly payments will be and stick to it until the card(s) is paid off.
- Consolidate your debt. Shop around for a personal loan that will consolidate your credit card debt at a better interest rate. Not only will you save a ton of money in interest charges, but because personal loans are installment loans, you’ll have a set date by which your debt will be paid off.
- Spend less. Not adding more debt to your credit cards can help you pay them down sooner. Start by canceling payments to services you don’t use. Then create a monthly budget that includes everything you need, but allocate more money to pay toward your credit card debt. Finally, be faithful to your budget and avoid wasteful spending. Ask yourself, “Do I really need this?” If the answer is no, put your credit card back in your wallet.
Own life insurance
You may be thinking, “Is life insurance a good investment?” It’s not a happy thought, but there will come a time when you’re no longer around. What will happen to your debts? How will your family pay for funeral expenses? How will they survive without your income? There are a lot of questions that having a life insurance policy can answer, some of which you might never anticipate.
If you’re nearing 40, now is a great time to invest in a life insurance policy. The good news is that life insurance is usually less expensive than other types of insurance, especially if you get a policy when you’re younger and healthy.
How much life insurance you need is a bit more complex to answer. There are lots of recommendations and rules-of-thumb for determining how much your policy should pay out. But the Insurance Information Institute gives some safe guidance that’s worth considering:
- Look at your current total income (including health insurance subsidies, retirement account contributions, etc.), your total debt, and how much you pay in annual expenses outside of the usual bills (this could include seasonal landscaping, law or accounting services, membership dues, etc.).
- Estimate how many years you think your family will need support and how much might be needed for funeral costs, relocation, property taxes, school, and other expenses your family will have in the future.
- Multiply the number of years your family will need support by the amount of money you estimate they will need each year. This is the amount of life insurance coverage you might consider purchasing.
Coming up with a figure based on these criteria is a good place to start, but even when you get to a ballpark number, it can be hard to understand how life insurance works. Working with a licensed insurance broker with no vested interest in any specific insurance company can help you explore your options. You can also check out our list of the best life insurance companies.
Be building your retirement fund
Pensions are a thing of the past. The closest thing we have these days are retirement funds that we can contribute to during our working years. Two of the most common retirement accounts are an IRA and 401(k). These are special funds that act like a savings account, but instead of your money staying put and collecting interest, it’s invested in mutual funds, stocks, bonds, and other financial products that can potentially deliver a higher rate of return.
Your employer may offer a 401(k) plan, which you can contribute to with pre-tax money from your earnings. They may also match your contributions up to a certain percentage, which can help you grow your account faster. If your employer offers matching contributions, you should definitely take advantage of that because it is essentially free money.
If you don’t have a workplace 401(k) available to you, you can easily open an IRA account on your own. These accounts allow you to deposit pre-tax or already-taxed money, depending on which type of IRA you choose. If you’re not sure which type of IRA is best for you, consider speaking with a tax planning professional or financial advisor. Whether you have a 401(k) or an IRA, talking with a financial professional can help you determine how much to pay into your fund and for how long to achieve your retirement goals.
In addition to these ideas, you could also consider starting investing in the stock market. An easy way to get going is to check out robo-advisors and other easy-to-use investing platforms. These are typically simple to set up and allow you to get started in investing with as little as $1.
- Get $20 to make your first investment1
- Invest in stocks, bonds, and ETFs
- Fractional shares available
- Start investing with just $5
FinanceBuzz doesn’t invest its money with this provider, but they are our referral partner. We get paid by them only if you click to them from our website and take a qualifying action (for example, opening an account.)
Have an excellent credit score
There are a lot of reasons why credit matters. When you have good credit, you’re more likely to be approved for loans, rental applications, utilities, and other services. You’ll get better insurance rates and better loan terms. You’ll also be able to access a good amount of credit should you be faced with an emergency, which can offer you some peace of mind in retirement.
There are two simple things you can do to keep your credit healthy or improve your credit score:
- Get your free credit reports from each of the three credit bureaus: Experian, Equifax, and Transunion. Take note of the scores and check that all the information on each version of your report is correct. If there are inaccuracies, you can dispute credit report errors with the appropriate bureau so they can be removed.
- Pay down your credit card debt. The ratio between how much credit you have available to you and how much of that credit line you’ve used for spending accounts for about 30% of your total credit score. This is known as your credit utilization ratio, and lowering it can substantially boost your score.
There are a lot of other ways you can improve your credit score, but starting with these two strategies could result in some big jumps in your score pretty quickly.
It’s never too early or too late to start planning how to manage your money for your financial future. It’s easy to put off financial planning when you’re young and healthy or when you can’t imagine a major disaster impacting your life. But the sooner you start working toward the personal finance goals in this article, the more financially secure you’ll be.
Set small goals, stick to your plans, and continue to invest in yourself (even when times get tough). When you do this over the course of decades, a little sacrifice can turn into an enormous amount of security in the future.