Retirement Savings Strategies for Clients in Their 40s

Retirement planning in your 40s is very different than retirement planning at any other age. Forty-somethings are stuck in between two major financial goals. They’re at the point in their lives when they likely still have debt and at the same time are thinking about long-term savings. In addition to retirement planning and paying down debt, 40-year-olds may have additional financial goals such as funding a child’s (or grandchild’s) education. All of these goals should be taken into consideration when planning for retirement because they affect a client’s savings capacity.

So here are five ways advisors can help 40-somethings plan for retirement. (For more, see: How to Advise Clients Who Are Behind on Retirement Savings.)

This is the first step towards retirement planning in your 40s. Without a defined time horizon and income goals financial advisors can’t accurately help clients plan for retirement. Once the timing, income needs and expenses are projected advisors can help plan how much clients need to save now.

Defined goals combined with a client’s tolerance for risk will also help advisors create investment strategies for the years leading up to retirement. The investment strategy set for a 40-year-old may be different when they reach 45 because income, savings capacity, risk and the time horizon will change as they get closer to their target retirement date. Reviewing goals and investment strategies on a yearly basis will help clients (and advisors) stay on track with their retirement plans.

As a client’s income increases so should their retirement savings. When unexpected expenses come up and other goals take priority, retirement savings are often the first expense to get put on the back burner. Advisors can encourage clients to pay themselves first and factor retirement savings into monthly expenses. This way clients will always be able to afford saving for retirement. (For more, see: Advisors: Have Clients Try on Retirement for Size.)

If clients want to maximize retirement savings, they need to minimize spending, pay off the mortgage and eliminate debt. Clients can allocate the extra income towards savings – both short and long term. Forty-somethings most likely have 20 to 30 years before they retire and they just never know what types of financial curve balls life will send their way.

The faster clients pay off debt, the faster they can start putting that money aside in an emergency savings fund and investing for retirement. If clients have emergency savings, they won’t need to dip into their retirement savings or accumulate more debt if a financial emergency comes up.

If 40-somethings can’t find enough disposable income to max out their retirement savings, there are other ways to save for retirement. One is to take full advantage of an employer-sponsored 401(k) plan. Financial advisors should encourage clients to contribute the maximum amount into a 401(k) plan in order to take advantage of matching employer contributions. (For more, see: How Advisors Can Manage Evolving Retirement.)

Clients can also invest additional money in an individual retirement account (IRA). Clients can contribute up to $5,500 per year into a Roth IRA or traditional IRA. That amount increases to $6,500 when clients reach the age of 50. Every dollar counts when it comes to investing wisely and saving for retirement. Clients can maximize contributions in several different ways from investing a lump sum from a tax refund or yearly bonus or on a more frequent basis (such as bi-weekly or monthly) with pre-authorized contributions.

If clients want to save for a child’s or grandchild’s education, they need to take 529 plan contributions into consideration when setting a monthly budget. Helping younger generations pursue a higher education is generous, but at the same time clients need to realize that money spent elsewhere is money that is taken away from their own retirement savings.

Creating a financial plan to help clients set spending and savings priorities as well as showcase the difference in projected retirement income with different levels of savings can help clients set financial priorities in their 40s. (For more, see: Retirement Planning Strategies for Clients in Their 60s.)