Starting to save for retirement at 40

couple with kids

There's something about reaching the big 4-0 that often causes you to re-evaluate your direction in life. And when you do, it's hard to escape the fact that your day of retirement is indeed approaching faster than you ever thought possible.

If you're one of those who eliminated debt and made investing for retirement a habit since your 20s, there's very little to do other than enjoy your 40th birthday and continue on with what you're doing. But if you're heading into your 40s having done nothing to prepare for retirement, the prospects can be downright scary.

Related >> Maneuver Toward Retirement: What to do in Your 30s

Where Should You be?

If you missed the opportunity to let time perform its compounding magic on your investments, you face a problem of simple math: The compounding approach won't work for you if you get started this late.

Related >> The Extraordinary Power of Compound Interest

This chart shows the gravity of the situation:

investment value at ten year intervals

The two red, dotted lines represent the eventual value of a $100-per-month investment after 20 and 30 years — i.e., if you wanted to retire at age 65 and started at ages 45 and 35, respectively, investing in index funds with an average return of 8 percent per year, the $100 a month would yield you:

  • approximately $65,000 after 20 years, as opposed to
  • approximately $162,000 after 30 years.

Now What?

You missed the luxury train to retirement. It's not pleasant to hear, but it's true. Although it's not the end of the world, your situation is, shall we say, “imperfect,” and you will need to find a way to compensate for that imperfection.
Invest three times more than someone who started 10 years earlier. The good news is there are ways to get on track. The bad news is that none of them are ideal or even easy. You, therefore, have to decide which one (or more) of the following impositions of imperfection you will pursue for your best shot at recovery:

  • Accept a higher level of risk
  • Get more involved in your investing activities

1. Investing More

The math may be brutal, but it is simple. Let's say you want to have your investments provide you with $50,000 a year (to pick a random, round number). Nobody knows what prevailing interest rates will be 20 or 30 years from now. (Thirty years ago we were lucky to get a mortgage under 12 percent per year.) Relatively safe S&P 500 index funds yield 2 percent in cash dividends these days. On safe Apple or Microsoft bonds, you can earn something similar.

If those numbers stay unchanged, you would need $50,000 ÷ 2% = $2,500,000 to provide your $50,000 in relative safety. In order to arrive at that $2,500,000 number in your 20-year time horizon, you would have to invest more per month — something more on the order of say $3,850. Like I said, brutal, but simple.

Related >> How to Invest $1,000, $10,000, or $100,000

2. Accepting More Risk

Risk is a topic laden with emotions and even lots of opinions. But we seem to forget that risk is all around us: We take a risk driving along a highway, believing a simple painted line will keep an oncoming truck from wiping us out. The question is not risk or no risk, it is how much risk.

If you don't have $3,850 a month to invest in safe index funds, you will have no choice but to assume some risk somewhere along the line to compensate. Not pleasant; but again, the only way around the brutal math.

Alternative Investment Example

One avenue of higher risk might be to rely on a higher return on your investments once you retire (than the 2 percent we assumed above). The City of Detroit, for instance, recently issued a new round of bonds for its Fire Department. These bonds yield 4.75 percent, more than double the rate we assumed earlier. When people hear “Detroit,” they cringe and run for the hills. However, those bonds are probably very safe because they will stand before all existing bonds (and it has never happened that a big city paid zero on their bonds). Perfect? Of course not. But something to consider? Absolutely — especially when you know you have no chance of getting more than $2 million in 20 years.

If you assume that similar deals will continue to become available (a fairly safe assumption), that affects the nest egg you need dramatically: Instead of needing to invest $3,850 a month, $1,900 a month might work if you're ready to assume the added risk.

A Little Caveat About Being in this Situation

Before the quick/lazy readers get on their soap boxes and yell at the top of their lungs that risk is bad, please note: We are not advocating assuming a higher risk to get rich quick. As the saying goes, “Desperate times call for desperate measures.” There are all sorts of reasons someone could find themselves in a desperate situation with their retirement investments. (More on this below, but they don't all have to do with being lazy or cavalier about retirement.)

Still, it's important to note that risk is not a black-and-white affair, a choice between complete safety and total ruin. Rather, risk comes in shades of gray. Thousands of people navigate those shades quite successfully. It is not a slam dunk, however. Navigating risk successfully depends on …

3. Working Harder

There are investments out there which are less passive than, say, index funds but which, if you learn to do them well, may be more profitable. Probably the most visible example is rental property. Few investments have proven themselves over so much time and in so many countries as the classic home next door which you rent out.

As anyone who has ever taken this route will attest, this is not a passive investment by any stretch of the imagination. A friend of mine who succeeded at this very well called it a second job on steroids. To enhance your success, you will have to do renovations and repairs yourself, and you will have to deal with finding tenants and dealing with the inevitable problems they bring. But, in 20 years, you can turn this investment into a self-perpetuating income stream with a built-in hedge against inflation.

That is only one example; there are many. I alluded to the Detroit bond issue above. If you are willing to spend time to research a specific investment like bonds, you will in time be able to discern opportunities that others who rely on simplistic formulas pass over. The key, once again, is exploring options and setting aside the time it will take to get beyond passive investing.

Pulling It Together

Unless you are a mega-earner, there is no painless way to recover the ground you lost. Chances are you will end up employing some combination of the strategies outlined above.

Tighten Your Belt

In order pull it off, the first thing you will need to do is some serious belt-tightening. In your 40s, you will be close to your maximum earning potential. If you are not investing for retirement now, simple math says you are probably spending it all. The same math says that, in order to invest, you will have to cut back that spending. If you plan to invest a lot, you will need to cut back a lot. There really is no getting around that.

  • A budget is your first essential step. Slaughtering sacred cows will be next. Club memberships, eating out, travel, shopping, even your nice home, every one of those things near and dear to your heart will have to go on the chopping block. Things will only get worse if you don't.
  • The second step is getting rid of any consumer debt. When my wife and I arrived at this point, the view we took was that if we needed to eat bread and water, we'll do it. Fortunately, it never quite came to that, but you get the point: To succeed, you need a mindset of no entitlements and a microscope for all expenses.
  • You might even have to take a second job. That will help boost your income to get the money for that “catch-up” investment.

There is Hope

In summary, getting started with retirement planning in your 40s will not be easy, and that's putting it mildly. Almost everyone has some slack they can cut out in order to free up money to invest. Everyone has a few hours every day to invest in a second income and/or learning more about a particular kind of investing to get beyond what passive investments can generate.

That's the bad news. The good news is that it is not impossible; there is hope. A commenter or two on previous posts have noted that such a heavy emphasis on getting money for a nest egg may be overkill — money isn't everything. That is true. But money is the emphasis on this blog. And the only time to address the problem of taking care of yourself when Social Security is not enough is now. As I said earlier, although it gets more painful the later you start, it is never too late.

Related >> Best CD Rates | Certificate of Deposit Rates

Addendum: Life Isn't Always Kind

There are a few readers who, like me, blasted through the black-themed birthday party with nothing in place for those final years; others encountered situations that set them back to zero. Some of those predicaments might have been of their own making, perhaps poor choices; but they could just as easily be due to events being sprung on them through no fault of their own.

Lenny, a friend of ours, lost her job last week when the newspaper company she worked at for almost 20 years decided to shut down her division and eliminate all those jobs. They gave her a terrific recommendation, but recommendations don't pay the groceries when you are 75. Another friend buried his wife of a few decades this month, claimed by cancer. It's not hard to imagine that illness and care wreaked havoc on their finances.

Life isn't always kind — nor is it predictable — but this post is for those who, for one reason or another, are not on track to retire but realize it's time to get busy and do something about it. Life isn't always kind, but we don't have to make it harder for someone else. Please be kind to your fellow readers as you comment.

Are you older and starting to save for retirement? What options are you pursuing to deal with a shortened horizon? What would help you overcome the challenges?

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My Factoring Network
My Factoring Network
4 years ago

Interesting post!!! Retirement planning is a stage where life dependency is more in your savings and other investment profits done earlier. For a good and comfortable retirement, the investment planning must be strong from the beginning with a tightened budget. Thanks for sharing.

Rajesh
Rajesh
4 years ago

taking the risks is for the 30’s phase and one should take advantage of taking risks with equities during that phase, and for 40’s it is more about moving things in a balanced method.

Scooze
Scooze
4 years ago

Geez, if I hadn’t started saving by age 40 I think I’d have to kill myself. This whole article is unnecessarily fear inducing. I know it is October, but get a grip. One does not need 2.5M to live on $50k per year. Have you heard of the 4% rule? One needs $1M. And social security will be there. Plus it’s way easier to save more after age 30 or 40 when student loans are paid off (and one’s salary has risen at least a little). It’s not ideal to wait, but it’s not the end of world, either. If… Read more »

Dee
Dee
4 years ago
Reply to  Scooze

Unfortunately I have to agree. The title caught my attention, but the tone was so negative that the (few) practical ideas were all but lost. Before reading it I was expecting to share it with some friends who I knew would be interested in the topic; after reading it I won’t be sharing it with anyone.

I think it’s a topic that resonates with a lot of people. I’d love to see the topic addressed again, in a way that actually offers some hope for those in this situation. That’s an article that I would gladly share & pass along.

Emily @ JohnJaneDoe
Emily @ JohnJaneDoe
4 years ago

Interesting article, and unfortunately applicable to many. Even those who have been saving longer may feel the need to take change their savings patterns or take on some more risk to meet their retirement goals when retirement starts looming closer.

jestjack
jestjack
4 years ago

What a great article…My first home I purchased 37 years ago and had two apartments. It was a dump…with good bones. Fixe it up and lived in the lower portion for 6 years, bought another house, rented out the bottom and never looked back. Still own the house and it continues to “pay dividends”….Best move I ever made! As for life not being kind…so very true. My Dad is in the hospital for rehab and we met a very kind lady who brought him his dinner. We began chatting and she shared that she was “down-sized” by an insurance company… Read more »

Jessica W
Jessica W
4 years ago

Thanks for the article. I’m 26 and motivated for early financial independence myself but I worry about my parents who are in their 50s and neither have a dime saved. A number of factors have contributed to their current situations but I think 2 major ones have been 1) lack of education/awareness about saving and investing. And 2) a certain amount of anxiety paralysis that is causing them to burry their heads in the sand rather than start taking the dramatic action they need to. Whenever I bring up my own or ask them about their finances they don’t seem… Read more »

Cindy
Cindy
4 years ago
Reply to  Jessica W

You may not be able do it alone. They have powered-butt syndrome. They won’t listen you because they changed your diapers.

Do you have an aunt, uncle, or a friend their age that might be able to reach out to them to discuss the issue?

Jessica W
Jessica W
4 years ago
Reply to  Cindy

Ha! yes you may be right.

Penny Price
Penny Price
4 years ago

Great post. It doesn’t sugar coat, but it doesn’t take a hatchet to us, either. I am in my early thirties, and turning our first home into a rental while we move into a real fixer-upper. Our financial goals are longer-term, but do include private school for the kiddo, so we’re willing to sacrifice some creature comforts now. Setting short and mid-term goals and having a small emergency fund seems to be the key at this stage in the game. Then again, I suppose I won’t *really* know that until I am looking in the rear-view mirror. The irony there… Read more »

DD
DD
4 years ago

Unfortunately I have to agree with Scooze and Dee’s comments. There are some unusual statements in this and the author’s past articles (such as “What’s your position on debt? Read this First” https://www.getrichslowly.org/whats-your-position-on-debt-read-this-first/). $2.5 Million is an extraordinary and likely impossible-to-reach figure for most people, and unnecessary to live in retirement on $50,000 per year, as there are safe bonds and bond funds that pay more than the 2% described. Additionally, I agree with their sense of the negative tone or scare tactics. Suggesting that tightening your belt may require that “every one of those things near and dear to… Read more »

Carla
Carla
4 years ago
Reply to  DD

“Suggesting that tightening your belt may require that “every one of those things near and dear to your heart will have to go on the chopping block,” including your “nice home,” is just not reasonable nor helpful”

Exactly, especially when you don’t have that much to begin with. I made the mistake of reading this post before bed and now I’m trying to find a way to not be up all night with anxiety.

lmoot
lmoot
4 years ago

My plan is to save for retirement up to the point that it doesn’t mess up my goals up to retirement. Whatever that amount will be is what I will save. I promised myself I would not torture myself over retirement. As long as at least 10% is going in, I’m okay. I’ll have social security, investment property (rental income as well as real estate value), and hopefully will still be earning income for as long as possible, doing a job/s I love. We can’t predict whether things will go badly or goodly (I made up a word, deal with… Read more »

Linda Vergon
Linda Vergon
4 years ago

(This comment came from Kerry, a reader of our daily newsletter.)

I have pursued living in Mexico. Living here even part time is saving me over $15,000 a year while still living in a condo on the beach. I can buy a comprehensive healthcare policy for $1,300 a year. Working part time, I can still take deductions even if my business is new and has not yet generated much income.

Kerry

Trep
Trep
4 years ago

8% return? How?

alex
alex
4 years ago

8% above inflation ?!?

Indeed, the higher the return, the larger the difference between somebody who started investing in his 30s and somebody who started investing 40s.

8% above inflation is not realistic…

Sage Lewis
Sage Lewis
4 years ago

I actually think this type of strategy is pre-recession thinking.

Don’t worry everybody. You are going to be fine.

Share a house with that college friend you always liked.
Become a workcamper at a camp ground.
Work at a National Park.
Take a job at Walmart.
Move to a lower cost of living country.

If you “have” to live on $50k a year and not lift a finger for it once you hit 65, maybe consider opening your mind to all the other cool ways you can live on this planet.

getagrip
getagrip
4 years ago

I understand the math and why the author said what was said, but I think $2.5M is overkill for most folks. The conservatism associated with that value is crippling for most people and in many ways makes no sense. I mean, think about it, if my $2,500,000 only earned enough to keep up with inflation to an essentially 0% value, at a $50,000 withdraw rate that would equate to 50 years of retirement income. I would be 115 years old before running out of money. If I earned just 1% above inflation that would stretch it to 70 years and… Read more »

Mysticaltyger
Mysticaltyger
4 years ago

I think a 2% withdrawal rate is too conservative and I’m pretty conservative with this stuff. Going back to 1926, 3% as long as you had at least 50% in stocks, has been 100% successful. We can’t guarantee that will be the case in the future, but it’s a reasonably conservative assumption. 2% is not. However, the general gist of the article is correct. You need to get serious about retirement savings if you’re in your 40s and have saved nothing. A 10% savings rate is not going to cut it. If you are 40 with nothing saved and want… Read more »

Josh
Josh
4 years ago

I just reached the 2-9. I’ve put back close to 10% most years since I graduated college (recommendation of after-tax pay for my age group). I recommend using the retirement calculator with your investment brokerage to see how much you need to put away each month.

tara
tara
4 years ago

As one who started saving for retirement well after age 40–hey, no one ever sat me down and had the “value of compounding interest” talk–I welcome the thoughts posted and didn’t find them anxiety producing. Indeed there is hope for those of you who have put this off for whatever reason, but now’s the time to get started!
Thanks for the ideas.

Elle
Elle
4 years ago

“Life isn’t always kind”. One thing I don’t see written about very often is regarding people who may have only started saving up for retirement in their 40s because of employers’ changes to defined benefit pensions. In my 20s and 30s, I got my letter every year telling me what my benefit was, how close I was to vesting, and what the projection was. Back then, people didn’t talk about 401Ks or investing. I thought I had a pretty good thing coming down the pike. And then they froze the pensions. They grandfathered in people of a certain age, but… Read more »

Sarah Noelle @ The Yachtless
Sarah Noelle @ The Yachtless
4 years ago

Thanks for taking the time to say that there is hope. It’s really important, I think, for people who started saving late, like at 40 (or, in my case, in my early 30s) to realize that it’s not a lost cause and that there’s a lot they can still do.

Dividend Meter
Dividend Meter
4 years ago

Agreed – 2.5m isn’t necessary to retire. I didn’t get serious about saving and investing until I was 38 years old. Only seven years later, I’m starting to see the wonders of compounding dividends. Wish I had started earlier, but it’s never too late, as long as you’re happy and have a pulse.

Nanette
Nanette
4 years ago

It’s scares me this article but I calmed myself down and think that we don’t need to have 2.5m to retire. Maybe I’m just lucky I came from poor family so I don’t need to have 2.5m inorder to retire comfortably. It maybe so that comfortable is different from everyone. With me as long as I’ve got roof on my head and able to eat 3x a day and can go out once in a wk for a meal, Im satisfied.

Sam
Sam
4 years ago

Frankly, I think more aggressive investments means more in stocks or small caps than the formulas suggest. But, frankly, even in retirement most people should still have a healthy amount (not all of course) invested in stock to guard against inflation.

As for real estate investments, as a landlord myself it is not for the faint of heart and certainly not a path for easy money. The upside is that your tenants can pay off the property over time and hopefully provide an income stream 15 years or so later.

Mary @ Retirement Planning IQ
Mary @ Retirement Planning IQ
4 years ago

Hi William, thank you for encouraging me to save more money. The effects of compound interest is very motivating. Keep up the good work.

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