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You've reached your 40s and you haven't saved a dime toward
retirement.
EEEK!!!
Meanwhile, it seems everyone around you is comfortably set
for his or her retirement.
EEEK!!! EEEK!!!
Don't hit the panic button, though.
Although in your 40s, retirement begins changing from an
abstract, far-off idea to a hardening reality, you still have a few factors working in
your favor. With both disciplined saving in your 401(k) and the increase in earning power
that comes in your 40s, you still have plenty of time to build a respectable retirement
fund.
Weighed against these factors, though, are increasing
demands on your money as kids reach college age and parents' health starts to fail.
Here's a look at the 40s and how best to avoid the
"EEEKK!!!"s.
Gaining Wisdom, Income in Your 40s
The popular view of the 40s is that this is when the
mid-life crisis hits. You buy a red convertible, take up hang gliding and book tickets to
Tahiti. Of course, this clichý isn't often correct. The 40s are a time when most folks
make big strides in their careers while their families continue to grow and mature.
Last October, in this space, we wrote about Knute Iwasko,
who didn't start saving for retirement until age 40. "In my 40s, which is when I
started, I was just saving for a cushion or a nest egg…I never thought about saving
for retirement," he said in a recent interview.
Twenty years later, after accumulating $1 million in his
401(k), he quit working. "My real surprise was when I added things up in my early
50s, and saw how (the money) mushroomed," he added.
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how Knute's 401(k) plan figured prominently in his quest to become a millionaire
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His story shows that people starting in their 40s can
save for a comfortable retirement.
40s have wisdom, discipline
Let's face it, after living for 40-plus years, you have most likely gained the necessary
qualities that allow you to deal with retirement saving: discipline and steadfastness.
That means you have the tools not only to create a
realistic retirement plan, but also to follow through with it. But, we're not saying it's
going to be easy.
Iwasko didn't have it easy. He was trying to raise five
kids. But, after joining an investment club at work, he learned he needed to create a plan
and stick with it.
"One lesson (I learned) was regularly investing
money," he said.
First, Iwasko and his wife sat down and created a budget.
After paying all the bills each month, the pair looked at what was left over. Then, they
put the remainder in their retirement account. "Some months it was only $15," he
said.
You still have time
In your 40s, one big factor still working in your favor is - believe it or not - your age.
"You still have some time to have your dollars work
for you," said David Strege, a financial advisor with Syverson, Strege, Sandager
& Co. in West Des Moines, Iowa.
You have about two decades to take advantage of one of the
most powerful retirement tools available - interest compounding. With compounding, your
profits are plowed back into your investment so that the next time interest is calculated,
you earn interest on the interest.
By saving for retirement in accounts such as an IRA or
401(k) plan, you gain the advantage of tax deferral. You get an immediate tax break and
all your profits grow tax deferred. You will, however, have to pay taxes upon withdrawal.
Hopefully, at retirement, you will be in a lower tax bracket.
Building a $1 million portfolio like Iwasko's would take
some pretty aggressive, disciplined, and shrewd investing. In building his portfolio, he
benefited from the stock market's healthy gains in the 1980s and 1990s. At times, he was
averaging 45% annual returns. There's no guarantee such market performance will continue.
Further, you may not feel as comfortable with the risk
level Iwasko took on. That said, even with less risky investments, and assuming a fairly
conservative return, you should be able to build a respectable account.
Hitting your 40s often means hitting your financial
stride
The big advantage folks in their 40s have in saving for retirement is that their incomes
take a big leap upward.
"When you are in your 40s you are starting to hit a
real stride in terms of your career," said Campbell Brown, a financial consultant and
author of Retire At 55 .
The median income for folks 40 to 44 years old was $55,157
annually, compared to $49,129 for folks 35 to 39, the Census Bureau said in a March 1999
report.
Reality Sets In
When younger folks (20s and 30s) think about retirement,
it's a more abstract thought. It's when you hit your 40s, and your body shows inevitable
signs of aging, that retirement thoughts solidify.
The challenge is to keep focused on saving for retirement
even as a growing number of factors compete for your savings dollar.
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"There are so many people and
things competing for my money. Who has the time to plan for something 20 years down the
road?"
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| - Campbell Brown, a
financial consultant and author of Retire At 55. |
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"The most difficult part is that there are so many
people and things competing for my money," said 44-year-old Brown. "Who has the
time to plan for something 20 years down the road?"
College costs hit home
Perhaps one of the biggest expenses 40-somethings face is their kids' college education.
It's pricey now, and likely to increase.
Currently, average annual room, board, and tuition are
$7,472 at a public university, and $19,213 at a private college, according to the College
Board.
Betsy Leidecker, 46, a mortgage broker, said one of her
biggest financial worries is whether she'll be able to pay for college for her 10-year-old
son Peter. So far, Leidecker, her husband, and her father have put $25,000 into college
savings for Peter.
Leidecker realizes that even though she and her husband
continue to sock away more for Peter's education, they may not be able to send him to the
college of his choice. "If Peter ends up going to the (state) university, it's an
extra perk" because the tuition will be lower, she noted.
When your lifestyle rises to meet your income
One burden folks in their 40s must bear is a reputation for being part of the
lifestyle-driven baby-boomer generation.
"It's not just clothes for our kid, it's designer
clothes. It's not just tennis shoes, it's Nikes," said Chris Cumming, vice president
of marketing at Diversified Investment Advisors.
Plus, the 40s are often when folks want to buy a vacation
home, a sports car, or a boat. "Classic baby boomers are saving less than the peer
groups underneath them," Cumming added. "They spend much more and don't save as
much."
Other financial planners tell of customers with six-digit
annual incomes, two houses, wine cellars, the best cars, and no retirement portfolio.
As a result, many 40-somethings are in jeopardy of coming
up short for retirement.
Elder care and the sandwich generation
Folks in their late 40s often are starting to enter what is popularly known as the
sandwich generation. They're caught between still caring for their children and the
prospect of caring for their aging parents. These two hefty expenses can hinder your
ability to save, and even force you to think about tapping into your retirement account.
Cindy Wingard, a 45-year-old mortgage banker, doesn't have
kids. She has her 68-year-old mother living with her.
While Cindy's mother is currently in good health, Cindy is
aware that she may have health troubles as she ages.
"I have to make sure that…I will be able to take
care of her," Wingard said. "That figures prominently in my plans."
Even as she grapples with these potential expenses, Wingard
continues to aggressively save for her golden years. She's putting $10,500 into her 401(k)
plan this year, the maximum allowed.
Her strategy is one that financial planners heartily
endorse.
"Maybe a few years down the road you will be in the
sandwich generation, you will be taking care of your kids and your parents. What's most
important is to continue to set aside funds for retirement," said Christopher Seling,
55, a registered representative with National Planning Corp., a broker-dealer affiliated
with Fiducial Triple Check. Fiducial Triple Check provides income tax, personal finance,
and business services.
Don't count on Social Security
One grim realization 20- and 30-somethings have grasped is that Social Security won't be
their main source of retirement income.
But for folks in their 40s, such a reality hasn't really
gelled, financial planners say.
Within the last few years, Congress raised the age at which
folks can file for full benefits, and it has recently repealed laws that would tax some
Social Security earnings.
Cumming, 43, noted that he's among the age group that won't
be able to get full Social Security benefits until age 67.
"If (my) Social Security picks up my greens fees, I'll
be happy," he said.
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"If (my) Social Security picks up
my greens fees, I'll be happy."
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| -Chris Cumming, vice
president of marketing at Diversified Investment Advisors. |
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Further, he expects Congress may again try to tax Social
Security earnings.
Use Wisdom to Balance Reality and Succeed
Given these pros and cons, how do you survive? Think of
yourself first.
That means setting limits on yourself and your
money.
Plan for your retirement
If you haven't up to this point, it's important to sit down and do some retirement
planning. Figure out what you want your retirement to look like and what it will take to
get there.
Strege says his typical client reaches 50 and then starts
thinking about retirement.
"At least in your 40s, you still have some time to
have your dollars work for you," he said.
Put the max in your 401(k)
If you can afford it, contribute the maximum to your retirement accounts like a 401(k)
plan, Seling said. If you can't afford the max, at least put in enough to get the full
amount of any company-matching contributions.
"If you don't max out, participate in some
fashion," he said. "The earlier you invest, the more compounding works for
you."
Go beyond the max
If you've maxed out your 401(k) plan, what else can you do? If you qualify, you could open
a Roth IRA.
You could also open an after-tax IRA, Cumming said.
"Few people know about that one," he said.
This is a traditional IRA you fund with after-tax dollars.
While you don't get to reduce your tax burden through your contributions, all profits in
the account grow tax deferred. You will, however, have to pay taxes when you take the
money out at retirement. But, by then hopefully, your tax bracket will be lower.
Figure out a child college-payment philosophy
Many parents feel they need to save enough to pay for a full Ivy League education. But,
they need to be realistic. Your retirement needs come first.
Your children have more options when it comes to funding
college than you have to fund your retirement. They can apply for scholarships, grants,
loans, work their way through school, or even attend a cheaper college.
It's laudable to try to save for your child's education,
points out Greg Thurin, personal financial advisor with American Express Financial
Advisors, but not at the expense of your retirement.
"If you get to retirement and don't have enough money,
you're out of luck. Your choices are a lot tougher than taking out a loan at age 18,"
Thurin said.
Plan for your parents, if necessary
What if your father or mother had a stroke? Suddenly, your carefully made retirement plans
would have to be set aside to cope with a major financial crisis.
You shouldn't wait until a medical crisis occurs to talk
with your parents about their care, Strege said.
The two issues to cover are: What are the reasons to bring
a parent into your house and what will trigger moving the parent to a nursing-care
facility.
Further, you need to figure out how you will pay for the
care. The insurance industry is starting to provide some solutions that folks in their 40s
might consider.
"You may want to look at buying long-term-care
insurance to finance the cost of…a nursing home," Strege suggested.
Senior citizens can purchase this insurance for themselves,
as well.
Keep a long-term focus: stocks are still right
With 20 years to go until retirement, it may seem like the time is ripe to be shifting
into more conservative investments. Not yet, financial planners say.
"For folks in their 40s, it's still appropriate to
have a majority of investments in equities," Strege said.
Cindy Wingard, who opened her first IRA in her 30s, now has
a total of $60,000 in her IRAs and 401(k) plan. Some of her co-workers constantly readjust
their portfolios. But, Wingard resists hopping on the bandwagon.
"I know in the long run, I'm better leaving it alone.
I know what I need to be doing," she said.
And that's keeping an eye on the long-term retirement
goals. She expects to continue working until age 65.
Currently, she's invested in moderate and aggressive
investments, including a 30% investment in international stocks.
So, use your strengths as a 40-something along with a solid
investment strategy, to build your way to a comfortable financial retirement.
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