For many Americans, your 40s are your peak earning years. At this point, you are halfway between the point in your life when you entered the workforce and when you’ll reach the traditional retirement age. This is why this decade is an essential time to stay on track or get on track with saving for retirement. You may not have pensions or other sources of income available during your retirement, so your income in your golden years will need to come from your savings and investments.

If you are in your 40s or will soon be entering your 40s, you may be looking for information on financial planning, retirement savings or investing options available to you. How you plan to save for retirement now can significantly impact your future assets, which is why we cover the financial goals you should have at 40, how you can save for retirement, how to build wealth and how to invest.

Financial Goals by 40

Now is the time to review your financial plans or make plans if you haven’t already. First, consider your financial goals for this season of your life. If you have a spouse or partner, involve them in identifying your financial goals. Additionally, analyze your income, expenses, discretionary spending and current retirement savings to determine what you want to accomplish in the next decade. Here are some examples of financial goals you may want to set in your 40s.

1. Save for Your Child’s Education Separately

If you plan on paying for your child’s college tuition, save for it separately. The last thing you want to do is borrow from your retirement accounts to pay for your child’s education, especially because your child may be eligible for grants, scholarships and loans. College tuition and fees typically cost tens of thousands of dollars a year, so saving as soon as possible can ensure you can support your child’s educational pursuits.

Rather than neglect your own financial future in favor of your child’s, save for both goals. Before you begin saving for your child’s education, ensure you are saving enough for retirement. Once you determine you’re on track, if you have money left at the end of each month, consider saving for your child’s college education with a 529 plan or one of your taxable savings accounts.

2. Pay off Your High-Interest Debt

Many credit cards come with high interest rates. If you have credit card debt, you may want to prioritize debt payoff to boost your financial security. Loans can also be forms of high-interest debt, such as student loans and car loans, especially if you borrowed your loan when interest rates were high. If you have multiple high-interest loans, you may be able to refinance.

Keep in mind that not every debt needs to be paid off early, especially low-interest debt. Your mortgage, for example, typically doesn’t need to be repaid early because interest rates tend to be lower than credit cards. You may also be able to claim a tax deduction for paying your mortgage interest. Speak with a tax professional about your situation to determine whether you should claim the standard deduction or itemize, which could affect whether you can subtract your mortgage interest.

3. Review Your Tax Situation

Since you may be earning more in your 40s, this could bump you into the next tax bracket. Consider your tax situation to ensure you are taking home as much of your income as possible. By assessing your tax situation, you can determine whether you should focus on making pre-tax contributions to an employer plan option or after-tax contributions to a Roth IRA.

The right choice for you depends on how much income you currently make and how much income you need in retirement. If you expect your current income to be higher than your retirement income, you may want to invest in a traditional 401(k) and claim the tax deduction. If you expect your current income to be the same or less during retirement, you may want to focus on investing in a Roth IRA.

4. Determine Whether You Are on Track for Retirement

If you have held several jobs throughout your career, you could have several 401(k) plans or other retirement accounts. When you’re in your 40s, organize your accounts and review how your investments have performed. This allows you to get a comprehensive picture of your wealth and ensure each account aligns with your financial goals.

When you review your retirement accounts, determine whether you can save on management fees, invest idle cash or consolidate your funds into an IRA with Accuplan. Since you have more time before you retire, getting on track now is easier than it will be in your 50s. If you don’t already know how much you need to save for your retirement, now is the time to figure it out.

5 Tips for How to Build Wealth in Your 40s

Once you determine your financial goals, you need to know how to build wealth and meet your goals during this decade of your life. Follow these tips to build wealth.

1. Claim all the tax deductions and credits available to you: Review your tax situation to ensure you are claiming all the available tax deductions and credits to save you money. If you pay for childcare, for example, you may be able to claim the dependent care tax credit.
2. Make an estate plan: If you haven’t already made an estate plan and written a will, now is the time to do so. Your will determines who receives your savings and possessions and who will act as a guardian to your children. You can detail your end-of-life-care wishes and give a loved one the power of attorney for healthcare if you cannot make medical decisions for yourself. You can also designate someone to handle your finances.
3. Contribute to an FSA or HSA: To save money, you may be able to make pre-tax contributions to a Flexible Spending Account (FSA) or a Health Savings Account (HSA). These accounts can help you lower your taxable income to save on taxes, and you can use this money for qualifying healthcare expenses. When you open an HSA at Accuplan, you can earn interest and self-reimburse for your healthcare expenses, all at a low to no cost structure.
4. Increase your emergency fund: An emergency happens when you least expect it. A job loss, a medical issue or a costly home repair can present a major financial hurdle if you don’t have savings to cover the related expenses. An emergency fund can give you financial stability when you need it the most. Increasing your emergency fund in your peak earning years is essential, as you may have more at stake and be responsible for more dependents than in your 20s or 30s.
5. Maximize your company benefits: Many companies offer benefits on top of your base pay, such as pre-tax transportation benefits, tuition reimbursement, matching retirement contributions and tax-advantaged accounts for healthcare and childcare expenses. Review what benefits your employer offers, and be sure to take advantage of these benefits to help you build wealth.

How to Save for Retirement at 40

Ideally, you’ve been saving for retirement since you entered the workforce. If not, that’s all right! There is still time to catch up and get on track. Start saving for retirement in your 40s by selecting the retirement plans that offer the tax advantages you need, and use the power of compound interest to build your nest egg. Automate your savings so your personal finances are on auto-pilot.

How Much Retirement Savings Should I Have at 40?

A good rule of thumb is to have at least three times your annual salary in retirement savings by age 40. By 50, you’ll want to have six times your annual salary saved, so keep this in mind as you save for retirement throughout this decade of your life. Since your 40s is typically when your earnings peak, you may want to increase your retirement savings rate as much as possible to ensure you hit your goal by retirement age.

Another rule of thumb you can follow is the 80% rule, which involves saving enough that you’ll be able to spend 80% of your current salary each year in retirement. If you earn $100,000 a year, for example, you would want to have enough saved for retirement that you can spend $80,000 per year in retirement. For a 20-year retirement, this would mean you need to have at least $1.6 million saved by retirement age.

How Much Should I Have in My 401(k) at 40?

How much you should have in your 401(k) at 40 depends on how much you want to save for retirement and how much you have in other retirement accounts. The average 401(k) balance for Americans in their 40s is a little over $93,000. However, what other Americans are saving has little to do with how much you should save for retirement.

How much you need to save depends on when you want to retire and the lifestyle you want to lead in your retirement years. For example, if you want to travel internationally with your family, live in your dream home and leave behind a large estate for your children and grandchildren, you should save more than someone who wants to downsize and live a quiet retirement.

Investing for Retirement in Your 40s

What type of investing in your 40s is best for building your retirement nest egg? Investing is essential to reach large financial goals like retirement. After determining how much you want to save for retirement, you should develop the best strategy for reaching your goal. In your 40s, saving for retirement should be your top financial goal, and you should focus on contributing to your retirement accounts.

Invest in Your 401(k)

Investing in a 401(k) plan can be an excellent way to build your retirement nest egg. If your employer offers a 401(k) with a matching contribution, be sure to maximize your contribution and take advantage of the free money your employer is offering to contribute.

Keep in mind that a 401(k) plan has contribution limits each year. If you hit your contribution limit, you may want to continue investing in other retirement accounts to ensure you save enough each year. If you have an owner-only business, Accuplan can be your Solo 401(k) administrator.

Invest in a Self-Directed IRA

You can use a self-directed IRA to direct your retirement savings into alternative assets that standard retirement accounts do not typically allow. Rather than be limited to investing in stocks, mutual funds or bonds, you can funnel your money into other assets that could help you diversify your portfolio. Popular alternative assets you can use a self-directed IRA to invest in include:

• Rental properties
• Loans
• Cryptocurrency
• Private equity
• Precious metals like silver and gold

Remember that some asset classes cannot be invested in with a self-directed IRA, such as firearms, life insurance, antiques, some precious metals and collectibles like stamps or art.

Choose this type of IRA to diversify your portfolio and get tax advantages. Since an individual asset class can experience a severe downturn, putting all your eggs in one basket can be extremely risky. When you invest in multiple asset classes, your portfolio can better withstand drops in the market and mitigate risk. As with a standard IRA, you can also enjoy tax advantages from tax-deferred or tax-exempt growth. 

You must follow the IRS rules and laws for a self-directed IRA to avoid penalties or fines. At Accuplan, we can help you avoid prohibited transactions and investments to ensure your account complies with the guidelines. If you want to invest in a self-directed IRA, you can open an account with us. Our application process is simple, and all you need is your personal information and funds to start investing.

Learn More About Investing in Your 40s With a Self-Directed IRA

Financial planning in your 40s can be simple when you have the right investment strategy and retirement accounts. For many Americans, this means investing in 401(k) plans and IRAs. While standard IRAs are usually limited to conventional asset classes, such as stocks, mutual funds and bonds, self-directed IRAs enable you to invest in other asset classes, including rental properties, cryptocurrency and certain precious metals.

At Accuplan, we offer self-directed IRAs so you can invest in what you’re passionate about and diversify your portfolio. We have several years of experience in the retirement account industry, so you can trust us to help your accounts remain compliant and give you the personalized touch your investment strategy needs. Whether you want to start saving for retirement at 40 or you’re looking to enhance your investment strategy, open a self-directed IRA with Accuplan today.

Our information should not be relied on for investment advice. Rather, our content is simply for information and educational purposes only. It is not meant to provide, nor should it be relied on, for investment, legal, tax or accounting advice. We make no guarantees regarding our information.