Retirement Savings Advice: Age 30's and 40's

by Ray Martin

A few days ago I wrote about retirement savings advice for folks in their 20's and 30's.

But folks in their 30's and 40's confront many challenges than can interrupt a good retirement savings strategy. This is the time when other life events, like getting married, buying a home, having children, etc., can compete for more of your income, leaving little if any to save for retirement which is a long way down the road.

A Milestone to Reach in Your 40's

According to the National Savings Rate Guidelines study, assuming you are looking to retire at age 65 and earn an average income, by the time you are age 40 you should have accumulated 4 to 6 times your annual pay in retirement savings be saving 15 percent or more of your income in your 401(k). Check to see how you compare.

Here are some guidelines for folks in their 30's and 40's to consider.

Don't Interrupt Retirement Savings

It is all too easy to allow other priorities to crowd out your retirement savings. But don't stop saving for retirement!

Some people think that buying a home will be their main source of retirement savings. But there are significant risks in relying on your home equity as your long-term retirement income plan. The home may not appreciate and you may not get the price you want when you sell. Also, in retirement, you'll still need to pay for some place to live. Even folks in other countries know that homeownership is no substitute for retirement savings.

Some folks are tempted to stop saving for their retirement in favor of putting money away for their children's college education, which is also important. What you need to keep in mind is that while there are financial alternatives (loans, scholarships, etc.) that can help to pay for education costs, there are no such programs to pay for your retirement!

Often saving for retirement gets put on hold when a two-income household suddenly becomes a one-income household, such as often the case upon the birth of children. A negative impact on retirement savings for workers who leave the workforce is that they do not continue to participate in an employer provided retirement savings plan such as a 401(k) plan. If you do this, even if only for a few years, you still should continue to accumulate retirement savings in your name. One way to do this is to open and contribute to a Spousal IRA.

Contribute 10 to 15 Percent

By now, you should be contributing more than 10 percent to your 401(k) plan, because you were taking a part of each increase in pay to increasing your contributions to your retirement savings. Also, as your income grows, more of it will be included in higher tax brackets. This makes the pre-tax contributions you can make into a 401(k) plan more valuable to you.

Auto-Increase Contributions

One of the more recent features provided by 401(k) plans of larger employers is called an automatic contribution escalator. This allows plan participants to set up future increases in their contributions to coincide with expected pay increases. So if you are currently contributing 12 percent and next February you are expecting a three percent raise, then set the contribution escalator to increase your 401(k) plan contributions from 12 to 15 percent at that time and it will automatically change for you. If you find that the increase in savings was not leaving you enough net pay to get by, then just log on to the plans web site or call the plans service center to change your contribution rate.

Invest for Growth and Diversify

Since retirement is still a long time away, your retirement savings should still be invested mostly in stock funds. But now that your balance is larger, diversification becomes more important. Chances are you will experience a stock market down turn. If the stock market falls 10 percent, a $100,000 portfolio invested 100% in stocks will fall in value by $10,000. On the other hand, if your portfolio was invested 75 percent in stocks, it would only fall $7,500, which would be easier to recover from.

Rebalance and Monitor Your Account

Unless you have signed up for an account management service, you should not treat your 401(k) account allocation like the popular chicken roaster as seen on TV and simply 'set it and forget it!'

Take the time to review your account and its performance at least quarterly. The good news is that most large employer's 401(k) plan web sites today include a personal rate of return, which indicates the performance of your account. Also review the year-to-date performance of the funds in which you are invested and compare these to their peer-group index performance. This information is provided by most plans. You also should be rebalancing your account at least annually. Many large employer plans also feature an automatic rebalancing feature, which you can elect to set either on the plans web site or by calling the plans service center. This automatic rebalancing feature will typically rebalance your account either quarterly or annually and is typically offered at no additional cost.


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