This article was updated on Oct. 8, 2017, and originally published on Dec. 19, 2016.
Retirement might seem like a far-off milestone when you're in your 40s. It's easy to forget about retirement when you're deep in the throes of mortgage payments and child care expenses, but in reality, your 40s are a key time to focus on saving for the future. Here's what you need to do today to set yourself up for a financially secure retirement.
1. Get rid of bad debt
You'd think millennials would be the ones guilty of having the most credit card debt, but actually, that not-so-coveted title goes to those in the 45- to 54-year-old bracket. Recent data from ValuePenguin reveals that Americans in this age group owe more than $9,000 on average. If you're carrying bad debt, you'll need to start chipping away at whatever you owe so it's not hanging over your head as retirement nears.
Furthermore, the sooner you pay off your debt, the less money you'll end up wasting on interest charges. Imagine you're carrying a $5,000 balance on a card charging 18% per year. (Many cards, for the record, charge even more.) If it takes you five years to pay that off, you'll wind up spending an extra $2,600 on interest fees alone.
On the other hand, if you work on minimizing your expenses to pay off that debt in a year's time, you'll spend just $500 on interest -- a $2,100 difference. And, if you then take that $2,100, invest it, and generate an average annual 8% return with a stock-focused portfolio, you can turn it into almost $9,800 over 20 years -- a far better alternative than giving it away to your credit card company.
2. Max out your retirement plan contributions (or get as close as possible)
Your 40s are a critical time to start pumping money into your retirement account. Though you'll be subject to an annual limit of $5,500 for an IRA and $18,000 for a 401(k), hitting the max for either type of account can make a huge difference in your ending balance, especially if you're planning to retire in your mid-60s or later.
Imagine you're able to contribute $18,000 a year to your 401(k) for the next 20 years. (Once you hit age 50, you'll have a chance to put in even more, but we'll stick with an annual $18,000 contribution since it's a pretty impressive figure on its own.) If you focus your investments on stocks and generate an average annual 8% return, you'll have about $824,000 by the time retirement rolls around. Of course, most of us can't afford to part with $18,000 a year, but saving even half of that under the same circumstances would give you roughly $412,000 two decades from now.
Now if you're in your 40s but have yet to start saving for retirement (which is the case for many Americans), it means you've already lost out on a good 20 years of compounding. It's therefore all the more crucial that you take steps to catch up, even if it means cutting back on expenses to free up extra cash to save.
Furthermore, if you wait until your 50s to focus on retirement savings, you stand to amass a lot less by the time you're ready to leave the workforce. Even though the annual contribution limits for retirement accounts are higher for Americans 50 and older, waiting five to 10 years means losing out on even more growth opportunity.
Say you start putting $24,000 a year (currently the 401(k) limit for those 50 and older) into a retirement account at age 55 and want to retire 10 years later. Let's also be optimistic and say your investments generate an average annual 8% return -- even though you should ideally shift a larger portion of your portfolio out of stocks by the time you're within five years of retirement. By age 65, you'll have about $348,000. While that's not a small amount of money, it's less than what you would've accumulated by saving $9,000 a year starting at age 45. The point here is that the earlier you start saving, the more opportunity you'll have to grow your wealth, so if you can't max out your retirement contributions in your 40s, do whatever you can to get as close as possible.
3. Explore dividend stocks
Your portfolio should remain largely stock-focused when you're in your 40s, as you still have several decades to ride out whatever stock market volatility comes your way between now and retirement. But if you're going to put your money in stocks, it pays to consider dividend stocks that you can hold until and during retirement. Remember, dividend payments can serve as a steady source of income for retirees, and if you reinvest your dividends along the way, you stand to gain even more.
Another thing to keep in mind about dividend stocks is that they've historically outperformed their non-dividend-paying counterparts. And that makes sense, because companies that pay dividends tend to be established businesses with strong, sustainable competitive advantages and solid earnings -- the type of companies that are best positioned to withstand volatility and economic downturns. If you're willing to give dividend stocks a shot but aren't sure where to begin, check out these strong contenders to add to your portfolio.
While you may still have a number of working years until retirement, now's the time to take advantage of whatever savings opportunities you have. A few smart moves in your 40s could set the stage for financial success down the line.