Retirement Planning in Your 40s

Since we're at the half way point, we can make several comparisons using a retirement savings calculator. This allows us to see some of the different scenarios we might be faced with in the future.

For example, we are going to illustrate what retirement plans might look like for a 45-year-old that had been saving through the years, versus one that is just starting to save for retirement. We're also going to demonstrate what happens if we decide to wait another ten years before setting money aside for those retirement days.

In this example, a 45-year-old that has already saved $75,000 needs to save about $5,300 annually to meet their desired income replacement rate of 70% when retired. But a 45-year-old that has a minimal amount of retirement funds needs to save at more than double that rate, nearly $12,000 per year. For instance, an individual in Indiana has a monthly average retirement income of $21,774while D.C. has a monthly average of $43,744.

More importantly, if that same 45-year-old waits until age 55 to start saving for retirement, then they need to set aside over $18,000 a year! Saving that much money each year will truly present that individual with a lifestyle challenge. That's roughly 20% of their pre-tax income that needs to be set aside each year until the day they retire.

It's a good idea to run through some retirement scenarios using our retirement calculators. In the example above, we're counting on Social Security and a pension plan to help close the retirement income gap. Those assumptions may not be true in all situations.

Once we've figured out exactly how much we need to save each year, then our next stop should be a retirement investing guide. This particular publication walks through a series of questions aimed at helping to decide where to start, or continue, retirement savings. Most of us have two options when it comes to retirement accounts: IRAs, and employee sponsored savings such as 401(k) plans and 403(b) accounts.

Employee Sponsored Retirement Savings Plans

Usually, the first recommended course of action will be to start funding a 401(k) plan or 403(b), especially if our employer offers such a plan, and they are matching our contributions. Depending on how much we have saved, whether or not our employer offers a 401(k) plan, and the generosity of the plan itself, this type of account is usually our best bet; especially if we're playing catch up.

Individual Retirement Accounts

Depending on what an employer is offering, and how much we need to save each year, we may find ourselves supplementing the employer's 401(k) plan with an individual retirement account.

For example, let's continue with the scenario above using a 45-year-old with minimal retirement savings. If their employer matched 50% of their first 8% in contributions to a 401(k) plan, then they'd be saving $9,600 via that plan. But they still have a $2,000 savings gap, and at this point their next best option might be a Roth IRA.