At 40-years-old, many retirement savers are near their peak-earning years and have likely begun executing their retirement savings strategy. But when you are in your 40s, you may also have many expenses. Some may be paying off student loans, wrestling with how to pay for their children’s college tuition, paying off credit card debt along with your mortgage or facing any number of other situations. There is plenty of uncertainty around what could happen between age 40 and retirement. Retirement may seem very far out for 40-year-olds, and you may not have started saving much in your retirement accounts or contemplating your desired retirement lifestyle yet. However, putting these things off can be dangerous.
Your 40s is a great time to invest and grow your nest egg. Paying off student loans, taking care of your children’s education and financially supporting your family are all important, but so is investing for retirement. After you retire, being able to maintain a lifestyle similar to your pre-retirement years can require a lot of planning. While you can begin receiving Social Security retirement benefits in your 60s, it likely will not cover all your expenses in retirement. It is best to start your retirement saving earlier rather than later, if possible. If you are struggling to implement an effective retirement saving strategy, you may benefit from working with a financial planner or investment adviser.
Here are some tips to help you get started.
At age 40, most people have long investment time horizons—meaning their investments likely need to last for decades to come. While bonds are often pitched as “safer” or less-volatile than stocks, this may not always be true. Over shorter periods—think five years—stock returns tend to vary more than bond returns. However, over longer periods—think 20 or 30 years—stock returns are higher and actually tend to vary less than bond returns. Exhibits 1 and 2 illustrate this effect in hypothetical portfolios with different allocations of stocks and bonds measured over 5- and 30-year rolling periods. Over five-year rolling periods, portfolios invested more heavily in stocks had higher growth potential but also higher return variability, as measured by standard deviation.* Over 30-year rolling periods, portfolios with higher weighting in stocks tended to maintain higher average returns with lower variability than portfolios invested more heavily in bonds.
Exhibit 1: 5-Year Rolling Periods
Exhibit 2: 30-Year Rolling Periods
*Standard Deviation represents the degree of fluctuations in the historical returns. The risk measure is applied to 5- and 30-year rolling annualized returns in the above charts. Past performance is not indicative of future performance.
Source: Global Financial Data, as of 11/06/2018. Average rate of return from 12/31/1925 through 10/31/2018. Rolling stock return based on Global Financial Data’s S&P 500 Total Return Index. The S&P 500 Index is a capitalization-weighted, unmanaged index that measures 500 widely held US common stocks of leading companies in leading industries, representative of the broad US equity market. Rolling Fixed Income return based on Global Financial Data’s USA 10-year Government Bond Index.
Further, by saving for retirement earlier, your returns will have more time to compound. Investing earlier allows you to earn more returns on the returns you have previously earned—a phenomenon called compound interest. Because of compound interest, taking advantage of retirement accounts and employer-sponsored plans can help you accelerate your savings capabilities.
In your peak working years, you could set up different retirement accounts to invest in. For starters, contribute to an employer-sponsored retirement plan if one is available to you. If you do not have one of these plans, there may be alternatives for you to explore. If you are able to cover your expenses such as student loans and credit card debt, you might consider making the maximum annual contribution to your employer-sponsored plan. Doing so should allow you to capture the maximum amount of your employer match if they offer one. Many investors can also contribute to a Roth individual retirement account (Roth IRA), which is a retirement account made up of post-tax dollars and investment gains are not subject to capital gains taxes. However, these saving strategies and account types aren’t perfect for everyone. If you’ll need access to your savings before age 59.5, there may be other account types that will allow you more withdrawal flexibility. Because of the different rules and nuances surrounding retirement accounts, you may benefit from seeking professional advice. A trusted adviser may be able to help you explore your opportunities and find the right solution for you.
While some employer-sponsored plans allow you more investment flexibility, others provide only narrow investment options. All too often, these plans offer limited lists of mutual funds or target-date funds. Here are some common securities available in employer-sponsored retirement plans:
Because mutual funds and target date funds are pooled-asset products, they are usually made for a wide range of investors and aren’t tailored to your individual situation and goals. If you are a high-net-worth investor, you may be able to graduate from these commingled asset products to invest in a portfolio tailored to your long-term goals, investment time horizon, risk tolerance and income needs.
Similarly, your situation could change, and mutual funds or target-date funds won’t take that change into consideration. For example, consider two hypothetical 50-year-old investors who plan to retire in 10 years but have different personal situations and goals. Hypothetical Investor A is in good health, has a younger spouse and hopes to increase her purchasing power over time, while Hypothetical Investor B is not in good health, is single and plans to spend everything during his investment time horizon. These two investors might need vastly different investment strategies! A target-date fund or other default investment option might have them invested similarly regardless of their opposing circumstances.
While pooled asset products may be useful in some cases, they may not always be right for you. To determine whether your investment strategy should include mutual funds or other securities, you may benefit from working with a trusted investment adviser.
The saving and investing decisions you make today can have significant impact on your ability to retire at full retirement age or earlier. For qualified investors with $500,000 or more in investible assets, our professionals can assess your personal situation and long-term investing goals to recommend a personalized portfolio that may include individual stocks, bonds or other securities. Call today to learn more!