It’s true. The sooner you start investing for retirement, the better your retirement years will be.
But that doesn’t mean it’s too late if you’re 40 years old, for instance. It all depends on your goals and how you decide to approach investing.
Speaking of which, how do you invest for retirement at age 40?
In short, at that age, you should begin by making a few assumptions if you haven’t done so already. For example, when you will retire, how much you will be spending once you do, how much you can allocate to investing now, etc. Depending on your assumptions, you will be ready to choose the right investment approach for you.
Don’t worry. In this article, I will guide you through the process of making these assumptions as accurate as possible. And of course, I will outline some investment options for various sets of assumptions.
How does that sound?
Let’s get into it!
Starting Investing for Retirement at 40: Pros and Cons
First of all, let’s talk about the elephant in the room. If you and a 20-year-old want to retire at age 60, they got it better than you do.
They have 40 years ahead of them and you only have 20. They will also be much more able to work harder than you and save much more each year.
But time is overrated and you may not be the average 40-year-old when it comes to zeal and endurance. Sure, being 40 creates a couple of hurdles when it comes to retirement that a younger one will not face to the same degree. But it’s nothing that you can’t overcome.
For example, if you have little to zero debt or you have a higher than average take-home pay, then you can make up for the time lost. It will be much easier for you to double down on the monthly portion allocated to saving.
But enough about the obvious struggles of starting late. There’s also a very nice advantage that no one talks about…
If you’re 40 and start investing for retirement now, you will know how you want to spend your retirement years much better. Through all these years, the chances that you have no idea what kind of retiree will be or what you will be spending your money on are very low.
For example, if I ask a 20-year old whether they will be golfers or travellers or both by the time they reach 60, I might not get a straight answer. It’s different for someone who have had 40 years to realize what they like and what they don’t. In addition, you’ve had more time to get to know potential health issues that will arise later in your life.
This is very important stuff because it determines your assumed expenses during retirement more accurately.
Speaking of which…
Assume your Expenses
Roll up your sleeves, now…
First of all, find your last year’s expenses or the average annual expenses over the last couple of years if there have been large and irregular costs. Include everything; bills, food, insurance, travelling, etc. Don’t leave anything out.
Now, think of all the additional expenses you will be making as a retiree. Will you be fishing, travelling, golfing, giving a lot of presents? Try to make a rough budget for all of the things you will be doing during retirement and add them to your current expenses.
And also determine when these expenses will change again. For example, you may not be able to travel all around the world if you reach the age of 85. As you get older, you may be spending less and less. It’s important that you account for this factor if it applies to you as well.
Besides lavish living, you may have to also account for raising insurance costs, elimination of retirement savings contributions and communing, etc.
At this point, many may object to not advising to account for inflation. And that’s fair enough; inflation in 20 or 30 years from now could make your assumed income during retirement look low. But we cannot really predict inflation rates accurately.
The costs during retirement are usually lower. So that may counterbalance not accounting for inflation. Because I fear you might paint an overly dark picture of how much you will need during retirement if you do so.
It’s up to you, though…
Assume your Retirement Period
How long will you stay in retirement?
No, I’m not assuming you will get back to work at age 80. I am just trying to ask you “when will you die” in a much nicer way.
People don’t want to think about that matter, but the potential alternative is a much more scary thing; you run out of money before you run out of life. Who wants this?
But, I do understand that it’s not an easy task to predict when you will be leaving planet earth. Statistics show that the average person will live up to 70-75 years old. But what if that doesn’t apply to you? What if you live much much longer? Should you assume a shorter retirement period? Can you afford to take that risk?
The answer is “no”, so here’s a potential solution. Assume that you will live up to 100. Even though you may belong to this very small percentage of people who live beyond that age, you will be old enough to adjust your expenses accordingly. Remember that, statistically, expenses are reduced as you age during retirement, unless you develop very serious health issues.
Another solution would be to assume a shorter period (80 years old for example) and buy a longevity annuity. This is a very cheap type of insurance that starts paying you a monthly income after a certain age until you die.
If you don’t like either of these strategies, I have one more for you but it’s going to be harder. You can simply assume nothing (or assume that you will live forever) and save a retirement fund huge enough to produce passive income.
In practice, you could remain invested in an index fund or real estate during retirement and feed off the return from these investments. But, of course, this implies a much larger nest egg.
Assume Other Sources of Income
Now, this is easy.
Can you determine how much your pensions will contribute to your retirement income if any?
Be careful though. If you only have a company’s pension to rely on and this company hasn’t been around for a long time, then you may want to not include this in your assumptions.
Retirement plans issued by employers are not written-in-stone promises that they will take care of you. If it’s a government-sponsored pension, though, it may be less risky to allow it into your calculation.
Also, will you pick up any profitable hobbies? For example, you may have a freelance business right now that will contribute to your income much more than it does now.
If you think that the return from a small business will be significant and there’s no chance you will stop operating, then you should count it in.
When will you Retire?
The age your retirement starts is as crucial as the age it stops.
First, this can give us a definite retirement period that will in turn determine how much you need to save for retirement. Second, it will allow us to see how much you have until you retire; and that’s important when picking an investment approach.
So, pick a date…
How Much Can You Invest?
We finally reached the last piece of the puzzle. How much can you invest each month or yearly for retirement?
This is a very important question as you may have to either find ways to increase your income right now or choose riskier investment vehicles.
How to Invest for Retirement at Age 40
If you end up believing that you can allocate enough money for retirement, then you can afford to be conservative. An index fund will suit you fine. If you’re new to index funds, then check out this article.
But if you come up short, then you could increase your risk tolerance a bit and go with mutual funds, individual stocks, real estate, your own business, etc. When it comes to mutual funds, it’s best to hire a financial advisor to help you choose. And when it comes to stock picking, you will need to educate yourself enough until you retire so you can confidently analyze companies.
Real estate and businesses also require a lot of knowledge too. You also have to like them for them to succeed. It’s a good idea to only save money for a few years to learn the ins and outs of the real estate or any other industry. The same applies to investing in a custom-made stock portfolio; it’s best to read a few investment books before you even consider buying a stock.
By the way, make sure you understand the risks associated with stock picking before you begin learning more.
But keep in mind that it’s always preferable to try and find ways to make more money so you increase the percentage you save for retirement. At age 40, you can still take risks, but if you have the means to save more each month, you won’t need to.
Conclusion
As I already said, if you make the most important retirement assumptions, you will be ready to choose the investment vehicle that works for you.
Those who want to retire early and don’t have the income power they need to come up with the desired retirement fund may have to look for alternative ways to invest. It can be anything from a business that you love and won’t bother having forever or real estate investing and individual stocks.
The secret is that you adjust your retirement plan every few years as your needs change. That’s because it’s not a science. You need to make lots of assumptions. Fortunately, you are at an age where you won’t have to change your plan too often.
Now, I hope this article answered your question. But if you still have anything else to ask, you can leave a comment below. If you enjoyed this article, also consider sharing it using the social media buttons.
Thanks a lot for reading and I hope you have fun planning for your future!
Disclaimer: This information should not be viewed as financial advice. You should consult a financial advisor or do your own due diligence before you invest. The owner of this website and author of this article are not to be held liable for any undesired result by anyone who uses this information that is provided here in any way.
