Planning for Retirement: 7 Steps to Take in Your 40s

Retirement Planning

 Ben Schwartz By: Ben Schwartz

Making a plan for retirement is about more than maxing out your 401(k) contributions and taking advantage of employer matches—although that’s a good place to start.

Ensuring you have a sizeable nest egg to generate enough retirement income is crucial, but there are other factors to consider that may affect your plans.

Putting these pieces in place in your 40s will help you set yourself up for the life you want in retirement while ensuring your family is taken care of. Take these seven steps to stay on the right track with your financial plan leading up to retirement age.

Establish a Savings Strategy for Education If You Have Children

In the last 20 years, Americans have experienced in-state tuition and fees increase by about 56% at public National Universities and 40% at private National Universities when adjusted for inflation, according to U.S. News & World Report.

To offset the cost of higher education and reduce or eliminate the need for student loans, many parents help their children pay for college. However, it’s essential to balance saving for education with saving for your own retirement goals and other financial plans

The primary way to save for post-secondary education is a 529 College Savings Plan. You can use the money you contribute to a 529 to pay for college tuition, trade school tuition, fees, room and board, books, computers, and more.

Contributions grow tax-free and are even tax-deductible in some states. Plus, you can transfer unused funds to another beneficiary, use them to pay off student loans, roll them into a Roth IRA for your child, and more.

Another option to consider is a Uniform Transfers to Minors Account (UTMA). A UTMA doesn’t have the tax benefits of a 529, but you can use the money any time and for any reason (not just post-secondary education) as long as it benefits your child. UTMA’s are generally a good option for education savings when you’d prefer flexibility over tax incentives.

Once you’ve decided whether to save for college in a 529, and UTMA, or a combination of both, the tricky part is determining when and how much to contribute.  A financial advisor can help you determine  this based on a variety of both personal and financial factors. 

Max Out Your Retirement Accounts

Your 40s and 50s are often your highest earning years. Now is the time to take advantage of every penny offered through an employer match, and max out employer-sponsored retirement plan if you’re not already doing so.  

Already maxing out your retirement plan?  Talk to your advisor about whether you are eligible to make retirement contributions to a Roth Individual Retirement Account (Roth IRA) as this is often a great way to further augment your retirement savings.

You can also begin planning for the catch-up contributions you can start to make in your 50s.

Consider a Taxable Brokerage Account

If you’re maxing out your retirement accounts and have a healthy emergency fund, adding a taxable account to your investment portfolio is a logical next step for investing additional cash and reaching your financial goals.

It offers withdrawal flexibility, allowing you to transfer funds out at any time.  And while the earnings aren’t tax-deferred or tax-free like a retirement account, some of the dividends and capital gains are subject to a tax rate that is lower than most of your other income.

Plus, it opens the door for early or partial retirement because you don’t have to wait until retirement age to access these funds. Depending on your personal financial situation, these types of investments can be a great tool for you.

Another tip for investment accounts: make sure your asset allocation fits your personal level of risk tolerance, and continually check in to make sure these accounts are tax-optimized. A good financial advisor can help you with tax-loss harvesting and portfolio rebalancing as necessary.

Pay Off Consumer Debt

Paying off high-interest consumer debt, such as credit cards and personal loans, as soon as possible should be a top priority in your 40s.

In November 2023, the average interest rate on credit cards that were charged interest was nearly 23%, and the average rate for a 24-month personal loan was over 12%, according to the Federal Reserve.

With rates like these, much of the return you earn on your investments is offset by the interest you’re paying—hindering your ability to build wealth, buy a house, or achieve other savings goals.

Open an HSA

One of the silver linings of having a high-deductible health insurance plan is that you get access to  a Health Savings Account (HSA) which allows you to tax-efficiently save for healthcare expenses. Plus, some employers offer a match.

Unlike a Flexible Spending Account (FSA), you don’t have to use the money you contribute to an HSA within a certain timeframe, so there’s little risk to maxing out your account up to the contribution limit.

If you don’t use it, you can leave the money in your account year-over-year to pay for future healthcare expenses—even in retirement when healthcare costs are likely to increase.

Establish Your Estate Plan 

Establishing your estate plan now will help ensure your wishes are carried out in the future. While everyone’s plan will be unique based on their dependents, assets, beneficiaries, health and other factors, there are four critical components to consider, regardless of your situation.

  • Power of attorney (POA). This legal document allows someone else to act on your behalf if you’re unable to. The two most common types of POAs—financial and healthcare—enable the person you designate to make financial and healthcare decisions for you if you can’t.

  • Transfer on Death (TOD) and Payable on Death (POD) designations. If you haven’t already, now’s the time to assign TOD or POD designations to all your investment and savings accounts. These designations indicate who the accounts should pass to after your death, allowing your beneficiaries to avoid the expensive and time-consuming process of probate.

  • Trust. Much like with a Transfer on Death designation, assets within a trust will avoid probate.  However, that is just one of many benefits of having a trust.  Trusts allow for utmost specificity when it comes to your estate.  A trust not only specifies who will inherit your estate, but it can also dictate how and when the assets are spent, and who the assets will go to even after the next generation.  Assets inherited within a trust also receive creditor and marital protections, reducing the likelihood of your assets being seized by a third party.

  • Will. Everyone should have a will, even if all their assets are already in a trust or under a TOD designation. A will can serve as a backup for specifying how your assets should be distributed — if you forget to designate a beneficiary on an account — instead of having the state decide for you. If you have children, it also designates guardianship for them prior to reaching adulthood. 

How Plancorp Can Help Create an Individualized Retirement Plan for You

Ensuring you’re ready for retirement when it finally arrives takes planning, consistency, and hard work.

Retirement planning isn’t something you do once and forget about. It requires continually revisiting your plan to ensure it still aligns with your goals.

A financial advisor can help you develop a comprehensive retirement plan that meets your unique needs, ensure it stays on track, make adjustments when your goals change, and help you pivot when life throws you a curveball.

Take our two-minute financial analysis to find out if you’re making the right decisions with your money, and get personalized suggestions based on your responses.

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Ben brought with him several years of experience in investment management and financial planning when he arrived at Plancorp in 2013. Ben’s immersion in the industry gives him the insight necessary to determine customized and thoughtful solutions for each of his clients. More »