How to create a sustainable financial plan after 40

Planning for retirement seems less important in your 20s and 30s than it is in your 40s. Time creeps up on us quickly. If you need evidence of that, use a retirement calculator to see how much money you need to retire. Compare that number to what you have in your 401(k). Passing the threshold into “middle age” is a good time to do this. If you’re in your 40s, the tips below can help you create a sustainable financial plan.

1. Contribute more to your retirement savings plan

Turning 40 is a good time to increase your retirement savings contributions. The IRS has set the 401(k) maximum annual contribution limit to $22,500 for 2023. That’s approximately $433 per week. Contribute the maximum if you can. In a few years, when you turn 50, the maximum contribution limit will go up. They call that “catch-up” contributions.

No one wants to be in a position where they need to get caught up on something they should have done much earlier in life. At 40, there’s still plenty of time to build a healthy retirement nest egg. That runway shortens considerably when you get into your 50s. Adjust now to give yourself a healthy head start on retirement savings.

2. Eliminate your debt

Your 40s are also a good time to eliminate as much debt as possible. Unfortunately, we tend to accumulate debt in our 20s and 30s. This means student loans, mortgages, car payments, and credit card balances could be outstanding by the time we reach our fourth decade of life. Now is the time to start reducing those monthly debt payments. There are several ways to do that:

• Debt Consolidation: Taking out a personal loan to pay off credit card debt can make monthly payments easier to budget and cut down on the total amount of interest you’ll need to pay on those outstanding debt balances.
• Debt Snowball: A debt snowball is a method of paying the minimum amount due on all your credit cards and adding an extra payment to the smallest balance until it’s paid off. You do this progressively until all debts are paid.
• Debt Avalanche: A debt avalanche works like a debt snowball, but you prioritize the account balance with the highest interest rate first. Pay that off with extra payments until it reaches zero, then move on to the account with the next highest interest rate.
• Refinancing: Refinancing is a great option when interest rates are going down. Look for opportunities to get lower interest and better terms on outstanding mortgages and loans. Smaller monthly payments and lower interest rates can help boost your savings plans.

3. Invest in permanent life insurance

Term life insurance can cover your expenses when you die, taking the burden away from your loved ones. Permanent life insurance does more than that. It builds cash value every time you make a payment, making it an asset, not a liability. Speak with your financial planner or an insurance agent about the different types of permanent life insurance policies.

There are additional insurance products you may want to consider at this stage of your life, including fixed index and variable annuities. Ask about these when you’re reviewing your insurance options. Your timeline to retirement is in the “sweet spot” to make these investments now while you’re in your 40s. Ask your financial advisor for help with this.

The Bottom Line

Turning 40 is when the reality of retirement starts to take hold. It’s an excellent time to create a sustainable financial plan to ensure that your retirement is a comfortable one. You can do that by increasing your retirement savings, eliminating debt, and investing in permanent life insurance and/or annuities. Speak to your financial advisor about how to do this.