5 things people in their 40s need to do now to be comfortable in retirement, according to a financial planner

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  • If you're in your 40s and looking to retire in 20 to 30 years, there are a few things you should do now to ensure you're comfortable down the road.
  • Even if you haven't yet saved a dollar for retirement, there is still time to build your savings. The key is to start now and continue investing consistently.
  • It's important to build or maintain your emergency cash reserves, and pay off debt to free up cash flow in retirement.
  • You can also look into saving into a health savings account (and investing the funds) and consider a Roth conversion if it's appropriate for you.
  • Use Blooom to analyze your 401(k) today and see how you can grow your retirement savings »

Retirement planning at any age involves many factors, but there are specific things you should be thinking about depending on your age. 

Traditionally, people in their 40s have about a 20- to 30-year time frame until retirement, so there is still plenty of time to accumulate wealth. But there are five things people in this age range need to know about this type of planning.

1. Focus on disciplined, consistent investing

Whether you have accumulated a sizable amount of savings/investments over the years or are just getting started, those in their 40s should direct their focus to a disciplined program of investing. 

No matter what the amount, it is the consistency of the investment contribution that can truly build wealth by taking advantage of compound interest. 

For example, if an individual is age 40, has accumulated $150,000 of retirement savings thus far, and decides to invest $10,000 annually to this account for the next 30 years (assumed growth rate of 7%), then they will have approximately $2.2 million in retirement. 

Even further, take this same example but assume there has been $0 saved for retirement thus far. If this person committed to the same investing program (investing $10,000 per year) over 30 years, then they would still have $1 million despite starting at $0! This scenario shows that it is not too late to begin an investing program in your 40s. The key is to just get started if you have not yet done so.

2. Establish (or maintain) emergency cash reserves

Although these types of assets (e.g. checking/savings and money market accounts) are not designed to be growth vehicles, they still play an essential role in retirement planning. Having a strong liquidity position in your 40s can help you stick to your financial plan when unexpected financial obligations arise. 

The dollar amount you keep in your emergency fund will vary for different people, but at some point in our lives, we will all face some type of unforeseen event that impacts us financially. Examples can include car/home repairs, job loss, and support of a family member. Emergency cash reserves provide financial flexibility to address these situations without interrupting your regular retirement savings contribution. 

Also, maintaining a strong cash position during retirement is very important for the same reasons. They might differ slightly, but unexpected events (e.g. higher healthcare costs) will still occur during these years.

3. Take advantage of Roth conversion opportunities

A Roth conversion is when someone transfers funds from a traditional retirement account to a Roth account, which results in a taxable event (due to moving money from a tax-deferred account to a tax-exempt account). After the conversion, money in your Roth account will grow tax-free and withdrawals in retirement are tax-free as well. 

This topic is not as straightforward as the previous two items noted in this article because the decision of whether to do a Roth conversion in a specific tax year can involve several factors. 

One specific factor is someone's expectation of if they will be subject to higher or lower tax rates during their retirement years. No one knows the future of tax reform, so anticipating this can be extremely difficult, especially for someone in their 40s whose retirement could potentially be 30 years from now. 

Also, another factor to consider is if an individual has available cash (outside of retirement accounts) to pay the income taxes that will be due when the conversion is complete. It is prudent to coordinate with a financial planner and accountant at least once a year to decide if a Roth conversion would be advantageous.

4. Invest the money in your health savings account

For those who have access to a high-deductible health plan, a health savings account, also known as an HSA, could be a vehicle to consider if it makes sense for your specific financial situation. 

HSAs are designed to pay for out-of-pocket medical expenses, so someone can use these funds now or years later during their retirement. In other words, this can be an account specifically set up to cover retirement medical expenses. 

Even more impactful, HSAs provide tax advantages: an individual's contributions are tax-deductible, growth of the account is tax-free, and withdrawals for qualified medical expenses are tax-free.

5. Focus on paying off debt

Most people in their 40s will not have their mortgages paid off, but if an individual maintains other types of debt, then it is prudent to start making strong efforts to get it all repaid. Examples include credit card debt, car loans, and student loans. 

Debt has a negative impact on free cash flow, so it is important not to bring these financial obligations into your retirement years. One pillar of retirement planning involves evaluating and creating streams of income for the retiree. Debt can create unnecessary stress and will not allow you to completely enjoy this income during your retirement years.

Martin A. Scott, CFP, is the founder and financial planner of Lasting Wealth Principles, a fee-only comprehensive financial planning firm.

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