Saving and investing in your 40s
Almost half of retirees say the primary purpose of money is “to provide security for the unexpected.” Another 45% say it’s “to have the freedom to live life as they want.”1 But how do you get there? Especially after the events of the last year and a half, how do you put your finances together today in a way that puts you on track for financial freedom in retirement?
1 Pay yourself first
You may be familiar with “paying yourself first,” but it can take on new meaning in your 40s. Make sure you don’t sacrifice your financial freedom in retirement for your child’s education. Save enough for your retirement first, and then, if you can, help your kids out with their college expenses. They can take a loan to pay for college, but you can’t take a loan to pay for your retirement.
2 Tackle your budget and debt
Set up a budget or revisit the one you already have. It can give you a closer look at the choices you’re making and provide guardrails and guidelines for your financial decisions. And while you may not be able to avoid borrowing, you can manage it. Look for ways to reduce your debt—especially high interest-rate debt, such as credit cards. Or if you have a mortgage, look for lower rates that may allow you to refinance and pay it off sooner.
3 Try to save more for retirement
If you want financial freedom in retirement, you have to define what that means for you. Picture your retirement, what you want to do, and how much that may cost. Will your annual expenses go up or down when you retire? Picturing your retirement can help you understand how much you need to save for the retirement you want.
See if you can maximize your retirement savings, whether you’re saving in an individual retirement account (IRA) or an employer-sponsored plan such as a 401(k). In 2021, you can contribute up to $19,500 in a 401(k) and $6,000 in an IRA; in 2022, the limits are $20,500 for an employer-sponsored retirement plan and $6,000 for an IRA.
If you’re saving in a plan offered by your employer, try increasing your contributions—even as little as 1% per year can mean a lot more in retirement.
If you stopped contributing or had to borrow from your retirement plan during the pandemic, put a plan in place to restart your retirement contributions and keep saving. Remember that your retirement plan is a long-term investment—and making a short-term move could endanger the savings you’ve worked so hard to build.
4 Check in on your retirement
As you’re getting closer to retirement, you want to check in on your investments to see if they’re still right for you or if you need to make changes. Generally, you want to have more conservative and less risky investments the closer you get to retirement. You still have 20 years to grow your savings, but the investment mix you chose in your 30s may not be right for you now, so make sure you’re investing in the appropriate mix. Some investments make that even easier—including target-date funds (TDFs), which manage the fund with your retirement date in mind, and target-risk funds, which manage the fund toward the amount of risk you want.
And although it’s normal to be watching your investments more closely when the stock market is going through ups and downs, sticking to your long-term investment strategy may be the most effective way to cope with market uncertainty. Take some time to understand how your investments work and how to stay focused on your long-term goals.
TDFs are managed for investors on a projected retirement date timeframe. The target date is the year in which an investor is assumed to retire and begin taking withdrawals. A TDF or target-risk fund’s allocation strategy does not guarantee that investors’ retirement goals will be met. These portfolios’ risks are directly related to the risks of the underlying funds, as described. Please see the fund fact sheet and prospectus for more details on these risks. Asset allocation does not guarantee a profit or protect against a loss. Asset allocation may not be appropriate for all participants, particularly those interested in directing their own investments.
5 Plan and save for your child’s college education
It’s important to have a plan to save for your child’s college, so you’re not forced to dip into your retirement savings. You can always seek outside help from a professional such as a financial planner or a college coach. Or if you prefer to do it yourself, put together spreadsheets and set a goal that you’ll stick to.
Consider contributing to a college savings vehicle, such as a 529 savings plan, which lets your earnings grow on a tax-deferred basis and allows you to take distributions for qualified higher education free of federal income tax. And when the time comes to apply to colleges, look to see if your child qualifies for scholarships or financial aid.
If you’re not planning on supporting your child’s expenses 100% throughout college, it’s good to set those expectations early. College expenses aren’t just about paying for tuition. There’s the cost of room and board, books, travel, entertainment, and more. If they know they’re responsible for half of the tuition or certain living expenses, they might decide to go in state or to community college first, instead of taking on hundreds of thousands of dollars’ worth of debt (which could follow them around for decades). Setting expectations early will help your child make important decisions that could affect them for the rest of their life.
Explore the type of financial knowledge you need now to build an education plan that works for your family.
6 Prepare for emergencies
As the pandemic has shown, the unexpected can happen at any time. And having a cash buffer can provide a safety net for those large or unplanned expenses.
Setting up an emergency savings account—an account you don’t touch, except for emergencies—can help keep you from using credit cards, borrowing money, or tapping into your retirement savings, if times get tough. Consider keeping a few months’ worth of expenses set aside in case you lose your job.
One way to make saving easy is to make it automatic, setting aside a little from each paycheck, so it never hits your checking account. Or if, over these challenging 18 months, you’ve been fortunate enough to have found some unexpected savings because you didn’t spend as much on your usual expenses such as filling up the gas tank, going to the movies, or even vacations, consider putting that unspent money to good use toward emergency savings, retirement savings, or a college fund.
Emergencies happen, which is why 57% of retirement plan participants say they worry about the impact an emergency would have on their financial situation.²
Get your finances—and retirement—on track
Now that you’re in your 40s, use this decade to get your finances and retirement on track—and keep saving. Even small changes can have a positive impact on your finances and your retirement savings goals.
1 “The Four Pillars of the New Retirement: What a Difference a Year Makes,” Edward Jones and Age Wave, 2020. 2 In July 2020, John Hancock commissioned our seventh annual financial stress survey with the respected research firm Greenwald & Associates. An online survey of 589 workers was conducted between 7/28/20 and 8/14/20 to learn more about individual stress levels, their causes and effects, and strategies for relief. John Hancock and Greenwald & Associates are not affiliated, and neither is responsible for the liabilities of the other.
For complete information about a particular investment option, please read the fund prospectus. You should carefully consider the objectives, risks, charges, and expenses before investing. The prospectus contains this and other important information about the investment option and investment company. Please read the prospectus carefully before you invest or send money. Prospectus may only be available in English. There is no guarantee that any investment strategy will achieve its objective.
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made herein.
529 PLANS ARE NOT FDIC INSURED, MAY LOSE VALUE, AND ARE NOT BANK OR STATE GUARANTEED.
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