All the important stuff eventually gets posted on the refrigerator door. In your 20s, it may have been pizza delivery coupons and a note to roommates reminding them to pitch in for the cable bill. In your 30s, it’s save-the-date wedding notices and listings for weekend open houses. By 40, photos of the kids and business cards from roofers, plumbers and orthodontists start vying for precious refrigerator-door real estate.
Making room for all of your financial priorities will always be a challenge. But in your 40s, the reminder to save and invest for the future — your future — should be front and center on your fridge, or wherever you keep your “to do” list.
The good news for investors in their 40s is that you’re heading into your peak earning years. The bad news: Your time horizon is shrinking. But wait, more good news! There’s still plenty of time to make up lost ground if you’re an investing late bloomer. Here’s how:
1. Get a grip on all your accounts
By now you’ve probably been around the work block a few times, hopping from a starter job to better gigs and maybe even changing careers. If you signed up to contribute to an employer-sponsored retirement plan, even at a short-term job, now is a good time to do some housekeeping with your retirement accounts.
A 401(k) rollover into an individual retirement account is the best way to consolidate multiple 401(k)s from former employers under one roof. In addition to all the feels of seeing all that cash from the couch cushions of your employment history in one account, rolling over into an IRA offers:
- Protection from an avoidable tax bill: Withdrawing money from a 401(k) and failing to move it into a similarly tax-advantaged account triggers a 10% early withdrawal penalty, as well as additional income taxes for the year.
- More investment choices: The investment options in a workplace retirement plan are limited to whatever the plan administrator provides. An IRA offers access to the broader world of investments, making it easier to customize and diversify your portfolio.
- Control over fees: This includes investment fees — expense ratios and commissions — as well as account fees. A 401(k) costs money to run, and often participants are forced to foot the tab.
- A command center: It’s a lot easier to get a clear picture of your investment mix and rebalance your portfolio when most of it is in one place.
Life is busy enough. Who wants to spend time logging in to multiple accounts at various financial institutions?
>>MORE: Your guide to 401(k) rollovers
2. Shine a bright light on your portfolio
As a measure of your financial wellness, the amount of money in your portfolio is incomplete. A truer picture takes into account current and future savings, spending, investment returns and inflation. Only then will you know whether you’re on track for the lifestyle you’ll want and, if not, what to do to get there.
You don’t have to be a mathlete to figure it out. A good retirement savings calculator can do the heavy lifting. It’ll show how much your current savings will provide in monthly retirement income, play out different saving and spending scenarios and provide a rundown of prescriptive measures to take.
This may seem like the financial equivalent of trying on bathing suits under fluorescent lighting in front of an unflattering mirror. Remember, it’s just a starting point. In your 40s, even small adjustments, like saving $100 more a month or working one additional year before retiring, can lead to major improvements in your future quality of life. Finally, now may be a good time to call in help, learn how to choose an advisor, be it a human or robo-advisor.
>>MORE: Retirement calculator
3. Start making up for any youthful indiscretions
“I’ll get serious about saving for retirement — later” is, understandably, a common refrain in your 20s and 30s. Investing enough just to get the 401(k) match and maybe tossing money into an IRA is tough when dealing with other financial demands like student loan debt, car payments, rent or a mortgage, and all things child-related.
Well, “later” is here. Pricey life events will vie for a piece of your paycheck for the next few decades. And putting this off until even later means pushing saving and investing further into the next decade, which will force you to take on more risk than you might be comfortable with and take more drastic measures to slash your cost of living.
Tax-deferred accounts make saving more a little less painful. Money directed into a 401(k) or traditional IRA goes in before the IRS takes a cut and lowers your annual taxable income on a dollar-for-dollar basis. If you’re eligible to max out both your workplace retirement account and an IRA, you’ll shield $23,500 from income taxes this year.
>>MORE: IRA vs. 401(k)
4. Don’t fear stock market exposure
True, the closer you get to retirement age, the less risk you should take on. That means ratcheting down your exposure to stocks and increasing the portion of your portfolio dedicated to more stable investments. But don’t overdo it or you’ll overexpose yourself to another risk: stunting your investment growth.
Exactly how much should you be exposed to stocks in your 40s? Using Vanguard target-date retirement funds as a guide, the portfolio of people in their early 40s who plan to retire in roughly 25 years would have 87% of their money in stock funds and roughly 13% in bonds. About 15 years before retirement, exposure to stocks drops to 72% and bonds rises to 28%.
These are just guidelines. Other factors affecting your asset allocation include your personal tolerance for risk and your retirement income needs and flexibility. Will you continue to work past retirement age and bring in income? Will you be able to get by on less during down years in retirement?
Stocks should always be a part of your portfolio. They still feature prominently in Vanguard’s target-date fund model for current retirees in their late 60s or early 70s, where stocks make up 30% of the mix. Don’t back away from risk too soon.
5. Invest in a Roth IRA like you’re 20-something
“If you’re in your 20s you should invest in a Roth IRA.” So ageist, right? In fact, a Roth IRA — or a Roth 401(k), its employer-sponsored peer — is a great retirement savings tool for any age. What you give up in the upfront tax savings that come with a traditional IRA and 401(k), you gain back in so many other ways. Among the reasons the Roth rules:
- More favorable early withdrawal rules before age 59½, compared with the taxes and early withdrawal penalties with traditional IRAs and 401(k)s.
- Tax diversification. In years when your income is higher, you can take advantage of tax-free withdrawals from a Roth.
- More time for investment growth. The Roth doesn’t require you to start taking distributions by age 70½.
- The ability to keep making contributions past age 70½, so long as you have earned income.
More workplaces have been adding a Roth 401(k) option for employees, which makes it easy for those whose income exceeds the cutoff to contribute. Remember, you can contribute to both a Roth and a regular 401(k) in the same year as long as your combined contributions don’t exceed the maximum $18,000 allowed for those under age 50.
And if your household income exceeds the Roth IRA rules for eligibility — contribution limits start to phase out at $186,000 for joint filers and $118,000 for single filers — there is a workaround: the backdoor Roth IRA conversion.
This article was written by NerdWallet and was originally published by Forbes.