Saving for retirement: 40 years old and nothing saved for retirement? Do this!
Something weird happens when you turn 40.
You suddenly realise that you're only around 15 years away from accessing your private pension 😅.
This could then lead to panic if you have little or nothing saved for retirement.
If you're in this position, it's not too late!
However, you'd need to make some radical decisions and that's what today's post is all about.
If you're in your 20s, 30s, or 50s, you'll learn from this post too.
Saving for Retirement at 40
Here is what we would do now in 7 steps to plan for a comfortable retirement:
Step 1 – Set The Mental Foundation ✨
A radical mindset change is required for building any kind of wealth.
If you don't believe you can achieve Financial Freedom or reach a comfortable retirement one day, you won't.
It's a hard truth 😳.
You need evidence of a shifting mindset e.g.
- Get away from toxic people and those who think too small.
- Stop sacrificing your retirement by paying for private education if you're barely affording it 🤷🏽♂️.
- Get on the same page with your partner (if you have one).
Plus, you need to be clear on why this goal is meaningful for your life for you to take any meaningful action.
Step 2 – Use the 3.5% Rule 😎
Use this rule to figure out roughly how much you need to retire in the UK.
Example: You need £2,000 a month to cover expenses at retirement.
Do this calculation: (£2,000 x 12)/0.035 = £685,714.
Repeat for yourself.
If you're in the US or North America, you can repeat the same calculation but using 4%.
e.g. ($2,000 x 12)/0.04 = $600,000.
The percentage above is what's known as your Safe Withdrawal Rate (SWR) and will differ depending on where you're in the world.
i.e. the percentage of your retirement portfolio that you can safely withdraw annually without running out of money.
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Note that the above calculations are before you factor in the impact of any future State Pension, which will come at age 66.
Step 3 – Create The Money Foundation 😍
You need to first target expensive debts, then choose a fixed % to start Saving and Investing.
To do that, you need to make radical decisions e.g.
- Downsize your car
- Downsize your house
- Downsize your life
👉🏾These are hard decisions but if you do them, you mean business.
Step 4 – Tell Your Money Where To Go 🎯
You need a consistent way of allocating every £ or $ or whatever that you make.
As a starting point, we say that you should aim to allocate your money like this:
10% of gross income should go to your pension e.g. via salary sacrifice.
Then, when your net income hits your bank account, aim for 100% of it to be allocated like this:
- 50% – Needs.
- 15% – Stocks and shares investment e.g. by opening a stocks and shares ISA
- 10% – Pay off expensive debts.
- 10% – Giving.
- 5% – Emergency fund.
- 5% – Fun and wants. You can increase this over time.
- 5% – Risk-taking or exploring ideas to make more money.
That totals 100%. Of course, you can change this as you see fit as it's a guide.
e.g. If you already have an emergency fund, that extra 5% can go towards debt payoff or investing, for example.
Ultimately, aim for your net income to be allocated like this as a goal:
- 50% – Needs (this will be hard due to the cost of living, but it's possible)
- 40% – Investing (start at 10% at worst and gradually work your way up to 40% or more)
- 10% – Other (to cover your fun, giving, etc)
👉🏾For a no-stress life, I'd invest it in the Stock market via a low-cost Index Fund or ETF in the S&P 500 or a global fund.
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Step 5 – Create a Limited Company and Max Out Pension 💷
With a day job, you already have an established way of saving into your pension.
However, did you know that you can have a side hustle or business and pay up to £60k a year into your Private Pension (SIPP)?
This is treated as a tax-deductible expense with no corporation tax to pay on that money if you set up a limited company.
e.g. you can make up to £60k revenue and pay 100% of it as a business expense straight into your pension and pay no corporation tax.
Pause for a moment and think of the implications of that.
If you have a partner and you're both run the business, that could be £120,000 a year.
You'd have to hustle of course to make money in the side hustle but just think of the potential.
For each person, £60k a year for 5 years = £300k, even before you factor in compound interest.
Of course, £60k is a lot for anyone to save and invest yearly.
You can invest anything up to that amount depending on what you make in your side hustle or business.
Generally speaking, the key is to start investing today.
Imagine that you had a household income of £4,000 a month net and you saved and invested 50% of that i.e. £2,000 a month consistently.
Even if you started at zero savings for retirement today at age 40, you can still reach over £1m portfolio in the next 20 years (by age 60) assuming an 8% average return.
Here is how your retirement portfolio could turn out:
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Step 6 – Keep Your Lifestyle Simple ⭐️
We talked earlier about paying for private school, for example, if you're barely able to do this.
Of course, if you can afford it and prepare for retirement too, no issues.
However, we're aware of lots of people (e.g. Africans) who are currently struggling to pay for school fees and barely have any retirement savings.
We've also seen this in the Asian community and non-ethnic minority Brits as well.
With the rise in the cost of living and debates about school fees potentially attracting VAT in the future, this will be a crippling cost for some people.
Aside from this specific point, it goes without saying that if you're in your 40s, retirement is an urgent matter to prioritise.
- If you get a bonus, invest it 📈
- If you get a pay rise, invest it 📈
Avoid lifestyle creep at all costs.
Step 7: Plan For The Worst and Protect Your Wealth 💸
As lovely as it sounds to plan and look forward to retirement, no one can guarantee tomorrow.
Of course, we all wish and pray for a long and healthy life but there are no promises.
Anything could happen, so who would take over all that money you've been saving?
This is why you'll need a will, life insurance, and trusts to protect your wealth and pass things on to your loved ones properly.
It's easy to put off this topic of saving for retirement for tomorrow and I get it.
However, if you think about it, if you've been looking after your health, tomorrow will almost certainly arrive just as today did.
When I look at our 10-year-old son, I often wonder, how has time flown by so quickly.
I also think the same when I consider that Mary and I are now 40 years old and I can still remember 20 like it was yesterday.
Today, not tomorrow, is the day to make those decisions about the version of retirement you want and start creating it. It is not too late for you 😊.
What to read next about saving for retirement at 40:
- Book 121 Coaching
- How Much Do I Need To Retire Comfortably?
- 5 Signs You'll Become Wealthy 10 Years From Now
What to watch next about saving for retirement at 40:
👉🏾Are you behind or on track for your retirement? What age do you plan to retire (whatever that means to you)? Comment below with any questions about saving for retirement 😀.