It might not be too late if you start now
THEY say that the best rule when it comes to saving for retirement is to start as early as possible.
However, many don’t even consider saving for retirement until later on in their working years... much later.
Is it to late to start saving when you’re already in your 40s?
According to US-based financial writer Megan Harris, in her article 7 Retirement Planning Rules for People in Their 40s, your 40s may be the most important decade when it comes to preparing for retirement.
“For one, you’ve likely hit your peak earning years, with several studies showing that pay tends to level off for most people around age 40. If you’ve been waiting for a big income bump to start saving, you may be out of luck.
“Second, once people reach their 40s, they’ve probably checked off some other big items on their financial to-do list, like paying off student loans and buying their first home. That means they should be free to devote both their attention and their financial resources to preparing for what happens after they stop working.”
So what should you do?
Consolidate your retirement
By the time you reach your 40s, you should have accumulated some investments here and there, says Success Concepts chief executive officer and licensed financial planner Joyce Chuah.
“If you have not, you’re in trouble! Review these investments and understand how your retirement assets (investments set aside for your retirement and not for other purposes) are performing and do not review them as singular instruments, but as a whole portfolio.”
Questions you need to ask yourself, Chuah says, are how are you doing in terms of asset allocation? Is the portfolio too skewed towards conservative or growth assets or does it have a healthy balance of both? Is your portfolio too illiquid and undiversified (such as investing only in properties which Malaysians are so fond of).
“Are there segments of your portfolio which has been underperforming or left dormant? Do you need professional advice as to what to do with them?
“What is your portfolio’s average weighted return? How is it doing against your lifestyle inflation? Are you in or out of money vis-à-vis personal inflation?”
Chuah adds that one should consider whether there are gaps in your retirement portfolio when it comes to meeting your retirement goals.
“If so, what measures are required now before time runs out?” she asks.
Be certain of how much you need to save
According to Harris, deciding how much you need to save for retirement shouldn’t be a guessing game.
“A better approach for people in their 40s is to set a clear retirement saving target. They should know how much money they actually need to have for retirement,” she says, citing a certified financial planner in her article.
Plan ahead for the children
When you’re in your 40s and have children to provide for, you’re going to have to set aside some money for them.
“Ensure adequate funds are available for your children’s education, prior to retirement,” says licensed financial adviser and syariah financial advisory for Excellentte Consultancy Jeremy Tan.
“This is because you need to fulfil your responsibility as parents to ensure your children are educated and independent,” he says.
Harris notes that many people today are delaying retirement, simply because they need the money.
“Not everyone has a choice about when to retire. Layoffs and health problems force some people out of the workforce sooner than they would like. But people who could continue to work and still choose to retire early may be at risk of running out of money later in life.”
Citing a certified financial planner, she says people today need to accept that working until 70 “is a good thing.”
“It’s not a failure. A failure is retiring at 62 when you’re not ready.”
Settle your debts
If you’re in your 40s and planning for retirement, best to review your debt structure, says Chuah.
“Everyone wants to be debt free when they retire. I am a contrarian as far as this is concerned. Good debts (like mortgage debts for an investment property) can still be kept to be leveraged on, provided sufficient cash meant to clear the entire debt is stashed somewhere in an investment account earning more than the cost of your borrowing.
“Using good investable funds (like even your Employees Provident Fund) to clear good debts now so that you can be debt free by 55 years old may not be that prudent and may not stretch your retirement monies. However, if it is an expensive debt, by all means clear them now.”
Save as much as you can
Being in your 40s, time is obviously a factor and now would be a great time to start saving as much as possible.
“People in their 40s should focus on setting aside as much as possible for retirement, especially if they haven’t already made saving a priority,” says Harris.
“Still, many people don’t seem to be getting the message about the importance of saving for retirement.”
Be careful how you spend
Harris adds that at this age, you should not be treating your retirement funds like an ATM.
Your 40s will likely be your peak earning years, but this decade can also bring increased financial challenges. Many people in this age group find themselves trying to balance saving for retirement with paying for a child’s college education, covering a mortgage and other debt payments as well as meeting day-to-day expenses.
“Some people may cut back on retirement contributions to balance their household budget even though it’s hard to make up for those lost saving years. But even worse is taking early withdrawals from retirement accounts.”