Retirement Planning in your 40s

By Larissa Fernand |  23-09-19 | 
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About the Author
Larissa Fernand is Website Editor for Morningstar.in. She would like to hear from you and welcomes your feedback.

If you are in your 40s, you cannot shake off the reality of retirement, even if you plan to retire at the age of 65. You can play around when you are younger, but the keen awareness to save creeps up after you hit 40. As Morningstar’s director of personal finance, Christine Benz says, “In your 20s and 30s, the concept of retirement is somewhat nebulous, but in your 40s it starts to feel a bit more real.”

The best-case scenario is that you are well on your way to achieving your goals. The truth is often far from it.

My colleague Andrew Willis in Canada tackled this subject. I have taken a fair bit of information from his writing and adapted it for an Indian investor. 

  1. Start with savings habits

Before tackling your retirement savings, it’s particularly important in your 40s to check in on your emergency fund to ensure it is large enough to cover your current career situation. “Midcareer accumulators, especially higher-income folks, should target a year's worth of cash,” says Benz. You can read on the basics of an Emergency Fund here.

By now, you should have a monthly savings regime rolling along. If you don’t, then make it a priority. Diverting funds towards your retirement kitty is a must.

Which bring us to whether you are saving enough. To figure out how much of your pre-tax income must be saved towards this goal, numerous factors must be considered. Whether your spouse is also earning. The planned date of retirement of each of you. The current makeup of your portfolio. How much you have already saved.

  1. Get rid of debt.

Well, as much as possible. You may still have to service your home loan, but you do get a tax break on it. Ensure that debt on credit card and personal loans are not putting stress on your savings ability. These are big money drainers.

When earning well, it may be easy to service all these loans. But what you are not realizing is that debt is a big impediment to retirement savings.

  1. Think innovatively for your retirement kitty.

This requires a long-term perspective.

A friend completed servicing his home, but as he was earning well (and so was his wife), he faced no financial stress when paying his EMIs. So he continued with the amount allocated for EMIs into an SIP of a balanced fund.

Similarly, if you get a big bonus, a tax refund, an inheritance, a gift – stash it away for retirement. Your future self will thank you.

If you are earning money outside your main source of income - guest lectures, proceeds from a book you authored, media columnist, teaching, rent – let this be channelized to your retirement kitty.

  1. Move on to investing.

Just because retirement is now a reality doesn’t mean risk must be off the table. As individuals work longer and lives last longer – it is best to keep the right amount of risk to ensure you have the returns to make it.

You need your money to last. Chances are, you have a long life ahead of spending. Your money needs to grow. While a sizable portfolio of the portfolio can be in equities, ensure that it is diversified and not concentrated in mid and small caps. Avoid speculative and thematic bets. It may appear appealing, but a huge loss can offset your overall progress.

“Portfolios for people in their 40s and 50s should still include plenty of higher-risk assets with higher return potential; after all, such individuals could be drawing on their portfolios for at least 40 or 50 more years, so they can't be content to hang out in low-risk assets with low returns to match,” says Benz.

  1. Always be open for advice.

It’s a good idea to sit down with a financial planner to get solutions that work for your unique situation. Thumb rules (save 10% of your pretax income) may not really be apt for your individual needs.

Even if you’ve developed a do-it-yourself proficiency over the decades, you may need help aligning your medium and long-term savings goals. You may be in a complicated financial situation or may need a lot of ongoing hand-holding but may not realize it.

Benz says that “As your financial life grows more complex and you get closer to retirement, paying a financial professional for help can be money well spent. You may glean insights that you hadn't picked up on in your own reading, or receive counseling in complicated areas like tax and/or estate planning.”

  1. There’s more to it than money.

Lastly, investing in your 40s need not only be about growing your financial capital. Your own skillset and knowledgebase can reap their own set of dividends – and now’s the time to invest.

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Sujeet Singh
Sep 24 2019 05:20 PM
6th point is best! In India 5th point is as difficult as finding a true Guru. Contemplating on your asset allocation will be more helpful.
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