How to Invest for Retirement When You're 40

By: D. Laverne O'Neal

Investing for retirement at age 40 is different from investing in your 20s and 30s. Since there are fewer years until retirement -- say, 25 as opposed to 45 -- you must lower the degree of risk, focusing less on emerging markets and start-up companies and more on blue-chip stocks, bonds and other more conservative securities. Putting thought into estate planning and retirement-age taxation is also a good idea, even if you need to recruit professional help.

Step 1

Put the maximum into your 401(k). The yearly limit as of 2013 is $17,500, and when you reach 50, you'll be entitled to make an additional catch-up contribution ($5,500 per year as of 2012). If your employer matches your contributions, even to a limit of 25 percent, you'll get free money for retirement savings.

Step 2

Max out your IRA. The limit as of 2013 is $5,500 per year. You may not be able to deduct your contributions if you participate in a plan at work. In addition, you may not be able to open a Roth if your income is too high. However, you can always open a traditional IRA and roll it into a Roth later.

Step 3

Invest outside of retirement plans. Stocks, bonds and mutual funds are all appropriate choices, but beware: Outside of a retirement plan, cashing out securities can result in greater tax liability. Consulting a tax or financial professional can help you identify and sort out financial issues and develop a solid investment plan for your future.

Step 4

Reallocate existing holdings. In addition to reducing the proportion of high-risk securities, you might want to shift the ratio of stocks to bonds, choosing at most an 80-20, or even a 60-40 stock-to-bond mix. The idea is to begin to focus more on maintenance than extraordinary growth.

Tip

  • Traditional IRA earnings are tax deferred, while Roth earnings are withdrawn tax free at retirement.

References

About the Author

D. Laverne O'Neal, an Ivy League graduate, published her first article in 1997. A former theater, dance and music critic for such publications as the "Oakland Tribune" and Gannett Newspapers, she started her Web-writing career during the dot-com heyday. O'Neal also translates and edits French and Spanish. Her strongest interests are the performing arts, design, food, health, personal finance and personal growth.

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