How to Start Saving for Retirement at 40, 50, and Beyond

Starting to save for retirement can be daunting if you don’t know how and have nobody to ask for advice. If you’re 40 or above, you may feel far behind your peers. This article explains the basics of retirement accounts, why they are useful, and how to use them to start saving for retirement at 40, 50, or ages beyond.

It will guide you in deciding what kind of account to open and how to select investments. Moreover, this article explains how to set you up for success by automating monthly contributions.

Don’t let age discourage you from starting to save for retirement. The earlier you start investing, the better — I’m sure you’ve heard that. But even if you’re late to the game, there’s no better time than now to start saving for retirement at 40, 50, or beyond.

Why Save in Retirement Accounts?

You know you should be saving for retirement, but maybe you haven’t started yet. That’s OK — you’re not alone.

What does saving for retirement mean, and how is it different from saving for a rainy day?

Saving for retirement involves setting aside money to invest in specific financial accounts. These accounts get special tax treatment from the U.S. government to encourage Americans to save for retirement.

Once the money is deposited, savers are incentivized to leave the money untouched until age 59 ½. The rules are intended to discourage early withdrawals by implementing penalties. The rules help you avoid spending the money too soon.

Rainy day savings are more about putting cash aside to pay for unexpected expenses, also known as an emergency fund.

The beneficial tax treatment varies depending on the type of retirement account. There are three fundamental tax advantages:

• Tax-deferred – Contributions and investment earnings are not taxed until a future date, usually upon withdrawal after 59 ½.
• Tax-deductible – Contributions to retirement accounts before paying any income tax on the money. For example, if you earn $80,000 in a year and contribute $6,000 to an individual retirement account (IRA), the IRS sees you as someone who made $74,000.
• Tax-free – No taxes are paid on the dividends or capital gains in a retirement account. Roth IRAs and Roth 401(k)s offer this advantage.

The following sections explain the various types of accounts that offer tax advantages and recommend a plan for beginner to intermediate savers and investors with access to employer-sponsored plans and those without.

Employer-Sponsored Retirement Accounts

According to the Bureau of Labor and Statistics, sixty-eight percent of private industry workers in America had access to employer-sponsored plans in 2021. These plans are also known as defined contribution plans. Common types include the 401(k), 403(b), and the Thrift Savings Plan (TSP) for federal workers and the military.

If your employer offers a plan, it is the easiest way to begin saving for retirement. Enroll in your employer’s plan first if you’re eligible. Contributions to these plans reduce your taxable income in the current year’s tax return, and the money grows tax deferred.

When you enroll, you’ll be asked to choose a contribution percentage, usually from 1% to 15% of your salary. The money is automatically withdrawn from your paycheck and deposited to an account where it’s invested directly into chosen index mutual funds or managed mutual funds.

The largest U.S. employer-sponsor retirement plan administrators are Fidelity and Vanguard.

Mutual funds are common assets that group several stocks or bonds into one investment. Buying one mutual fund invests your money into tiny portions of hundreds or thousands of stocks or bonds. Owning mutual funds is an easy way to diversify.

The author prefers index mutual funds to keep fees low and returns aligned with the broader long-term market returns.

Unfortunately, employer-sponsored plans have limited selections of mutual funds, depending on the program terms and administrator. Programs may have a few mutual funds to dozens.

If your employer offers a matching contribution, contribute at least the percentage of your income required to receive the match. In 2023, you may contribute up to $22,500 of your salary or $30,000 for those age 50 and older (catch-up contributions).

Savers cannot withdraw from employer-sponsored plans without penalty until the investor turns 59 ½. Withdrawals from most traditional tax-deferred employer plans are taxed as income. Roth 401(k) withdrawals are tax-free after retirement age.

Individual Retirement Accounts (IRAs)

If your employer does not have a 401(k) or similar retirement plan, the next best option to start saving for retirement at 40 or beyond is an IRA. IRAs are widely available at most investment services providers and low-cost online brokers.

When you open your account at a mutual fund company or online brokerage, you must choose either a traditional IRA or Roth IRA. The contribution limits for traditional IRAs and Roth IRAs are $6,500 in 2023 or $7,500 for those aged 50 and older.

The advantages of each account are different.

Traditional IRA

For those with a stable career and income but no employer-sponsored plan, I recommend selecting a traditional IRA because it reduces your taxes in the year you contribute. The contributions are tax-deductible (reduce your taxable income in the eyes of the tax man), and your investments grow tax-deferred, enabling your retirement nest egg to increase more over time.

However, getting the money out of a traditional IRA without penalty is more challenging than a Roth IRA. Taking the money out before age 59 ½ will incur a 10% penalty plus taxes on the withdrawal. It’s best to wait until age 59 ½ to avoid penalties and extend tax-deferred growth. Withdraws after age 59 ½ are taxed as regular income.

When retirement savers reach age 72, they must start withdrawing some of their savings. These withdrawals are called minimum required distributions (RMDs).

If your employer offers a 401(k) or similar plan, you will not be eligible to contribute to a traditional IRA. But you may be eligible to also contribute to a Roth IRA.

Roth IRA

The Roth IRA is an excellent option for people with irregular income or low taxable income. If you need to use your retirement savings before age 59 ½, the Roth IRA is better than a Traditional IRA.

When you invest in a Roth IRA, you use after-tax money. That’s the money that ends up in your bank account on payday. Since you contribute after taxes, there is no tax deductibility. But your investments grow tax-free, and you pay no taxes upon withdrawal.

Another nice feature is you may withdraw your contributions to a Roth IRA anytime. But you cannot withdraw any earnings on the contributions without penalty until after age 59 ½.

High-income earners may not be eligible for a Roth IRA. Eligibility begins to phase out at $138,000 (modified adjusted gross income) for singles and $218,000 for married couples filing jointly in 2023. These limits do not apply to traditional IRAs.

Some employer-sponsored plans offer Roth 401(k) or 403(b) options.

Another benefit of the Roth IRA is that retirees do not have to take RMDs at 72. The funds can continue to compound indefinitely.

How to Choose an IRA Provider

The tax advantages are the same no matter what IRA provider you choose, so look at other criteria to make your selection. Criteria for selecting an IRA provider include:

• Reputation
• Investment selections
• Low fees
• Customer service
• Convenience

Location isn’t as important as it once was. Nearly all modern platforms have desktop and mobile accessibility. Most people now access their accounts exclusively online. Some may have local offices.

If you prefer local resources, your bank may offer IRAs. But remember that a bank’s primary function is deposits and loans. Several companies specialize in investment services and will likely provide better customer service and lower-cost investment options.

Here are some of the largest mutual fund companies and online brokerages. All offer IRAs and a variety of investment choices.

• Fidelity
• Charles Schwab
• M1 Finance
• Vanguard
• Robinhood
• Rowe Price

I use the traditional mega-financial services Fidelity and the leaner startup, M1 Finance. I’m happy with both. Both are excellent for ETF investing. Fidelity is better for mutual fund investing. 

I’ve also used Vanguard, which I also recommend.

How to Contribute to an IRA

After deciding the type of IRA and online broker, it’s time to contribute money and make investments. Do-it-yourself investors have many simple options that can be set up quickly and automated. I’ll focus on only a few to make this less confusing. 

Investors can make IRA contributions in one of two ways: 

1. One-time annual lump sum
2. Monthly recurring withdrawal (also known as dollar cost averaging)

The first option is for investors with significant cash available to invest. Most new retirement investors do not and should choose monthly recurring contributions.

Contributions can be automatically transferred from your bank account into your brokerage account and directly invested in your investment choice.

Providers call this an automatic transfer and investment from your bank account. Customer service representatives can assist in setting it up over the phone.

Set your monthly IRA contributions on the same date each month. Transfer the affordable amount without exceeding the annual limits. Direct deposited contributions into your chosen investment through a recurring purchase. 

Mutual funds are a simple choice because dividends and capital gains are automatically reinvested back into the funds.

Most mutual fund companies and online brokerages have several no-fee mutual funds and ETF (exchange-traded fund) options, meaning you pay no fees for each purchase or sale.

ETFs trade like stocks, so you are required to buy them with market or limit orders. Therefore, mutual fund orders are slightly easier to set up and automate. 

Working directly with a mutual fund company (such as Fidelity or Vanguard) is the easiest and lowest-cost way to invest in your preferred mutual fund. But watch out for fund minimums. They may prevent you from starting to save for retirement with a favorite fund. 

What Investments are Best (Easiest and Safest) for Your IRA?

Keep your investment plan simple by choosing only one or two investments initially.

Two types of mutual fund investments are easy for do-it-yourself retirement savings for IRAs and employer-sponsored plans. They are stock index funds and age-based target date funds.

Some mutual funds have initial minimum investments of $1,000 or more. Look for low or no minimum funds with very low expense ratios to start. Verify that low-minimum investments are available before you open an account with a specific broker.

Once investors reach the minimum investment threshold, they can make additional future investments into the same funds in small amounts.

Start Saving for Retirement at 40 with Stock Index Mutual Funds

Index funds track specific chunks of the broader stock market. Investors accept that market-equivalent returns are good enough instead of buying managed funds or trying to pick individual stocks that will outperform the market. 

Through an index fund, you can invest in the 4000+ stocks trading in the U.S. using a total market index fund or ETF. Total stock market index funds are an excellent choice for the lowest-cost access to markets with significant diversification.

The expense ratio indicates the fund fees. A typical U.S. total stock market index fund should have an expense ratio below 0.10%. If you have $10,000 invested in the fund, you’ll pay $10 in annual fees.

Popular total stock market index funds include:

• Fidelity Total Market Index Fund (ticker: FSKAX) — $0 initial investment
• Schwab Total Stock Market Index Fund (ticker: SWTSX) — $1 initial investment
• Vanguard Total Stock Market Index Fund (ticker: VTSMX) — $3,000 initial investment

Index fund investing has increased in popularity, so most mutual fund companies have similar offerings.

The same investments are available as ETFs. Vanguard’s Total U.S. Stock Market ETF (ticker: VTI) is one of the most popular and preferred in my retirement savings portfolios. 

Employer-sponsored plans don’t always offer total market index funds. If so, look for an S&P 500 or Russell 2000 index fund or ETF for similar results. 

Sometimes company plans have no index funds at all. In that case, find a low-cost growth stock mutual fund to start. Call HR and ask them to add “low-cost index funds or ETFs”. They may surprise you and add better funds to the pool of investment selections. 

Bond index funds are also available for investors closer to full retirement age. 

Once you’ve started with a fund or two, consider adding additional funds to your portfolio as you become more comfortable. 

For those who want more hand-holding, age-based target date funds may be a good option. 

Target Date or Age-Based Funds

Age-based target date mutual funds tailor the fund investment allocation to your age or expected retirement date.

For example, if you are 45 years old and expect to retire at age 65, you can purchase a 2043 target date fund.

Managers modify the ratio of stocks to bonds, changing them as investors age to reduce market risk.

Younger than 40, there will be a higher ratio of stocks to bonds, perhaps 60% stocks to 40% bonds. At age 55, the ratio may be 30% stocks and 70% bonds.  

Target date funds are actively managed and are, therefore, more expensive. Expect to pay at least 0.50% on your investment. For a $10,000 investment, that’s $50 in annual management expenses.

Conclusion — Start Saving for Retirement at 40, 50, or Beyond

19% of Americans have less than $5,000 saved for retirement, according to an annual study by Northwestern Mutual. 

You aren’t alone. Start saving for retirement at 40, 50, or beyond. The strategies work at any age. 

Even if you’ve never saved for retirement, set a goal to leave that group behind by saving your first $5,000 in the first year. If you don’t meet that goal, you’ll still make significant headway toward successful retirement savings.

More importantly, make saving for retirement a habit by starting small, automating contributions and investments, and looking ahead to your retirement date as a realistic goal instead of an unlikely outcome.

But the most crucial step is to get started investing. I hope this article is the stepping stone you need to start making progress toward your desired retirement lifestyle.

Once you’ve established your employer-sponsored account or IRA and become comfortable investing, you can expand your investment portfolio into international stocks and bonds to further diversify your investment strategy.

More advanced strategies could include self-directed IRAs, which empower investors to invest in non-traditional assets such as real estate, farmland, fine art, or private credit.

Let us know how you plan to start saving for retirement at 40, 50, or beyond in the comments below.

Featured photo via DepositPhotos used under license.