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At the age of 40 it is not too late to start saving, but it is time to start planning says Liberty Advisory Services. Around the age of 40 most people start to worry about their retirement funding for the first time.
This is possibly because at this age one’s own parents are entering retirement and are, in many cases, seriously underfunded and relying on their children for financial support. There is nothing quite like watching your own parents struggle financially to realise that you need to take action if you do not wish to suffer the same fate. The problem is that statistically around 90% of forty-year olds have at some stage cashed in their retirement provision when changing jobs and are already falling behind the curve in terms of retirement funding.
Theoretically in order to be in the same position as a person who saved 15% of their salary from the age of 25 you would now need to save 35% of your salary – this at a time when your expenses are maximised with mortgages and school fees. Getting yourself back on track may seem like an impossible task but this is not the time to throw your hands in the air and claim defeat, it is time to sit with a financial adviser and come up with a proper financial plan. Work towards a target You will need to accelerate your retirement savings but you can do this with future income.
The good news with being 40 is that you are at a time in your life when you should see career advancement resulting in above inflation salary increases. Commit to increasing your retirement funding by using fifty percent of your salary increase each year rather than increasing your lifestyle.
Set a base line Although the rule of thumb is to target 75% of your final salary as retirement income, the reality is that the income you require in retirement is 100% of your expenses in retirement. Your living standards in the last ten years of your working career determine your income needs in retirement. Get used to living on the salary you earn now and do not increase your lifestyle as your income increases.
Watch the debt levels Now is not a time to take on significant debt and if you do buy a new home only take out a mortgage over 15 years. Aim to be debt-free by the time you turn 55, or 60 at the very latest. Readjust your idea of retirement Few people can afford to retire at the age of 60 and considering that we are expected to live until 90, who would want to? Rather than planning on retirement, look at ways that you can create a new career that will allow you to earn an income well into retirement to supplement your retirement income. The longer you are able to avoid drawing down on your retirement lump sum, the higher the income you will receive in later years.
For example assuming the investment return is 10% and inflation is 6%, if you defer your drawdown for only five years you will be able to draw almost 34% more every month than if you started drawing down at age 60.