The Best Way to Save for Retirement at 45
- Reviewed by: Chad Seegers, CRPC®
- September 16, 2024
Retirement savings can feel daunting at any age, but at 45, there’s still ample opportunity to build a secure financial future. Whether you’ve just started or are looking to maximize your existing savings, this article will provide you with the steps needed to create a solid retirement plan. From understanding where you should be financially at this stage to adjusting your investment strategy and maximizing savings potential, we’ll cover the essential strategies to help you achieve your retirement goals.
Where Should I Be Financially at 45?
At 45, it’s important to have a clear understanding of your financial position as you approach retirement. The first step is to assess your current net worth, which includes calculating the total value of your assets—such as savings, investments, and real estate—minus any liabilities like mortgages, loans, or other debts. This snapshot helps you gauge where you stand financially.
Next, take a close look at your retirement savings. Are they on track to support your desired lifestyle in retirement? You should set realistic retirement goals based on your current lifestyle and future expectations. Whether you envision traveling the world or simply enjoying a quiet retirement, your financial goals should align with your personal aspirations.
As a general rule, by age 45, many financial advisors recommend having roughly three to four times your annual income saved for retirement1. However, this benchmark may vary depending on your individual circumstances, such as your income level, family needs, and planned retirement age. By evaluating your current savings and making any necessary adjustments, you can stay on track for a secure and comfortable retirement. For financial advising seek out our experts in wealth management in San Ramon and wealth management in Houston.
Best Retirement Accounts for 45-Year-Olds
At 45, it’s important to focus on tax-efficient retirement accounts that help you maximize growth while minimizing your tax burden. Three of the most popular and effective retirement savings vehicles include 401(k)s, traditional IRAs, and Roth IRAs.
A 401(k) is a common employer-sponsored retirement plan that allows you to contribute pre-tax income, which reduces your taxable income today while your investments grow tax-deferred. Many employers also offer matching contributions, which can significantly boost your retirement savings. If you’re contributing to a 401(k), aim to maximize your annual contributions. The IRS sets a limit for annual contributions, but if you’re age 50 or older, you can take advantage of catch-up contributions, which allow you to contribute even more.
A traditional IRA functions similarly to a 401(k) in that contributions are tax-deductible, and growth is tax-deferred. This is a good option for individuals who may not have access to a 401(k) or want to supplement their savings beyond their employer’s plan. On the other hand, a Roth IRA allows you to contribute post-tax dollars, meaning you won’t get a tax break today, but your money grows tax-free, and qualified withdrawals in retirement are also tax-free. Roth IRAs are particularly useful if you expect to be in a higher tax bracket in retirement.
The IRS allows catch-up contributions for both 401(k)s and IRAs, for those 50 and older. For 2024, individuals can contribute an additional $7,500 to their 401(k) and an extra $1,000 to their IRA beyond the regular contribution limits2. These catch-up contributions can be a powerful tool for boosting your retirement savings if you feel like you’re behind.
In addition to maximizing your contributions, diversifying your portfolio is an important part of reducing risk and optimizing growth. A well-diversified retirement portfolio should include a mix of asset classes such as stocks, bonds, and alternative investments. Stocks generally provide higher growth potential, but with greater risk, while bonds and other conservative investments offer stability but lower returns.
The Power of Compounding Interest
Starting to save for retirement at 45 still allows you to benefit from the power of compound interest. The concept of compounding means your money earns interest on both the principal and previously accumulated interest, accelerating savings growth over time. Even small increases in contributions can significantly impact your retirement nest egg.
For example, increasing your contributions by just a few percentage points can lead to tens of thousands of extra dollars by retirement age.
Adjusting Your Investment Strategy in Your 40s
In your 40s, it becomes important to transition to a more balanced investment portfolio, especially as you approach retirement. While earlier in life you may have prioritized growth-oriented assets like stocks, it’s now important to include more conservative investments such as bonds or dividend-paying stocks to provide stability. This balance between growth and stability helps protect the wealth you’ve accumulated while still allowing for some growth potential.
For early retirement, your risk tolerance will play a key role in determining how aggressive or conservative your strategy should be. If you’re comfortable with risk and have a longer time horizon, maintaining a higher allocation in stocks might still be appropriate. However, if you prefer more security, shifting toward safer investments like bonds can help reduce volatility. The goal is to create a portfolio that reflects your financial objectives and comfort level with market fluctuations.
Regularly rebalancing your portfolio is also key during this phase. Over time, certain investments may grow disproportionately, leading to an imbalance in your asset allocation. Rebalancing ensures that your portfolio remains aligned with your risk tolerance and retirement goals, helping you stay on track without overexposure to market volatility.
How to Maximize Your Retirement Savings at 45
At 45, increasing your savings rate is one of the most effective ways to boost your retirement fund. By adjusting your budget, you can find opportunities to allocate more money toward retirement without dramatically altering your lifestyle. Start by reviewing your current spending habits and identifying non-essential expenses. Small changes, like dining out less frequently, cutting back on subscriptions, or shopping smarter, can free up funds that can be redirected into retirement savings.
Creating a detailed budget can be a helpful tool for staying on track. Prioritize your financial goals, with retirement savings at the top of the list. You can then set specific targets for saving more each month and automate those contributions, whether through an employer-sponsored plan like a 401(k) or an individual retirement account (IRA). Automation makes saving easier and ensures that you consistently contribute without having to think about it.
Another strategy is to take advantage of salary increases, bonuses, or other windfalls by directing a portion—if not all—of these additional funds into your retirement accounts. This approach allows you to increase your savings without impacting your day-to-day budget. Additionally, exploring potential side income streams, such as freelancing, consulting, or investing in passive income opportunities, can help increase your savings rate even further. By focusing on these strategies, you can make a significant difference in your retirement savings, even with limited time before retirement.
Smart Spending and Saving Habits
One smart financial move at 45 is prioritizing the repayment of high-interest debt. Credit card debt, personal loans, and other high-interest liabilities can quickly erode your financial stability and limit the amount you can save for retirement. By focusing on paying off these obligations, you not only reduce the burden of monthly payments but also free up cash flow to redirect toward retirement savings.
Paying off high-interest debt also benefits your long-term financial health by saving you substantial amounts of money in interest payments. For example, a credit card with a 20% annual interest rate can accumulate significant interest charges over time, making it difficult to get ahead financially. By eliminating these debts, you increase your ability to save and invest, boosting your retirement fund without the drag of mounting interest costs.
Planning for Healthcare and Long-Term Costs
Healthcare costs are one of the most significant expenses in retirement, and planning ahead for them can help ensure financial stability. As you age, medical needs can increase, so it’s important to account for these potential costs in your retirement plan. One way to prepare is by factoring in the costs of health insurance premiums, out-of-pocket expenses, and long-term care. Even with Medicare and Social Security benefits, retirees often face gaps in coverage, which can lead to unexpected expenses. Supplemental insurance policies, like Medigap or Medicare Advantage, can help cover these gaps and provide more comprehensive protection.
Long-term care is another important consideration. Many retirees will need some form of long-term care, whether it’s in-home assistance or a stay in a nursing facility. Long-term care insurance (LTCI) is an option that can help cover the costs of these services, which can otherwise be prohibitively expensive. Purchasing LTCI in your 40s or early 50s can provide peace of mind, as the earlier you buy, the lower your premiums will be. If long-term care insurance isn’t an option, it’s wise to set aside specific funds within your retirement plan to cover these future needs.
Health Savings Accounts (HSAs) are another excellent tool for managing health care costs in retirement. HSAs offer a triple tax advantage: contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free as well. If you have access to a health savings account through a high-deductible health care plan, consider contributing the maximum allowed amount. Even if you don’t use the funds now, they can grow over time and be used for healthcare costs in retirement, helping you cover rising medical expenses without dipping into your primary retirement savings.
How Insight Wealth Strategies Can Help You Save for Retirement
At Insight, we understand that saving for retirement at 45 requires a tailored approach that fits your unique financial situation and goals. Our personalized retirement planning services are designed to help you optimize your savings strategy, making sure you’re taking full advantage of available tax-efficient accounts, catch-up contributions, and investment opportunities. Whether you need help fine-tuning your budget, adjusting your investment portfolio, or planning for healthcare and long-term costs, our experienced advisors are here to guide you every step of the way.
We also provide guidance on managing your investment strategy as you approach retirement, helping you transition to a balanced, diversified portfolio that reflects your risk tolerance and retirement timeline.
At 45, there’s still time to make significant progress toward your retirement goals. Let us help you create a plan that gives you confidence and peace of mind for the future. Our fiduciary responsibility ensures that your best interests are always our priority, and we are committed to helping you achieve long-term financial security. Contact us today to start building a retirement plan that’s right for you.
Reviewed by,
Chad Seegers, CRPC®
Chad began his career with Sagemark Consulting in 2005 and then became a Select member of Sagemark’s Private Wealth Services which operated as a national resource for financial planners focusing on Advanced Strategies in the High Net Worth marketplace. Chad then began his partnership with Insight Wealth Strategies in 2013 focused on retirement planning primarily with Oil and Gas employees and executives. His primary areas of expertise are retirement, estate, and investment strategies as he serves as Investment Strategist for the financial planning team.
Insight Wealth Strategies, LLC is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Insight Wealth Strategies, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Insight Wealth Strategies, LLC unless a client service agreement is in place.
Insight Wealth Strategies, LLC (IWS) and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
