Saving for retirement is a top goal for many investors, who aim to create a nest egg during their working years so that they can live comfortably in old age. You can still start to save for your retirement at 40 and retire rich, even if you're starting late. Here's how.
How to save for retirement at 40
The best solution to saving for retirement is probably that of Robert Kiyosaki, author of Rich Dad Poor Dad. In what he calls the “pay yourself first” principle, Kiyosaki suggests allocating money to income-generating assets every month before paying off other expenses.
The strategy is a bit counterintuitive, as most people first pay off their monthly expenses and then save or invest their remaining money. However, Kiyosaki advocates reversing the typical process. How much you can set aside every month to create assets will depend on several factors, such as your income, expenses, and retirement needs.
Increase income, lower expenses
No matter what philosophy you follow, how much you save every month is usually the difference between what you earn and what you spend. Three-time Super Bowl champion Emmitt Smith has said Dallas Cowboys owner Jerry Jones gave him the best financial advice. “He always said, ‘Have a big front door and a small back door. Take in as much as you can, and spend as little as you can.’”
Therefore, to save for retirement, your strategy should be to earn as much as you can during your working years and to limit your expenses. But, saving at 40 for retirement is just one part of the story. You also need to invest the money properly to reach retirement with a big enough sum.
How to invest your retirement money
How you invest your retirement pool should be a function of three things: your desired retirement age, your risk appetite, and your investing expertise. So, for example, if you intend to retire at 60 and start saving for retirement at 40, you'll have a good 20 years to work with, and most of your savings should be channeled to equities. As your retirement age nears, you should lower your equity exposure and move your money into safer instruments.
If you're familiar with stock markets, you can invest directly in stocks. However, if you have a lower risk appetite and aren't comfortable with fluctuations in your portfolio, or your investment knowledge is limited, you should have less exposure to stocks. You may be better off investing in ETFs or actively managed mutual funds.
When investing in stocks for retirement, you should look for growth stocks. These stocks might be volatile in the short term, but tend to outperform the market over the long term. There are plenty of growth stocks out there. Some examples include Amazon and Tesla, which have delivered phenomenal returns since their IPOs. Also, you shouldn't focus on dividends at 40 years old, as they're current income. As you near retirement age, however, you could allocate some funds toward high-dividend stocks.