3 Retirement Strategies to Employ Before You Hit 40

Retirement planning by 40

It's never too early to start preparing for retirement. To make sure you're on the right path, here are three retirement strategies to put in place before hitting the big four-oh. (See also these strategies for planning in your thirties, forties, fifties and beyond). If you adopt the right moves at each stage, you'll be more able to retire when and how you want.

1. Identify, prioritize, and plan

Let's face it. Your forties are a stage of life where you are pulled in many directions -- physically, emotionally, and financially. Whittling down credit card debt, paying off your own student loans, saving for your child's college education, and contributing to your retirement all compete for your dollars. But you don't have to let it overwhelm and discourage you.

Instead, identify your financial goals, prioritize your needs, and make a plan to address them.

First and foremost, devise a plan for reducing your debts. Paying them off faster lets you maximize retirement savings. Transfer any balances from high-interest-rate credit cards to one with a lower rate. Ideally, find a card with a zero-percent introductory APR. Then, take your balance, divide that by the number of months you have until the zero-percent-interest clock stops, and voila, you have a plan for eliminating credit card debt with the smallest monthly outflow possible.

2. Benchmark your retirement savings

Chances are good that by now you've asked yourself the burning question: "Am I on track?" To answer that, Fidelity recommends having the equivalent of twice your annual salary accumulated in retirement savings by age 40 (if you're curious, it's four times by age 50 and six times by age 60).

Keep in mind that these milestones are general rules with assumptions that might not fit your particular situation. Since every individual's circumstance differs, proceed with caution when using retirement savings calculators. Seek advice from a financial planner for more customized guidance.

3. Pump up your contributions

If you fall short of your benchmark, amp up your retirement plan contributions. Luckily for you, the contribution limits are quite generous: $17,500 for 401(k), 403(b), and 457 plans for 2013. And thanks to the phenomenon of compound interest, by upping your retirement contribution now, you won't need to save nearly as much money later.

Here your strategy is to contribute at least enough money to your 401(k) to get the maximum match your employer offers. But if you're flush with cash, why stop there? Invest as much as you can into your retirement plan at work. If you already max out your plan contribution (and a huge high five if you do!) or if you'd like to add some tax diversification to your overall plan, contribute to a Roth IRA. Just make sure you meet the eligibility requirements before doing so.

Get started today

Retirement is getting closer with every passing day. But before age 40, you've still got plenty of time to save. By identifying your financial goals, prioritizing your needs, and contributing enough toward your retirement savings, you'll reap the glorious reward of a retirement on your terms.

Nicole Seghetti is a contributing writer to The Motley Fool.


The Importance of Retirement Planning
The Importance of Retirement Planning