Preparing for Retirement: 5 Overlooked Financial Steps to Take in Your 30s and 40s

Your 30s and 40s are arguably the best time of your life—still young and energetic, but a little wiser. This is also an exciting, sometimes daunting period of life—with career growth, personal growth, and raising a family to contend with.

Amidst all of this, retirement might seem like an abstract, far-away thing that isn’t anywhere near the top of the list of priorities. However, your 30s and 40s are crucial when it comes to achieving financial stability for your post-career life.

Retirement planning isn’t a simple, monolithic task—it’s multifaceted, complex, and requires balancing competing interests. However, there’s no going around it—if you want to enjoy life after your early 70s, you need to start preparing for retirement as soon as possible, if you haven’t already begun. One in five Americans expect that they won’t be able to retire at all.

Doing this the right way consists of plenty of small steps and decisions, along with leveraging a couple of slightly more complex mechanisms. We’ve boiled things down to the 5 most important and overlooked financial steps that you can take in your 30s and 40s to ensure a successful retirement.

Let’s get started, one step at a time.

1. Understanding and Maximizing Employer Retirement Plans

Right off the bat, employer retirement plans are your most important and powerful tool when it comes to saving for retirement.

Employer retirement plans work like this—a portion of your pre-tax salary is deducted from your paycheck, put into a separate account (most of which have tax benefits), and then accrues gains from the investments made inside the retirement account.

There are several types of employer retirement plans—however, for the purpose of this guide, we’ll focus on the much more common 401(k) plan, as it applies to a large percentage of our readership. We’ll leave the topic of the 403b retirement plan, which is designed for employees of nonprofit or tax-exempt organizations, for another day.

To recap—these plans allow investors like yourself to set aside a part of today’s income to ensure a steady flow of funds later. So, how does that come to fruition?

First, we have to deal with the most underappreciated and underutilized part of these plans—and that is employee matching. A lot of employers in the US will match your contributions to these plans, up to a certain percentage—effectively incentivizing you to save for retirement by giving you free money.

So, the first practical consideration here is this: Find out if your employee matches 401(k) contributions, and maximize this benefit by taking full advantage of it.

The second piece of the puzzle is compound interest. Think of the term like this—compound interest is the interest you earn on interest. To put it in slightly more grounded terms, the gains you secure from your investments will be reinvested to generate further profits—this allows the size of your account to snowball over the long term, and is a key reason why you should start investing for retirement as soon as possible.

Next on the list, but no less important, are individual retirement accounts, more commonly referred to as IRAs. IRAs operate on a very similar basis to 401(k) plans, but they aren’t employee-sponsored. With IRAs, you’re on your own, and the contribution limits are much lower—but you have a lot more flexibility in terms of what you can invest in.

Both 401(k)s and IRAs also come in another version—Roth 401(k)’s and Roth IRAs. Basically, the Roth versions are funded with after-tax dollars—however, in return for that, your withdrawals in retirement (after the age of 59 and a half) are tax-free.

The pesky thing about Roth IRAs is that they have income limits—anyone making more than $153,000 on an annual basis cannot contribute to such an account. If this applies to you, there are some backdoor Roth IRA considerations that you should keep in mind.

2. Diversifying Your Investment Portfolio

Diversification is a method of managing risk when investing. In fact, it is the method of managing risk—the bread and butter of it, if you will.

The idea is pretty straightforward: Allocating your investments across a variety of financial instruments, industries, sectors, and countries allows you to experience smaller losses should one of them experience a catastrophic downturn.

At the same time, you are exposing yourself to a lot of potential upside. Should any of the industries, sectors, etcetera that you’ve invested in see great returns, it will be reflected in your portfolio. Don’t put all of your eggs in one basket, but in investing terms.

The crucial thing to remember is that proper diversification is achieved by carefully balancing your allocations between investments that are not correlated. In plain terms, you should invest in areas that react differently to a single set of conditions.

It’s important to note that diversification does not prevent losses—it mitigates them. Secondly, seeing as how conditions are always changing, diversification isn’t a one-and-done affair—it will require monitoring and adjustments from time to time.

Let’s go a bit more in-depth with diversification. Essentially, this method spreads out risk by investing in a variety of assets whose returns haven’t historically moved in the same direction and to the same degree. By doing this, should a portion of your portfolio decline in value the rest should either increase or not decrease in value as much, mitigating overall losses.

So, how do you go about achieving effective diversification for your portfolio?

First order of business—asset classes. The three main asset classes are equities (stocks), fixed-income securities (bonds), and cash and equivalents. There are also other asset classes, such as commodities, real estate, precious metals, and cryptocurrencies, but for the sake of brevity, we’ll focus on the main three.

All of these asset classes respond in different ways to market conditions. As an example, when the economy is trending upward, stocks usually perform well, while bonds offer subpar returns in comparison. When the tables turn, however, and the economy is in a recessionary environment, bonds can outperform stocks. Just by using this simple example, you see the underlying logic—diversification is a buffer against market volatility.

Second, diversification is also done within an asset class. Following the same logic, investing in stocks that are contained within one sector or industry is a death knell for your portfolio should that sector or industry face a crisis. Several industries and sectors are negatively correlated with one another — meaning that when one falls, the other tends to rise (for example, oil prices and airline stocks). It is estimated that some 90% of retail traders do not generate a positive return with their investments in the stock market—highlighting the need for diversification.

The same holds true for fixed-income securities. You need to diversify your bonds by investing in government, municipal, and corporate bonds in order to achieve the best returns.

Third, consider diversification in terms of geography as well. There is no reason to limit yourself to the place where you live. Allocating a part of your portfolio to developing markets can lead to high returns while simultaneously reducing overall risk.

Diversification is invaluable and necessary—but it isn’t a matter of“fire and forget”. As the value of specific parts within your portfolio increases or decreases, your actual allocations will drift. This is remedied by occasionally rebalancing your portfolio, which helps in maintaining a consistent risk profile.

3. Life Insurance and Estate Planning

You might easily think that if you do everything right in terms of retirement planning, you won’t need life insurance. That’s completely wrong. Let’s take a minute to discuss why.

Life insurance works like this—you pay premium payments, and the insurance company provides a lump-sum payment, known as a death benefit, to beneficiaries upon the insured’s death.

This benefit acts as a financial safety net, ensuring that your dependents can meet their financial obligations and maintain their standard of living.

When choosing a life insurance policy, it’s crucial to assess your family’s financial needs, taking into account factors such as your income, the number of dependents, their ages, future education expenses, and your spouse’s earning capacity.

When tackling the topic of life insurance, keep these three ideas at the forefront of your plans:

• Replacing a source of income: If you are the primary provider of income in your household, life insurance can replace that lack of income, helping your family maintain their standard of living.
• Repaying debts: Life insurance can help pay off debts such as mortgages, personal loans, student loan debts, and other forms of debt, ensuring that your family doesn’t face financial hardship.
• Funeral costs and cash on hand: Life insurance can also offer liquidity to your family, ensuring that funeral expenses are covered.

Different types of life insurance exist, including:

• Term life
• Whole life
• Universal life

Each of them has its own advantages and drawbacks. Since these are long-term commitments with potentially huge implications, it is best to go about the entire process of selecting and purchasing life insurance with a financial advisor.

Now let’s move on to the topic of estate planning.

While it might sound like something only people that have summer homes in the Hamptons need, that’s a far cry from the truth — and estate planning is essential in not only securing the financial future of your family but also in securing mental and emotional stability for yourself as you age.

Put simply, estate planning entails the management of your estate in the event of your death or incapacitation.
It involves deciding on important decisions like how assets should be distributed (or preserved), who should care for your minor children, and who should make decisions on your behalf if you yourself are not able.

Estate planning includes several elements. Wills are legally binding documents that clearly state how your assets should be handled after your passing, and how they should be distributed or preserved. Trusts offer a bit more say in exactly how and when your assets are distributed to heirs and can come with tax benefits.

On the less financial side of things, the process also entails choosing who to assign power of attorney to—a person you trust to make both financial and medical decisions in case you are unable to, and setting healthcare directives—instructions for medical care that go into effect if you are not able to communicate your wishes.

We should also tackle the topic of estate taxes. While the federal estate tax exemption is quite sizable (just shy of $13 million in 2023), some states have lower thresholds when compared to others.

In order to optimize the estate planning process, you might have to gift some of your assets to your heirs or set up trusts while you’re still alive.

Now that we’ve covered all of that, it should be clear that you can’t do all of this on your own. Estate planning entails enlisting the help of professionals, such as financial advisors and estate attorneys.

4. Health Savings Account (HSA) and Long-term Health Care

An often overlooked but indispensable part of retirement planning, health savings accounts, and long-term health care are crucial elements that are *not* optional.

As we get older, the odds of experiencing significant health-related expenses increase year by year. Medical costs, especially unexpected ones, can quickly pile up, spiral out of control, and completely deplete your retirement savings.

Let’s first explore Health Savings Accounts or HSAs. This type of savings account allows individuals to contribute pre-tax money to pay for qualified medical expenses. By contributing to an account like this, an investor can not only pay for their current healthcare expenditures but also save for future costs — all with significant tax benefits.

The HSA offers a triple tax benefit. The contributions you make are tax-deductible, the earnings in the account grow tax-free, and withdrawals for qualified medical expenses are also tax-free. Your HSA funds roll over year to year if you don’t spend them.

Additionally, after reaching the age of 65, you can withdraw funds for non-medical expenses without penalty, although these withdrawals will be taxed as income in those cases.
HSA’s also have a degree of flexibility to them — while it depends from account to account, some of them do allow you to invest in assets such as stocks, bonds, or funds.

Now, let’s move on to the second part of this point — long-term health care. As we grow older, the odds of needing assistance with everyday activities, such as bathing, dressing, or eating, increase.

The cost of long-term care can be staggeringly steep and can do quite a number on your savings. Long-term care insurance can help cover these costs. This type of insurance policy reimburses policyholders a daily amount (up to a preselected limit) for services to assist them with activities of daily living.

When considering long-term care insurance, remember that premiums may rise significantly over time and benefits may not cover all types of long-term care. Policies generally cover care in nursing homes, assisted living communities, and home health care. They can (and often do) cover other types of care, but this will require an in-depth overview by a professional.

5. Financial Literacy and Regular Review of Financial Plan

Securing a comfortable retirement is a marathon — not a sprint. This is a long-term commitment, and it will require continuous attention, effort, and adjustment in order to succeed. That continuous effort should primarily go in two directions — financial literacy and regular reviews of your financial plan.

Let’s deal with financial literacy first. This is a catch-all term that encompasses managing your personal finances, budgeting, and various forms of investing. Simply put, the more you know about finances, the better equipped you are to make the right decision at any given moment.

We’ve touched on some topics that fall under financial literacy — concepts such as compound interest, tax-advantaged retirement accounts, asset allocation, and risk tolerance.

However, that’s just a small sliver of financial knowledge — you should approach the topic as a lifelong commitment to learning. Just as a quick example, we’ve barely touched on the topic of taxes and inflation, which also have significant effects on retirement.

Nowadays, getting access to high-quality educational material is easier than ever. True, you will have to sort through things in order to separate the wheat from the chaff, but there are many books, online courses, newsletters, and financial media outlets that will help you understand any topic in the world of finance.

Now for the second point — a regular review of your financial plan. Think of this as a health check-up, as you might have at the doctor’s office, but for your retirement plan.

Nothing in this world is ever static — changes in employment and income, marriage, children, college tuition, inheritances, all of these factors can have huge impacts on your retirement plans. And those are just personal matters — to say nothing of changes in the tax code, laws, and the investment landscape.

Having regular check-ins allows you to see whether or not the ship is sailing in the right direction — and no matter how well you go about things, you will always have to make at least some minor adjustments in order for your plans to perform optimally.

In all likelihood, this will consist of reviewing whether or not you’re saving enough, reallocating and rebalancing your portfolio to get back to your desired allocation and risk tolerance, and updating your game plan if necessary.

We touched on risk tolerance above. This isn’t a static category — an investor’s risk tolerance will naturally change over time. While young investors can afford to make mistakes and take on more risk, since the longer time horizon allows the opportunity to make up for losses, the older amongst us don’t have that luxury — so we tend to opt for safer investments such as bonds.

Next, changing market conditions are another reason why you should regularly revisit your retirement plan. Having regular, pre-scheduled appointments with a financial professional allows you to keep track of these changes, mitigate emerging risks, and take advantage of emerging opportunities.

While you can (and should) think of these factors on your own, it is absolutely essential to enlist the help of a certified professional when reviewing your financial plan in order to avoid any potential blindspots and gain access to a vetted source of authoritative advice.

Conclusion

While retirement might seem like something that’s a lifetime away, especially for our younger readers, starting on time is well worth the temporary financial sacrifices.

As previously stated, retirement planning is a marathon, not a sprint. In accordance with that, the sooner you begin, the more leisurely you can reach your goal. This is an expansive process that entails a lot of different factors, so we hope that your list helps you prioritize your goals in what is arguably life’s most important financial journey.

We realize that there is no one-size-fits-all approach, but the steps we’ve outlined here—including maximizing your employer’s retirement plans, maintaining a well-diversified portfolio, and getting appropriate life insurance should apply to each and every working person in the United States.

If you keep these factors in mind, take a proactive approach, and remember to always consult vetted, trusted professionals, your long journey to retirement will be a calm one. Start on time, secure your tomorrow today, and start making your future self proud now.

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