5 Ways to Quickly Catch Up on 401(k) Savings over Age 40

If you’re wanting to catch up on 401(k) savings and are over the age of 40, it may seem overwhelming when you think about how you’re going to do it.

Fret not. With proper planning, informed action, and determination, it is still possible to catch up and enjoy a comfortable retirement. 

Just follow these 5 steps below to quickly catch up on 401(k) savings over age 40, and you’ll be shocked at how much you can save in the years to come.

#1 Get a Retirement Plan in Place ASAP

401(k) Savings over Age 40

If you don’t have a plan for how much you’ll need for retirement, you need one in place immediately. 

With a target amount in mind, you can work backwards to see exactly how much you need to stash away in your 401(k) each pay period. 

If you’re really behind on 401(k) savings over age 40, you may also need to contribute additional funds to an IRA or Roth IRA. 

You won’t know any of this until you know the amount of money you need to comfortably retire. 

Sit down and create a plan for retirement. If you created a plan years ago, but haven’t followed it, then hit the reset button and start planning. 

At what age do you want to retire? 

How much money will you need, not to just scrape by, but have a fulfilling, comfortable retirement? 

Get crystal clear on when you will retire and how much you’ll need for the lifestyle you desire. 

Then, take a look at how much you’ve already saved and figure out what you need to do to get back on track. 

[Check out our 401(k) calculator to calculate how professional help may improve your future retirement income. If you’re stuck, we recommend seeking third-party advice as soon as possible.]

#2 Maximize Your Retirement Savings This Year

401(k) Savings over Age 40

Now that you have an idea about when you will retire and how much you need to save, try to max out your 401(k) this year. 

Employee contribution limits for 401(k), 403(b), most 457 plans, and the federal Thrift Savings Plan are $20,500 for 2022 – up from $19,500. 

For those age 50 and older, the 401(k) catch-up contribution remains the same at $6,500 for 2022. If you turn 50 anytime during December of 2021, you’re still eligible to contribute the additional $6,500. 

Maximizing your 401(k) this year may seem like a stretch from where you are right now. We get it. 

See what you can do to save as close to $20,500 as possible. You’d be amazed at how cutting back on a few subscription services or putting off a larger purchase can make a big difference in the amount you save. 

In addition, if you’re contributing at least the minimum of what your company will match, depending on what your company matches, it may double the amount of what you’re already saving. 

Let’s say your company matched 100% up to 6% of your pay. With a $55,000 salary, you could put in 6%, or $3,300 for the year, and the company would match this at 100%. 

That’s another $3,300 per year of free money that’s yours to keep.

This extra $3,300 doesn’t include compounding interest or your earnings. This is just about the additional money you could be saving with your company match.  

If you still aren’t convinced you can increase your 401(k) savings over age 40, consider this: 

According to Vanguard’s How America Saves 2021 report which collects data from over 4.7 million defined contribution plan participants – the average 401(k) balance for ages 35 – 44 is $86,582. And the median balance is $32,664.¹

The average 401(k) balance for those 45 to 54 is $161,079, while the median balance is $56,722

Looking at these numbers above, is this where you want to end up at retirement age? Probably not. 

Do whatever you can this year, and every year thereafter, to maximize your contribution limits. Act like your future depends on it, and chances are you can save more than you think you can. 

[Related Read: Retirement Plan Contribution Limits for 2022]

#3 Avoid Target Date Funds

401(k) Savings over Age 40

A majority of retirement account investments are in target date funds (e.g., 2030, 2045 funds). 

Target date funds are structured to automatically reallocate as you move through different life stages. 

So, as you age toward your target retirement date, the funds shift toward more conservative investments to protect your money.

For many 401(k) investors, this sounds like a win-win. Invest your money, and let it do its thing until retirement. 

However, target date funds are actually riskier than many people perceive.

An article titled “Global Financial Crisis and the Performance of Target-Date Funds” indicated that, on average, target date funds (like 2030 or 2040 funds) invested 75% in stocks, generating average losses of over 30% during the 2008 financial crisis. Investors planning to retire in 2010 suffered significant losses because 2010 target date funds increased their common equity exposure in 2007.³

Morningstar analyst Jeff Holt put it this way, “In the long run, the biggest risk in target-date funds is that they won’t meet investor expectations for avoiding losses.”⁴

Another reason we recommend avoiding target date funds is, because they are based on the date of retirement, they fail to take into consideration that not all investors are created equal

Let’s say you plan to retire in 2045, you’re told to select a 2045 fund. 

What this means is investors are grouped solely based on their expected retirement date – location, age, profession, salary, risk tolerance, goals, and objectives are NOT taken into consideration. 

Investing in target date funds and not actively managing your retirement account is equivalent to saying there’s a one-size-fits-all investment strategy that works for everyone. 

This goes against common sense because investing for your retirement should not be a one-size-fits-all strategy. 

If you are currently in a target date fund, we suggest moving away from this option and better utilizing all the options available in your workplace retirement plan. At the very least, rebalance your account

Download our guide 5 Ways Target Date Funds Fail to Live Up to Their Promise.

#4 Avoid Borrowing from Your 401(k)

401(k) Savings over Age 40

While it may sound like an attractive option should you need money, taking out a 401(k) loan can impact the quality of your retirement, have negative tax consequences, and cost you money and opportunity. 

When taking out a 401(k) loan, you pay the interest to yourself. Sounds great, right?

Well, not when you consider you are borrowing money contributed with pre-tax dollars, and repayments are made using after-tax dollars.

When you take out money for retirement, you are taxed on the distributions at your ordinary income rate.

This means you are taxed twice – the first time is when you use after-tax dollars to pay off the loan and again when you withdraw those same dollars in retirement.

Another thing to consider is that many 401(k) plans prohibit you from making additional contributions until the loan is paid off. 

If your plan has this provision, taking a 401(k) loan may significantly impact your future 401(k) balance because you’ll be missing out on compounded earnings. If your employer offers company matching, you’ll miss out on those additional funds as well. 

Not being able to regularly contribute also has tax consequences, as you’ll not be able to write off the pre-tax income you would have otherwise put in your 401(k). 

Should your 401(k) plan allow you to pay back the loan and make contributions, the question is – can you actually do both at the same time?  

[Related Read: Is It a Bad Idea to Borrow from My 401(k) to Get a House?]

#5 Roll Over Old Workplace Retirement Plans

401(k) Savings over Age 40

If you have changed employers over the years, it’s likely you have some retirement savings accumulated from previous jobs. 

If you think this isn’t a big deal, think again. 

Capitalize recently published a white paper The True Cost of Forgotten 401(k) Accounts stating as of May 2021, there are an estimated “24.3 million forgotten 401(k)s holding approximately $1.35 trillion in assets, with another 2.8 million left behind annually.”⁵

Leaving behind a 401(k) with a past employer “has the potential to cost an individual almost $700,000 in foregone retirement savings over a lifetime.”⁶

While the potential amount you may be missing out on depends on your balance and fees, it is costing you more than you may think

For example, you are incurring ongoing fees with a left-behind 401(k), and you may not even realize your old 401(k) may be a high-fee plan. 

And you also have another account to keep track of that provides limited investment options. 

You have three options when it comes to moving your old 401(k):

  1. Roll over into your new employer’s 401(k), providing it’s allowed.
  2. Roll over into an IRA or Roth IRA.
  3. Cash it out.

Cashing out an old 401(k) is not advisable for tax and penalty purposes – and the fact that you want your money growing for you so you can use it later in retirement. 

We recommend seeking third-party advice to help you make the best rollover decision possible.

>> Before you make your move, click here to discover the 5 Costly 401(k) Rollover Pitfalls.

401(k) Savings over Age 40

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  1. https://institutional.vanguard.com/content/dam/inst/vanguard-has/insights-pdfs/21_CIR_HAS21_HAS_FSreport.pdf 
  2. https://institutional.vanguard.com/content/dam/inst/vanguard-has/insights-pdfs/21_CIR_HAS21_HAS_FSreport.pdf 
  3. The Global Financial Crisis and the Performance of Target-Date Funds in the United States – October 1, 2011
  4. Special Report: Fidelity puts 6 million savers on risky path to retirement, Reuters.com March 5, 2018
  5. https://www.hicapitalize.com/resources/the-true-cost-of-forgotten-401ks/
  6. https://www.hicapitalize.com/resources/the-true-cost-of-forgotten-401ks/
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