Many people worry about having enough money to live on in retirement. And it’s an understandable fear.
The cost of living has skyrocketed lately due to inflation. While the increases we’ve seen have been extreme, the reality is that spending tends to increase over time. So if you’re in your 40s and decades away from retirement, it can be difficult to predict how much income you’ll need.
While you may face some unknowns while retirement is still a long way off, you can also take steps to ensure long-term financial security. And if you’re doing these moves during quarantine, you’re likely to appreciate them once retirement arrives.
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1. Maximize your IRA
Maximizing an IRA in your 40s means setting aside $500 a month, or $6,000 a year, for retirement savings. To be clear, this is not an easy thing for everyone. But if you commit to this goal, you can prepare yourself with a lot of money for the future.
A good way to stay on track in this regard is to find an IRA that offers an automatic savings feature and set it up so that $500 is transferred from your checking account each month. If you put the process on autopilot, you’ll be less likely to spend that $500 on impulse and miss out on a month’s contribution here and there.
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2. Invest in dividend-paying stocks
The advantage of dividend stocks is that they offer two ways to make money. First, the dividends you receive can be reinvested for additional growth during your 40s, and once you retire, you can collect those dividends and use them as income.
Additionally, companies that regularly pay dividends are often stable companies with strong growth potential. So if you have held dividend stocks for many years, their value could increase over time.
3. Start funding an HSA
Health care could end up being one of your biggest expenses in retirement, if not the bigger. This is why it is important to save in advance. If you qualify for an HSA, it pays to take advantage of it.
Eligibility for HSA depends on enrollment in a high-deductible health insurance plan. But the advantage of HSAs is that they benefit from a triple tax advantage. Contributions are tax-free, investment gains are tax-free, and withdrawals are tax-free when used for eligible medical expenses.
Another great thing about HSAs? Once you turn 65, you can treat yours like a traditional retirement plan and withdraw funds for any purpose without incurring penalties. You will pay taxes on non-medical withdrawals, but this is no different from the taxes you would pay on withdrawals from a traditional IRA.
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However, chances are you’ll need the bulk of your HSA funds to cover senior health care costs, from health insurance premiums to copayments. So, funding an HSA a few decades before retirement could mean you have one less expense to stress about when you’re older.
If you’re only halfway through your career, you may not be ready to focus on retirement yet. But if you push yourself to make these key moves, you could really be setting yourself up for long-term success.
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