How to Invest If You're Starting Your Retirement Savings at 40

Turning 40 puts investing for retirement in the spotlight.

Time in the market — as opposed to timing the market — is one of the keys to investing wisely for retirement. Being late to the party can cost you. “The biggest challenge when saving for retirement later in life is overcoming the lost time value of money,” says Tony Drake, founder of Drake & Associates in Waukesha, Wisconsin. “If you start saving for retirement in your 40s, your money hasn’t been making money for you.” That may seem like an obstacle if you’ve reached age 40 with nothing invested, but the good news is there’s still time to build a portfolio if you follow the right plan. Here are eight of the most important rules to know for starting to save for retirement at 40.

Get focused first.

Your 40s are typically a stage in life where your career may be in full swing and you might be juggling raising children with caring for aging parents. If life’s distractions have played a part in why starting to save for retirement at 40 is your reality, you need to be committed to making up for lost time. “Engage and execute,” says Dave Hanzlik, vice president, annuity and retirement solutions at CUNA Mutual Group. Start by filling in the gaps in your investment knowledge, setting some reasonable expectations for yourself and talking to a financial advisor if you need to. “Then get going,” Hanzlik says. “You can’t reap the benefits of investment for retirement if you never start.”

Keep risk in perspective.

When getting a later start with investing, it’s important to understand the distinction between risk tolerance and risk capacity. The former is how much risk you’re comfortable taking; the latter pertains to how much risk you need to take to achieve your investment goals. “If you’re just starting to invest at age 40, you have a lot of ground to make up,” Drake says. “You may need to invest more aggressively than other 40-year-olds because you have a savings gap you need to cover if you plan to retire comfortably.” Long-term thinking is key. If you start saving for retirement at 40, consider how much recovery time your portfolio would have to rebound from a market correction or recession.

Choose the right asset location.

If you’re starting retirement savings at 40, consider where asset location fits into the picture. “When you begin to save for retirement, it’s important to think about the order of money,” says Christopher Berry, founder and CEO of Castle Wealth Group in Brighton, Michigan. If you don’t have any type of nest egg started yet, funding your 401(k) to get the benefit of an employer match is the first step. That said, putting all your investment eggs in one basket can be problematic if you’re ignoring tax risk, Berry says. Investing with a Roth individual retirement account if you’re eligible or a taxable brokerage account can help with managing that risk if you anticipate taxes rising in the future.

Remember that consistency counts.

Saving for retirement at 40 can turn up the pressure to contribute large sums to your 401(k) or IRA, but if maxing out your retirement accounts isn’t realistic at the moment, focus on being consistent for now. “Systematic investment provides for maximum accumulation through dollar-cost averaging,” says Jeff Barnard, principal and president of Barnard Financial Group in Roswell, Georgia. Dollar-cost averaging assumes that you invest money in the market at regular intervals and in regular amounts, regardless of how stock prices fluctuate. “Over time, what’s important is the number of shares you accumulate, which will lead to a potentially larger portfolio value,” Barnard says. Creating an automatic investment plan can help with maintaining consistency as your portfolio grows.

Watch out for common investment mistakes.

While there are certain things you should do when starting retirement savings at 40, there are other things that are best avoided. John Mantia, director of finance at PARCO, says investors often make two kinds of mistakes: tactical and psychological. “Tactical mistakes involve missed opportunities that benefit someone’s future self,” Mantia says. That could mean passing up opportunities to get your employer’s full 401(k) match or failing to open a Roth IRA. Psychological mistakes usually involve giving in to investment biases or adopting a herd mentality, which can be particularly dangerous to your portfolio if you’re starting to invest later in life. “Those who can avoid impulsive decision-making often have a better chance of setting themselves up for success,” he adds.

Be realistic and prioritize.

You might assume that you can simply work longer to make up a retirement savings gap if you’re starting to invest at 40. Life may have other plans. “Murphy can turn his head in your direction with possible health issues or a layoff that waylays your best of intentions,” says Sara Gardner, wealth advisor at EP Wealth Advisors. “Plan to not be able to work longer and if you can, chalk that up as a win-win.” And don’t allow other financial goals to derail you when starting retirement savings at 40. Gardner says many parents get sidetracked by saving for their kids’ education, but if you’ve reached midlife with zero in retirement savings, college needs to take a back seat.

Figure out what works for you.

One of the easiest traps to fall into when starting to invest is listening to the crowd. If you’re just now starting to save for retirement at 40, then you don’t have time for bad advice. “Tune out the noise,” says Tony Zabiegala, chief operations officer and senior wealth advisor at Strategic Wealth Partners. Chasing trends, for instance, can get you into trouble if a stock you thought would be a winner turns out to be the opposite. Zabiegala says it’s better to stick to your investment strategy and make sure your portfolio allocation matches your risk tolerance. “The stock market is a volatile environment, so understand there will be good and bad days,” he says.

Don’t get discouraged.

Starting to save for retirement at 40 means you have your work cut out for you — but don’t panic, says Matt Nadeau, wealth advisor at Piershale Financial Group. “There’s still plenty of time to catch up, but it will take some dedication and planning,” he says. This means taking the basic steps such as deciding at what age you want to retire, calculating your target retirement number and determining how much you’ll need to invest regularly to achieve that goal. “Compounding, even at age 40, is still a powerful force you can take advantage of,” Nadeau says. Instead of worrying over your late start, focus instead on making the most of the remaining decades you have left to invest.

Rules for starting retirement savings at 40:

— Get focused first.

— Keep risk in perspective.

— Choose the right asset location.

— Remember that consistency counts.

— Watch out for common investment mistakes.

— Be realistic and prioritize.

— Figure out what works for you.

— Don’t get discouraged.