A late start on retirement saving

Question: I'm 42 and would like to start investing for retirement through my retirement savings plan at work, which offers an employer match. What’s the best strategy at my age? -Missy, Atlanta, Georgia

Answer: So you want to make sure you’re investing appropriately in your retirement savings plan. Wise decision. You’ll have a much better shot at a secure retirement if you follow an actual investing strategy as opposed to just going by instinct or guesswork, particularly when you’re dealing with a tumultuous market like today’s.

But as retirement planning isn’t just about investing. In fact, I’d say the most critical element of preparing for retirement is saving, and that’s especially true when you’re getting a bit of a late start by beginning this process in your 40s.

Which means if you want to be serious about laying the groundwork for a comfortable and secure post-career life, you really need to focus on two things: figuring out how much you should be saving on a regular basis from this point on, and then deciding how to invest what you set aside so you have a reasonable shot at turning your savings into a nest egg that can support you through what can easily be 30 or more years of retirement.

How much should you be saving?

It’s impossible, of course, to pinpoint the exact amount you need to put away. There are just too many variables: the returns the markets will deliver, your eventual retirement age and how much income you’ll eventually need to maintain an acceptable retirement lifestyle, just to name a few. But it’s important that you at least arrive at a reasonable saving target to get started. Once you’re socking away bucks on a regular basis, you can always refine your savings regimen later on.

You can get a quick estimate of how much you should be putting away by going to our What You Need to Save Calculator. Since you say you’d like to “start” investing for retirement, I assume you’ve saved little or nothing so far. So don’t be surprised if the figure the calculator spits out is a little intimidating. For example, a 42-year-old making $50,000 a year starting from scratch would have to save about 18% of salary each year to retire by 65. By comparison, a 42-year-old earning fifty grand who already has two years’ worth of salary sitting in retirement accounts would need to save only about 10% a year.

Keep in mind, though, that such estimates can vary quite a bit depending on how you invest, whether you’ll collect a pension and whether you delay retirement a few years. If you want to include these sorts of factors into your estimate, you can do so by using our Retirement Planner tool.

At this point, though, I wouldn’t get too hung up about falling short of a savings level if it’s dauntingly high. The important thing is that you come as close to the target as you can for now. You can always bump up your savings rate gradually over the years.

Your investing strategy

When you’re in your 40’s, you’ve probably got a good 20 years or so before you’re ready to leave the workforce, plus your money will continue to be invested throughout retirement. Clearly, we’re talking a long investing time horizon. There’s no question that someone your age should be shooting primarily for long-term capital growth.

So even though the financial press is relentlessly focused on the market’s short-term ups and downs (mostly downs this year), you don’t want to be a partner in that obsession. You want to focus on a larger goal - namely, growing your nest egg as much as possible over the course of your career.

That means keeping the bulk of your retirement accounts invested in stocks or stock funds and devoting a relatively small portion to bonds. The stocks can generate the long-term growth potential you need to assure that the purchasing power of your savings stash will keep well ahead of inflation, while the bonds can provide some steadying income and bit of ballast in choppy markets.

There’s no single stocks-bonds blend that’s right for every Fortysomething (or for everyone of any age, for that matter). But investing roughly 85% of your retirement account in stock funds and 15% or so in bonds should give you reasonable long-term growth with a bit of downside protection. As you get older - and preserving capital becomes a bigger concern - you can gradually shift more of your money to bonds.

You can create this sort of portfolio yourself by mixing and matching individual stock and bond funds from your 401(k)’s investment menu. Index funds in particular make wonderful building blocks for a well-balanced portfolio. So if your plan offers them - as most do these days - you might want to make them core holdings.

But if you’re not sure you want to do this on your own, you likely have other options. For example, more and more 401(k) plans are offering target-date funds. You just choose a fund with a date that corresponds to the year you plan to retire (say, 2030 or 2035 in your case), and you get a portfolio with a mix of stocks and bonds that’s appropriate for your age - and stays that way by increasing the fund’s bond stake as your retirement date nears.

Managed accounts are also becoming more popular within 401(k)s. With this option, you turn over the investing reins to an investment firm like Financial Engines, Ibbotson or Guided Choice, which creates a portfolio for you and manages it on an ongoing basis. Naturally, this service isn’t free, but some plans subsidize the cost, which can make the fees of a managed account comparable to those of a target-date fund.

One final note: once you’ve got your savings regimen underway and your portfolio up and running, it’s a good idea to rev up our Retirement Planner or a comparable tool every year or so to make sure you’re still on track. If you’re not making as much progress as you would like, you can see how different adjustments - saving more, investing differently, postponing retirement - can boost your chances of achieving a secure retirement.

For now, though, your task is clear. Save as if your retirement depends on it. (It does.) And invest for long-term growth along the lines I’ve suggested. The sooner you start, the better your retirement prospects will be.