Retirement Series: You Just Turned 40, It's Showtime!

Summary

• You are 40 and haven't saved for retirement. Though there is no need to despair, it's time for serious action.
• We discuss our hypothetical couple – John and Lisa – who just turned 40 with little or no savings, and how they face the retirement savings challenge.
• We also provide some ideas on how to structure DGI and income portfolios to provide long-term growth and income.

When you turn 40 years old, it’s a major milestone in life. You are mature, stable and mostly well-settled in your professional career. You may be too busy at this stage to think of retirement which may seem distant (20-25 years away). However, this is absolutely the right time to be thinking about retirement planning, if you haven’t done already. You cannot afford to delay it any further, without limiting your future options.

Last week, we published an article for folks who are already 50 years old and have not saved much. We talked about how to start with no savings but still accumulate a reasonable amount of capital by the time they get to retirement age. Please note that we said “reasonable” and not “comfortable.” To have a comfortable retirement, you need to start retirement savings in your 30s but no later than early 40s. We firmly believe and stressed in our earlier article that it is always better to start saving and investing for retirement early and not wait until 50. Earlier you start saving, more flexibility you will have, and your savings can grow and compound longer, thus resulting in much higher net worth. We also presented a table comparing two friends (Mark and Ted) saving the same amount every month. However, Mark started early on while Ted waited another 10 years. Mark who started 10 years before Ted, accumulated 2.5 times more capital than what Ted could accumulate.

This article will focus on folks who have reached 40 years of age but do not have much savings to show for. We cannot emphasize enough how much easier it would be to reach their goals if they start now with the seriousness that this deserves rather than wait another 5-10 years. If you are one such person, you should not delay this issue any further and should start having a serious plan for retirement savings.

You Are 40 With No Retirement Savings, Now What?

As in the previous article, we will take help from our hypothetical couple – John and Lisa - in order to illustrate our point.

We will assume that both John and Lisa recently turned 40 and had saved nothing for retirement. The only savings they have is some emergency cash of $25,000. They decide to write down a retirement plan. Their combined annual income is $100,000. Since they are still in the prime working age group, they assume that their combined income would grow at 3% annually until they are 55. They are not too sure what happens after that so they would assume zero growth after 55. Here are some of the decisions they take:

They will contribute 10% of their annual salary into their 401Ks. Luckily, their employers match the contributions to the extent of 60% of first 6%. They also decide to open their individual ROTH IRA accounts and contribute $5,000 each annually.

The above decisions will mean that they will need to change their lifestyle a little bit and sacrifice on certain splurges. Even though they will save some money in taxes by contributing to 401K since those contributions are before tax (or tax-deferred), they will still need to cut down their monthly spending budget by at least $1,500. They have not been saving much so far, so this will be hard in the beginning, but they are confident to get used to the new lifestyle. This is how they plan a new budget with a targeted savings of $1,570 per month. They know they may fall short a little bit, but the goal is within sight.

Budget item	Current Spending	New Budget	Savings Per month
To pack lunch instead of eating out lunch every day (for two)	$500	$180	$320
To buy a used car (or small SUV) instead of leasing/buying a new full-size truck, including gas savings.	$600	$300	$300
No more expensive coffee/ lattes	$200	$50	$150
To move to a smaller house (mortgage + property tax + utilities)	$2,000	$1,500	$500
Discretionary spending	$1000	$700	$300
TOTAL			$1,570

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Once the goals have been defined, savings will start flowing. It is actually addictive. You want to save more and more. Who knows, they might exceed their target and save even more.

They have 22 years until they get to 62. If they do decide to work until 65, they have full 25 years for their money to accumulate. They consider their retirement savings as long term since they should not need to tap these savings for a long time. Outside their 401K accounts, they decide to invest most of their money in DGI Stocks, as well as some income-producing REITs, CEFs and MLPs. They assume that they will get a minimum of 8% annual return on their savings. It is not to say that they would get 8% fixed every year, after all, it is not a fixed deposit. Some years they will get high returns say greater than 15%, but some other years they may see negative returns. But in a nutshell, on an average, they would aim for 8% cumulative annualized returns.

401K Accounts:

Assuming John and Lisa’s company-sponsored 401Ks provide a few limited funds, they could follow the following investment options:

They could select some target funds, choosing a target date which is 25-30 years away. The better option would be to select as per the following model:

• 30% in S&P 500 Fund,
• 20% in Mid and Small cap fund,
• 25% in International fund (20% developed, 5% emerging),
• 10% in REIT fund,
• 15% in Bonds.

ROTH-IRA Accounts:

Lisa’s ROTH:

Lisa decides that she will invest mostly in conservative, large-cap, blue-chip and dividend-paying companies. She selects 20 stocks from various sectors/industry segments.

Author’s Note: The same set of stocks was shown in our previous article. However, dividend yields have changed slightly since then.

DGI Portfolio of 20 Stocks:

List of Symbols: (T), (VZ), (MA), (AFL), (XOM), (VLO), (MO), (UL), (PEP), (HD), (O), (MMM), (LMT), (AAPL), (MSFT), (CVS), (PFE), (AMGN), (JNJ), (ED).

John’s ROTH Account:

Since Lisa chose a conservative set of DGI stocks, John decides that he would invest 75% of the portfolio in a set of high-income-producing securities like REITs, CEFs and MLPs. All of the income or dividends will be reinvested. He believes that the high income reinvested regularly will have a compounding effect and will be able to achieve 10% overall returns. In addition, he will invest the 25% of the portfolio-value in high-growth but relatively safe large-cap stocks.

John’s High Income Portfolio: (75% of ROTH portfolio)

Security Type	Symbol	Name	Yield (04/04/2018)
BDCs/mREIT
	ARCC	Ares Capital Corporation (ARCC)	9.50%
	MAIN	Main Street Capital Corporation (MAIN)	6.12%
	NLY	Annaly Capital Management (NLY)	11.48%
	GBDC	Golub Capital BDC (GBDC)	7.12%
	NRZ	New Residential Investment (NRZ)	12.26%
REIT
	O	Realty Income Corp (O)	5.28%
	OHI	Omega Healthcare Investors (OHI)	9.91%
	STAG	STAG Industrial (STAG)	6.01%
	STOR	STORE Capital Corporation (STOR)	5.06%
	VTR	Ventas, Inc. (VTR)	6.39%
CEFs
	RFI	Cohen & Steers Tot Ret Realty (RFI)	7.88%
	UTF	Cohen & Steers Infrastructure (UTF)	8.69%
	NMZ	Nuveen Muni High Inc Opp (NMZ)	5.76%
	KYN	Kayne Anderson MLP (KYN)	10.79%
	HQH	Tekla Healthcare Investors (HQH)	8.97%
	PCI	PIMCO Dynamic Credit Income (PCI)	8.46%
	JPC	Nuveen Pref & Income Fund (JPC)	7.80%
	STK	Columbia Seligman Premium Tech (STK)	8.42%
TOTAL/AVERAGE (As on 04/04/2018)			8.11%

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John’s High-Growth Portfolio: (25% of ROTH)

This is one portfolio that John will need to monitor regularly. He will diversify this 25% capital in at least 5-7 names to start with but will add a couple more every year as the new money becomes available. John knows that not every company will be a winner but the underlying principle is that some companies will be long-time winners and provide the most returns even covering for some losers. In this portfolio, John expects 25-30% of the companies to perform extremely well, possibly multi-baggers, 50% to be average performers and the rest to be laggards.

Symbol	Name
AMZN	Amazon.com Inc. (AMZN)
GOOGL	Alphabet Inc. (GOOGL)
MA	Mastercard Inc. (MA)
AAPL	Apple, Inc. (AAPL)
AMGN	Amgen Inc. (AMGN)
CELG	Celgene Corporation (CELG)
HD	The Home Depot (HD)

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Growth Of Savings Over 22 Years (Or 25 Years):

	Retire at 62	Retire at 65
401K Accounts	1,010,912	1,345,583
Lisa’s ROTH Account	299,466	394,772
John’s ROTH Account	392715	540909
TOTAL	1,703,093	2,281,264

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This is how their savings grow over the years:

Conclusion:

As in our previous article, we have tried to address the challenge of saving enough for retirement for a specific age group. Even if you have saved almost nothing until 40, this is the right time to make a firm plan and treat it with the seriousness that it deserves.

Obviously, it goes without saying that more you delay, fewer options you will be left with. In case of our hypothetical couple – even though they had very little until the age of 40, but with prudent planning and some small adjustments and sacrifices in their lifestyle, they would be able to have very sizable savings by the time they are ready to retire in their sixties.

Disclaimer: The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Please always do further research and do your own due diligence before making any investments. Every effort has been made to present the data/information accurately. However, the author does not claim 100% accuracy. The stock portfolio presented here is a model portfolio for demonstration purposes. However, the author holds many of the same stocks in his personal portfolio.

Author's Note: The Passive DGI Core portfolio is published as free-content. Other portfolios such as 8% Income CEF portfolio, 6% Income Risk-Adjusted portfolio, 401(k)-IRA-Conservative portfolio, Sector-Rotation ETF portfolio, and High-Growth BTF portfolio are part of our SA Marketplace service High Income DIY Portfolios. For more details or a two-week free trial, please see the top of the article just below our logo.

Analyst’s Disclosure: I am/we are long ABT, ABBV, JNJ, PFE, NVS, NVO, CL, CLX, GIS, UL, NSRGY, PG, MON, ADM, MO, PM, KO, DEO, MCD, WMT, WBA, CVS, LOW, CSCO, MSFT, INTC, T, VZ, VTR, CVX, XOM, VLO, HCP, O, OHI, NNN, STAG, STOR, WPC, MAIN, NLY, PCI, PDI, PFF, RFI, RNP, UTF, EVT, FFC, KYN, NMZ, NBB, HQH, JPC, JRI, TLT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.