Preparing for Retirement: 5 Overlooked Financial Steps to Take in Your 30s and

Your 30s and 40s are arguably the best time of your life—still young and energetic, but a little wiser. This is also an exciting, sometimes daunting period of life—with career growth, personal growth, and raising a family to contend with.

Amidst all of this, retirement might seem like an abstract, far-away thing that isn’t anywhere near the top of the list of priorities. However, your 30s and 40s are crucial when it comes to achieving financial stability for your post-career life.

Retirement planning isn’t a simple, monolithic task—it’s multifaceted, complex, and requires balancing competing interests. However, there’s no going around it—if you want to enjoy life after your early 70s, you need to start preparing for retirement as soon as possible, if you haven’t already begun. One in five Americans expect that they won’t be able to retire at all.

Doing this the right way consists of plenty of small steps and decisions, along with leveraging a couple of slightly more complex mechanisms. We’ve boiled things down to the 5 most important and overlooked financial steps that you can take in your 30s and 40s to ensure a successful retirement.

Let’s get started, one step at a time.

1. Understanding and Maximizing Employer Retirement Plans

Right off the bat, employer retirement plans are your most important and powerful tool when it comes to saving for retirement.

Employer retirement plans work like this—a portion of your pre-tax salary is deducted from your paycheck, put into a separate account (most of which have tax benefits), and then accrues gains from the investments made inside the retirement account.

There are several types of employer retirement plans—however, for the purpose of this guide, we’ll focus on the much more common 401(k) plan, as it applies to a large percentage of our readership. We’ll leave the topic of the 403b retirement plan, which is designed for employees of nonprofit or tax-exempt organizations, for another day.

To recap—these plans allow investors like yourself to set aside a part of today’s income to ensure a steady flow of funds later. So, how does that come to fruition?

First, we have to deal with the most underappreciated and underutilized part of these plans—and that is employee matching. A lot of employers in the US will match your contributions to these plans, up to a certain percentage—effectively incentivizing you to save for retirement by giving you free money.

So, the first practical consideration here is this: Find out if your employee matches 401(k) contributions, and maximize this benefit by taking full advantage of it.

The second piece of the puzzle is compound interest. Think of the term like this—compound interest is the interest you earn on interest. To put it in slightly more grounded terms, the gains you secure from your investments will be reinvested to generate further profits—this allows the size of your account to snowball over the long term, and is a key reason why you should start investing for retirement as soon as possible.

Next on the list, but no less important, are individual retirement accounts, more commonly referred to as IRAs. IRAs operate on a very similar basis to 401(k) plans, but they aren’t employee-sponsored. With IRAs, you’re on your own, and the contribution limits are much lower—but you have a lot more flexibility in terms of what you can invest in.

Both 401(k)s and IRAs also come in another version—Roth 401(k)’s and Roth IRAs. Basically, the Roth versions are funded with after-tax dollars—however, in return for that, your withdrawals in retirement (after the age of 59 and a half) are tax-free.

The pesky thing about Roth IRAs is that they have income limits—anyone making more than $153,000 on an annual basis cannot contribute to such an account. If this applies to you, there are some backdoor Roth IRA considerations that you should keep in mind.

2. Diversifying Your Investment Portfolio

Diversification is a method of managing risk when investing. In fact, it is the method of managing risk—the bread and butter of it, if you will.

The idea is pretty straightforward: Allocating your investments across a variety of financial instruments, industries, sectors, and countries allows you to experience smaller losses should one of them experience a catastrophic downturn.

At the same time, you are exposing yourself to a lot of potential upside. Should any of the industries, sectors, etcetera that you’ve invested in see great returns, it will be reflected in your portfolio. Don’t put all of your eggs in one basket, but in investing terms.

The crucial thing to remember is that proper diversification is achieved by carefully balancing your allocations between investments that are not correlated. In plain terms, you should invest in areas that react differently to a single set of conditions.

It’s important to note that diversification does not prevent losses—it…