As if you didn’t already have enough on your mind as you hit your 40th circle around the sun, you’ve also now reached the point where you’re around closer to retirement. Gulp. Naturally, this leads to a cascade of inner questioning. What are you doing with your life? Are you where you’re supposed to be? How much savings should you have by 40? And what will you do if you don’t have enough?
Let’s hit pause on the panic spiral for a hot minute. For starters, you certainly aren’t the only one who probably feels ill-prepared at this milestone stage. In fact, according to a study by Northwestern Mutual, one in three Americans surveyed have less than $5,000 in retirement savings.
Not to mention, there’s quite a bit of conflicting information out there — which, to be honest, makes sense. There simply isn’t a one-size-fits-all formula that could possibly take into account each person’s unique set of circumstances. To drop a blanket number and assume that everyone can reach that benchmark smacks of privilege.
So, what we’re going to do is give you a few different perspectives offered by financial experts. But the most important thing for you to remember is that you have to do what’s right for your situation. You can always readjust if things change.
How much should you have in savings by 40?
To be where you need to be by retirement, Fidelity Investments recommends saving (and, ideally, investing) 15 percent of your annual income. If you dream of living the high life in retirement, that figure should go up. If you’re content with a more low-key retirement, it can go down. Basically, though, Fidelity says you should have around 10 times your final salary saved by retirement age. You can crunch your numbers to find out exactly where that would put you at 40.
Although T. Rowe Price also suggests socking away 15 percent of your annual income, this investment firm leaves a little more room in their retirement figure. Basically, they expect people to slowly build up to saving 15 percent, starting around 6 percent in their 20s. This would essentially amount to a benchmark of saving around two times your annual salary by 40.
According to Money magazine, a 40-year-old couple with a combined household income of around $100,000 should plan on amassing a savings of 2.6 times their salary.
And Financial Samurai boldly states that you should have saved six times your annual expenses by the time you’re 40. So, if you spend $50,000 per year, you should be strolling into your fourth decade with a nest egg of around $300,000.
Is there an average 401(k) balance by age?
Every individual’s financial standing is different just like every career trajectory is different. However, there are some figures and statistics that might offer you a snapshot of how much others your age have saved by a certain age. Per Investopedia, Fidelity Investments has released some stats that might shed more light on the issue.
Between the ages of 20–29, the average 401(k) balance is $10,500. Between the ages of age 30–39, the average 401(k) balance is $38,400. Between the ages of 40–49, the average 401(k) balance is $93,400. Between the ages of 50–59, the average 401(k) balance is $160,000. Between the ages of 60–69, the average 401(k) balance is $182,100. And between the ages of 70–79 the average 401(k) balance is $171,400.
Is there a more doable benchmark to shoot for first?
Listen, if you aren’t anywhere near these numbers yet, come sit by me. I’ll be your sister in solidarity because I’m right there with you. There are things we can do to turn this train around, though.
Not surprisingly, one of them is to set a budget and include diverting a little money every month into our retirement fund, 401(k), or both. Train yourself to get better at this by practicing the 70-20-10 rule of spending — 70 percent of your monthly income should go to living expenses, 20 percent should go to the payment of debt (if you have any), and the remaining 10 percent should go to savings. You can then adjust as you see fit to save more when possible.
You can also start with smaller goals. Do you have a rainy day fund? Make that your first target, as it typically entails having around $2,500 set aside for small-scale financial surprises. Then work your way up to an emergency fund, which ideally has three to six months’ worth of expenses saved.
And, again, don’t beat yourself up if you’re just starting to take savings seriously, or if your budget doesn’t allow much. Even if you can only put away $40 per month at first, it’s better than nothing.
While experts recommend having nearly three times your salary saved up by the time you hit 40, that number goes up exponentially by the time you hit your 50s, at which point experts recommend having six times your salary saved up. By the time you hit 60, that jumps higher to eight times your salary. These are important figures to discuss with your financial planner or retirement advisor.
If this seems impossible…
Let’s be real. Those one in three Americans with less than $5,000 probably aren’t working jobs where they make $100,000 a year. They may not even make $50,000 a year. (Teachers, for instance.) If you’re living paycheck to paycheck, the idea of saving even 10 percent of your monthly income might seem laughable, at best. That 10 percent is what pays for gas to get you to and from work, right?
Yahoo Finance gets it and offered up some reassuring tips for those of us who know they’re going to retire with no savings. One of their biggest tips is to reduce your living expenses. This can be anything from cutting the cable cord and downsizing your car to actually moving to a city with a lower cost of living. Another option: Pay off your debt. Retiring with a couple million bucks in the bank is easy for some people. But, don’t underestimate the simple freedom of retiring debt-free. If you don’t have credit card bills, a car payment or a mortgage, you’ve already cut down on how much money you’ll need each month.
Feeling better yet? Approaching 40 isn’t an easy thing to consider for anyone. Hopefully these tips make it seem a little less terrifying.
Poignant quotes about money
“If you would be wealthy, think of saving as well as getting.” —Benjamin Franklin
“Many folks think they aren’t good at earning money, when what they don’t know is how to use it.” —Frank A. Clark
“Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.” —Ayn Rand
“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.” —Robert Kiyosaki
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