Financial Planner: Here's How Much You Should Save for Retirement by 40
By age 40, many Americans are entering their peak earning years and are roughly halfway through their working lives. That's why financial professionals often view this milestone as an important checkpoint for retirement planning. While no savings benchmark works for everyone, one common rule of thumb can help gauge whether you're generally on track.
Here's how much you should have saved for retirement by age 40 — and what to do if you're not there.
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How Much Should You Have Saved for Retirement by Age 40?
One retirement savings rule of thumb states that you should have three times your income saved by age 40. This means that if you earn $50,000 a year, you should have $150,000 in savings and if you are earning $100,000 a year, you should have around $300,000 in retirement savings.
"This is not a perfect benchmark because everyone's retirement goals are different, but it's a reasonable checkpoint to determine whether you're generally on track," said Stephen Vecchione, certified financial planner and managing partner at Statera Advisors.
Why Missing the Age-40 Savings Benchmark Isn't a Disaster
If you're not where you want to be in terms of retirement savings, you shouldn't panic.
"Age 40 shouldn't be viewed as a pass/fail test," Vecchione said. "It's a progress report."
If you're ahead, stay disciplined and keep doing what’s working.
"However, if you're behind, you still have one of the greatest financial assets available: time," Vecchione said. "The decisions you make over the next 20 to 25 years will have a far greater impact on your retirement than the number currently sitting in your account. A lot can change in 20 to 25 years."
3 Ways To Catch Up on Retirement Savings After 40
If you feel you are behind in retirement savings, Vecchione recommends taking the following steps:
1. Boost Your Savings Rate Whenever You Get a Raise
"Increase your savings rate before you increase your lifestyle," Vecchione said. "Typically, people at age 40 are entering their peak earning years. If you receive a raise or bonus, redirect that increase towards savings."
2. Maximize Contributions to Your Tax-Advantaged Retirement Accounts
This includes taking full advantage of company matches and contributing to an IRA in addition to your 401(k).
"Tax-efficient savings can add up over the long term," Vecchione said.
3. Don’t Become Too Conservative Too Early
"Many people who realize they're behind become afraid of investing and move to cash," Vecchione said. "Ironically, they often need long-term growth more than ever. While your investment mix should match your risk tolerance and time horizon, someone with 20 to 30 years until retirement generally still needs exposure to equities to help outpace inflation. They also should check their target-date funds. Often it can make sense to have the target-date fund five or 10 years longer than your anticipated retirement date to prevent becoming conservative too soon."
Falling short of the three-times benchmark at age 40 doesn't mean you've missed your retirement goals. Consistently increasing contributions, taking advantage of tax-advantaged accounts and maintaining a long-term investment strategy can still make a significant difference over the next two decades.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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