Reaching 40 is a significant milestone, and while life experiences vary greatly among peers, a common concern arises: “How Much Money Should I Have Saved By 40 for retirement?” Financial experts offer guidance on retirement savings, balancing other financial goals, and maximizing contributions to retirement accounts.
According to Fidelity Investments, by age 30, you should aim to have saved your annual salary for retirement. By 40, this target increases to three times your annual salary.
Based on 2023 data from the U.S. Census Bureau, the median annual personal income is approximately $42,000, while the median household income is closer to $80,000. Therefore, retirement savings goals for those in their 40s should range between $126,000 and $240,000.
Lauryn Williams, a certified financial planner and author, emphasizes prioritizing retirement savings even amidst competing financial priorities. She advises focusing on retirement savings rather than solely on funding children’s education.
Retirement Savings of Most Americans by 40
Data suggests that Americans are increasingly prioritizing retirement savings.
The Federal Reserve’s 2022 Survey of Consumer Finances indicates that the mean net worth for U.S. households exceeds one million dollars. Furthermore, Empower’s data on median retirement savings in 401(k) accounts for the 40-50 age group shows balances topping $230,000.
Brent Weiss, CFP® ChFC®, and Head of Financial Wellness for Facet, suggests focusing on achieving financial independence by defining the life you desire and aligning spending accordingly.
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Alt text: Budgeting strategies for individuals in their 40s to improve their personal finance.
Prioritizing Savings at 40: A Step-by-Step Guide
If you find yourself behind on your retirement savings goals, several steps can help you maximize your income and contribute more to your retirement nest egg.
Step 1: Initiate Retirement Planning
If you haven’t already, creating a retirement plan is crucial. Envision your ideal retirement – travel, part-time work, or other pursuits. Consulting a financial professional can help outline specific details, such as ensuring sufficient funds to cover living expenses.
Peter Lazaroff, CFA and CFP® and host of the Long Term Investor podcast, notes that retirement planning evolves over time. Your retirement aspirations in your 30s may differ significantly from those in your 50s.
Step 2: Focus on Earning Potential
While peak earning years typically occur in your late 40s to early 50s, proactively seeking a higher salary is beneficial. Research the median salary for your profession and take steps to increase your earning potential, such as acquiring certifications, exploring opportunities at higher-paying companies, or negotiating a raise.
Recognize the value of employer 401(k) matches. Fidelity Investments data reveals that employers contribute on average up to 5% of employee retirement funds for those aged 40-49.
Step 3: Establish an Emergency Fund
If you haven’t already, creating an emergency fund is essential. Despite increased financial stability at 40, unexpected life events can hinder your ability to save for retirement.
Financial experts generally recommend maintaining three to six months’ worth of living expenses in an emergency fund. For instance, with monthly expenses of $3,000, aim for an emergency fund of $9,000 to $18,000.
Keep your emergency fund accessible but separate from regular spending money, such as in a high-yield savings account.
Step 4: Prioritize Retirement Savings
Whether maximizing pre-tax retirement contributions, investing in a Roth IRA, or utilizing money market or online savings accounts, prioritizing saving is crucial.
Williams advises aggressive saving in your 40s, as staying on track is easier than making significant adjustments later.
Step 5: Maximize Health Savings Account (HSA) Tax Benefits
Health savings accounts (HSAs) offer tax advantages and are beneficial if you anticipate significant healthcare expenses. Pre-tax contributions can be used for doctor visits, prescriptions, and related costs.
Over the long term, HSAs can contribute to retirement savings goals. Investing HSA funds allows them to grow and earn interest. Withdrawals for healthcare expenses in retirement are tax-free.
Step 6: Address Student Loan Debt
If student loan payments are straining your finances, consider prioritizing paying them off, especially if the interest rates are high.
Tony Steuer, author, podcaster, and financial wellness advocate, advises that paying off high-interest debt can be more beneficial than investing in retirement if the return on investment is lower than the interest rate.
Step 7: Don’t Sacrifice Retirement for College Expenses
Balancing retirement savings with college funds for children can be challenging. Financial experts recommend prioritizing your own retirement savings.
Weiss likens this to the airplane oxygen mask analogy, emphasizing the importance of securing your own financial health before focusing on college expenses.
Step 8: Consider a Financial Advisor
Lazaroff suggests that engaging with a financial advisor can be beneficial in your 40s to optimize retirement planning.
Financial advisors can provide insights into investment opportunities and leverage compound interest, potentially leading to improved returns. Choose an advisor who charges a flat fee rather than a percentage of assets.
Saving by 40 FAQs
Should I Maximize IRA Contributions in My 40s?
Maximizing pre-retirement income contributions is advisable, especially in your 40s and 50s. While catch-up contributions are possible in your 50s, there’s less time for compound interest to work.
Williams recommends focusing on meeting baseline needs, paying off consumer debt, establishing an emergency fund, and then prioritizing retirement savings.
What’s the Most Important Financial Goal in My 40s?
As retirement savings accumulate, consider the role of social security benefits and how to access retirement income. Diversifying investment vehicles can be beneficial.
Weiss advises building different “buckets” with Roth IRAs, HSAs, and other options to provide flexibility in retirement.
