The good news is you’re probably saving for retirement—even if retirement can seem a long way off right now. The bad news is you might not be saving enough.
There are different ways to save for retirement. The sooner, the better—so it can start adding up. And that’s exactly what people in their 20s and 30s have been doing.
Post-recession, young people are saving more than ever. A Bank of America survey found 16% of millennials now have $100,000 or more saved away. That’s double the amount of young people who had saved that much four years ago.
But, unfortunately that robust retirement savings isn’t universal. As of 2018, Americans between the ages of 40 and 49 had an average 401(k) balance of $103,500 .
As you get out of your 20s and 30s, you’re more established in your career and life goals. You’re probably starting to plan more for the future. If $103,500 isn’t enough, then how much is? How much retirement savings should you have at 40?
How Much Should I Have Saved by 40?
A general rule of thumb is to have the equivalent of your annual salary saved by the time you’re 30. By your 40s, most financial advisors recommend having two to three times your annual salary saved in retirement funds.
As you reach your 50s, you want to keep adding to that and should have six times your annual salary in your retirement savings at the end of the decade.
As your income increases and your other financial obligations are paid off, then you can put more aside for retirement.
When you start putting money aside for retirement, you’ll also want to figure out what type of retirement plan makes the most sense for you. There are a variety of accounts, including a 401(k) or IRA and each has different benefits to consider.
How Can I Get My Retirement Savings On Track?
If you don’t have that much saved, it’s never too late to get back on track. As you reach your 40s, it’s likely that your income increases, but so do your financial obligations.
You might be saving for your kids’ college; you probably have mortgage payments and existing debt; you may even be taking care of aging parents. It’s a lot of financial multi-tasking and you have to prioritize.
The key is to establish goals and create a budget. This can be made much easier by using SoFi Relay to know where you stand with your money, what you spend, and how to hit your financial goals. Then figure out how much you need to save for each goal and what kind of investments or savings make sense to achieve your goals.
A key priority to consider should be paying off any high-interest debt, including credit card debt. Be sure to make the payments on any existing loans to avoid any late fees or penalties for missed payments. It may be worth reviewing any loans you currently hold to see if you could potentially refinance to a lower interest rate.
If you don’t have an emergency fund yet, consider putting that at the top of your priority list. You should plan to have three to six months’ worth of expenses saved.
Once you have high-interest debt paid off and an emergency fund, you can allot a larger portion of your income to save for retirement and other goals. If you’re playing catch-up with your retirement savings, try contributing any financial windfalls toward your retirement savings.
If you have a 401(k), it might make sense to max out whatever matching contribution your employer offers. You don’t want to lose out on the money that your employer is willing to contribute to your retirement savings.
Try setting monthly or weekly targets to help you stay on track. You can even set up automatic transfers, so you don’t have to think about it.
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Saving and Investing by 40
Even if you are saving, you don’t want to just be stockpiling cash. It might feel safer, but it could be costing you over the long term. The inflation rate (2019) is 1.9% while the average savings account earns just 0.08% APY.
That could mean you’re technically losing purchasing power, because your return is lower than the inflation.
While there is no guarantee with the stock market, in the long run, investing your money might give you a better opportunity to grow your money when it comes to saving for retirement.
A key part of this is understanding the different types of retirement accounts and making a retirement savings plan.
That includes figuring out when you might want to retire, what kind of lifestyle you want in retirement, and how much income you might having coming in during retirement.
Beyond a 401(k), you might consider putting additional money aside in other types of accounts. There are a couple of common reasons why people should consider supplementing their 401(k) savings with other types of accounts.
First, there are contribution limits on 401(k) plans, so if you need or want to save more than the contribution limit, you will need to save somewhere else. This is especially common for high-income earners, workers who started saving later in life, or those trying to achieve financial independence at a younger age. Therefore, it might make sense to leverage a Traditional IRA, Roth IRA, or after-tax account to save beyond the 401(k) limits.
Second, many people contribute to their 401(k) plan by making pre-tax contributions. This means a tax break now but will lead to paying taxes when you take the money out. It might make sense to leverage a Roth IRA so you have a pool of money that you can withdraw from in retirement that you would not pay taxes on.
However, keep in mind that if you are a high earner, there are income limits on Roth IRAs, so after a certain threshold, you’ll no longer be able to contribute to a Roth IRA.
Third, the idea of achieving financial independence at younger ages is gaining traction. Qualified plans have restrictions on when you can withdraw money without paying a penalty. Therefore, it might make sense to leverage an after-tax account so you have a pool of money that you can withdraw from, without having to worry about penalties if you access the account before age 59 ½..
Getting Help Determining How Much You Should Have Saved for Retirement
How much retirement savings should you have at 40? How much should you be investing? It depends on what you plan to do with it, what your career goals are, and when you want to retire. Fortunately, you can open a Traditional IRA, Roth IRA, or after-tax account with SoFi Invest® to supplement your 401(k) savings.
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