At some point or another, you’ve probably asked yourself, “how much money should I have saved by 40?”
It’s a valid question that can be daunting to think about. The good news is you’re probably already saving money for retirement. The bad news is, you might not be saving enough money to retire when you want.
There are different ways to save money for retirement. The sooner, the better—so that it can start adding up. And that’s exactly what an increasing number of people in their 20s and 30s have been doing.
A Bank of America report found that almost one in four millennials (ages 24-41) have $100,000 or more saved as of winter 2020—a nearly 17% increase compared to that same report in 2015. The rising numbers are promising, but are these savings even enough? We’ll dig deeper into the numbers.
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, many financial advisors recommend having two to three times your annual salary saved in retirement money.
In your 50s, conventional wisdom holds that you should have six times your annual salary in your retirement savings by the end of the decade.
How Can I Get My Retirement Money On Track?
If you feel you don’t have enough money saved yet, 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 the obligations tied to your money.
You might be saving money 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 money goals and create a budget. Tracking your income and spending can help you figure out how much money you need to save for each goal and what kind of investments or savings make sense to achieve your goals.
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. With SoFi Relay you can track all of your money in one place, plus get credit score monitoring, spending breakdowns, financial insights, and more.
A key priority to think over is 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 money fund yet, consider putting that at the top of your priority list. You could plan to have three to six months’ worth of expenses saved.
Once you have high-interest debt paid off and an emergency money saved, you can allot a larger portion of your funds to save for retirement and other money goals. If you’re playing catch-up with your retirement money, try contributing any financial windfalls toward your retirement savings.
Saving and Investing Money by 40
If you already have a 401(k), there are a number of strategies to max out your 401(k) that are worth looking into. For example, it might make sense to contribute at least enough to qualify for any employer matching your company offers. Why lose out on the “free” money that your employer is willing to contribute to your retirement savings?
Try setting monthly or weekly savings targets to help you stay on track for retirement. You can even set up automatic transfers or deposits, so you don’t have to think about it.
As you’re rethinking how much money you need to save for retirement, it also makes sense to look at your lifestyle goals. That includes figuring out when you might want to retire, what kind of lifestyle you want in retirement, and how much money you might have coming in during retirement.
Where to Save Money for Retirement
Next, you’ll also need to figure out which retirement plan is right for you. There are many ways to save for retirement, even beyond the popular employer-sponsored 401(k). Other options include a traditional IRA or a Roth IRA (to see how much you can contribute to a Roth IRA, check out our Roth Contribution Calculator).
Some people choose to put their retirement savings in more than one type of account. This is useful if you want to set aside more than the yearly contribution limits on 401(k) plans—whether because you’re a high-income earner, or you started saving later in life, or you’re trying to achieve financial independence at a younger age. In that case, it might make sense to leverage a Traditional IRA, Roth IRA, or after-tax account to save beyond the 401(k) limits.
Investing in a Roth IRA now, with post-tax dollars, can also be useful if you want to withdraw money in retirement without paying taxes on the money. In contrast, 401(k) contributions are tax-deferred, meaning you will be taxed on funds you withdraw in retirement. That said, there are income limits on Roth IRAs, so this might not be an option depending on your salary.
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After-tax accounts can be appealing to individuals who plan to achieve financial independence at a younger age and retire early. Unlike qualified plans, which place penalties on withdrawing funds before a certain age, an after-tax account is a pool of money that you can withdraw from without having to worry about penalties if you access the account before age 59 ½.
While there are conventional rules of thumb as to how much money you should have saved by 40, the truth is everyone’s path to a comfortable retirement looks different. One piece of advice is universal, however: The sooner you start saving for retirement, the better your chances of being in a financially desirable position later in life.
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