Once you hit the big 4-0, the march to retirement becomes more real — and more urgent.
Unfortunately, most Americans don’t have a lot of cash saved for their golden years after about 20 years in the workforce. In fact, the average retirement account balance for Americans between ages 35 and 44 in 2019 was only $131,950, according to the Federal Reserve.
That’s why age 40 is an optimal time for a retirement checkup. It’s approximately halfway to retirement for a career professional who started work at age 22 and plans on retiring at age 62. Yet the so-called “miracle of compound interest,” in which invested money grows over time, isn’t as big of a factor for someone at age 40 compared to someone at age 20.
“Time has a diminished value the closer you get to retirement. $10,000 in a retirement account has more time to compound and grow at age 30 than at age 45,” says Gary Grewal, author of “Financial Fives.”
Consequently, the age 40 milepost is a great time to bear down on your goal for retirement savings and figure how you measure up against the average American. Here are seven points of focus for that retirement assessment, with each factoring in where you stand about halfway to retirement.
[Related:What Is the Average Retirement Savings Balance by Age?]
— Backdate your savings.
— Develop systems for saving and investing.
— Set your calculation.
— Use this formula.
— Take full advantage of a higher income.
— Watch out for lifestyle inflation.
— Take advantage of future catch-up contributions.
Backdate Your Savings
Retirement savers can start with a retirement goal at 65 and work their way backward to reach an ideal scenario at age 40.
According to Schwab’s 2022 Modern Wealth Survey, the average net worth it takes to be wealthy stood at $2.2 million in 2022. “What the Schwab study showed was that most of their survey respondents believed that a net worth of much higher was needed to be considered wealthy,” says Mark P. Eid, managing director of Virginia-based Acts Financial Advisors. “If we use that $2.2 million number as the target at age 65, one should have $321,239 in net worth by age 40.”
As the above Federal Reserve numbers show, Americans who turn 40 in 2023 aren’t quite there yet and need to pick up the pace.
Develop Systems for Saving and Investing
Creating good financial habits is like making other good habits.
“Clearly define the specific goal, make sure it is measurable, start small and make it routine,” Eid says. “Automatic withdrawals from a checking account into a savings account or brokerage account can make the process easier.”
[READ: 10 of the Best-Performing 401(k) Funds.]
Set Your Calculations
Here’s how a 40-year-old retirement saver can properly calculate their total retirement savings projection at age 40 with a presumable retirement date of 65.
“Start by reviewing your year-to-date expenses and identifying those you can realistically live without,” says Joe Camberato, chief executive officer at National Business Capital, a fintech lending marketplace. “Then add your necessary expenses, excluding entertainment, medical and miscellaneous costs.”
It’s also a good idea to research and explore insurance plans even though retirement is still a few years away. “This helps you create a budget that guides your savings leading up to retirement,” Camberato says.
Also, calculate your annual gross income, subtract your expenses and determine how much you can reasonably save each year until retirement.
“If your savings fall short of your goal, go back and review your expenses,” Camberato adds. “See if you can find additional income streams or explore more cost-effective insurance alternatives.”
Use This Formula
When projecting your total retirement savings at age 40, assess several key financial components accurately to come up with the optimal calculation.
“To project your total retirement savings at age 40, you need to focus on three main factors: the money you’ve saved so far, how much you plan to save every year until you retire and the estimated yearly growth of your investments,” says Andrew Latham, a certified financial planner and managing editor at financial services comparison platform SuperMoney.
While there are sophisticated retirement calculators out there to help with this, a basic formula for projection might look something like this:
Future savings = current savings with growth + yearly savings with growth.
In numbers: future savings = S x (1+R)^25 + C x 25.
“Here, ‘S’ is your current savings, ‘C’ is how much you save each year, and ‘R’ is the yearly growth rate (like 5% is 0.05),” Latham says. “Remember, this formula is a basic estimate. Real-life factors such as changing investment returns and inflation can affect the end amount.”
Take Full Advantage of a Higher Income
As you step into your 40s, several financial and personal factors come into sharper focus.
“For many people, the 40s bring about a peak in earnings; it’s the ideal time to channel a larger chunk of your salary into retirement accounts, especially if you’ve lagged in contributions during your younger years,” Latham says.
Outstanding debts such as mortgages play a significant role too.
“Constructing a roadmap to tackle these debts before retirement can pave the way for a smoother, more stress-free retirement phase,” he adds. “Other considerations might include planning for children’s higher education, potential medical expenses in later life and ensuring that investments are diversified to balance out risks.”
[Related:How to Retire on $500K]
Watch Out for Lifestyle Inflation
Lifestyle inflation can creep in as your salary grows. “It’s essential to maintain a budget and ensure that increased spending doesn’t outpace increased earnings,” says Taylor Kovar, CFP and CEO at Kovar Wealth Management in Lufkin, Texas.
Take these tips to the table, Kovar says, when you’re revitalizing your retirement plan at age 40:
— With a higher income, consider maximizing contributions to tax-advantaged retirement accounts.
— If you have a mortgage, understand its impact on your retirement savings. “Some choose to accelerate mortgage payments to free up more money for retirement later, while others prioritize investing,” Kovar notes.
— Paying off high-interest debts can provide a guaranteed “return” by saving on interest.
— If you have kids, balancing retirement savings with college savings can be a challenge. “Prioritize retirement but consider tax-advantaged education savings accounts,” he adds.
Take Advantage of Catch-Up Contributions When You Reach Age 50
When you reach 50, the IRS permits catch-up contributions to retirement accounts like 401(k)s and IRAs. Consider that a prime opportunity to significantly boost your savings as well as an opportunity to leverage some professional money management expertise for your entire retirement savings campaign.
“If you haven’t already, this might be the time to bring a financial advisor into the picture,” Latham says. “Their expertise can offer invaluable insights tailored to your specific financial landscape. Keeping up to date on the latest in tax laws and retirement policies is also crucial, as seemingly minor changes can dramatically reshape one’s saving strategy. Lastly, while it might be tempting, try to steer clear of hefty new debts, especially those riddled with high interest rates.
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How Much Money to Have Saved for Retirement by Age 40 originally appeared on usnews.com
Update 09/08/23: This story was published at an earlier date and has been updated with new information.
