Retirement Savings and the Magic Age of 40
A comfortable and secure retirement depends on your savings habits earlier in life. The general understanding when it comes to saving for retirement is that the earlier you start, the better. However, life goals often get in the way, like getting married, buying a house, and traveling. While accomplishing alternative financial goals is part of a happy life, it is necessary to ensure your financial strategy supports future plans and aging.
Savings Goals for Age 40
Are you on track with your retirement goals? There are different savings expectations depending on your current age. However, 40 often represents a significant milestone. Most financial experts recommend that people have a minimum of three times their current annual salary saved by the time they turn 40. Additionally, they recommend having three to six months' worth of basic monthly expenses saved in an emergency fund.
An emergency fund is a crucial financial objective because it can help protect your current and growing retirement fund. Having three to six months of expenses set aside means you are less likely to dip into a 401(k) or other retirement vehicles to overcome sudden or unexpected financial hardships. Another benefit of having an emergency fund, especially one stashed in a savings or different liquid account, is that you can earn interest on the investment.
Personal Circumstances Dictate Financial Goals
Everyone has different means and motives when it comes to finances. While an expert can offer a general rule of thumb, that rule is based on averages and is in no way a definitive measurement of where you need to be by the time you hit 40.
Obviously, if you can save three times your annual salary by the time you are 40, you are off to a great start, but there is no shame in not being near the goal. Most 40-year-olds do not meet the expert recommendation. In fact, on average, the retirement accounts of 35 to 40-year-olds have about $60,000, which for many is a little more than one year's salary.
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When do you want to retire? Most experts base their recommendations on people retiring when they are 67, but many are working into their 70s. If you plan on having a longer-than-average career, you can plan on saving less for retirement every year.
Alternatively, some people want to retire before the age of 67, meaning they will need to make greater sacrifices to ensure they have the money to survive an extended retirement. If you want to retire early, you will need more than three times your annual salary in a retirement account by age 40.
Regardless of where you are currently with your retirement savings, it is never too late to start. If you have an existing retirement account, make sure you are maximizing your contributions. Also, check if your employer matches 401(k) contributions.
When making contributions to an IRA or other account, try to keep the percentages the same throughout the life of the account, meaning if you get a raise, make sure you increase your contributions. Budgets can really help you stay on track with saving for retirement.
Do you have any savings advice for the 30 to 40-something crowd? Comment below.