We all know how important it is to save for retirement, but how do we know if we are on track to meet our savings goals? We can use these rules of thumb to check our progress and adjust if needed.
40 is a Milestone
Turning forty is a significant milestone in many ways. At this age, we start to take stock of our lives, careers, health, and finances. Forty is a turning point. We are certainly not old at forty, but we are not necessarily young. If we have been a but careless with our finances, there is still plenty of time to turn things around. When we hit forty, we have about the same number of working years ahead of us as we have behind us.
Getting Your Number
There are plenty of benchmarks in personal finance and determining how much money you should have saved by 40 is an important one. By the time you hit the big four-o, the rule of thumb tells us that you should have three times your gross income saved.
In 2020, the median household income is $68,400. Multiply that by three, and you come to $205,200. In Knoxville, the median is $33,494. Multiplied by three, and you get $100,482. Nationally, the median amount people have saved by age forty is woefully short of the goal. On average, American have just $63,000 stashed away.
When using this standard, the amount you should have saved by forty will vary according to your income, the age at which you’d like to retire, and the kind of lifestyle you want to have during retirement.
If you plan to retire at sixty and sail around the world, your number would look very different from someone who intends to work until seventy and sell their home in LA for a condo in Florida.
Where do you stand? Are you on track? If not, what can you do to get caught up?
The Bad News
When you are forty, you may have a lot of expenses and more coming up. You may have a mortgage, children, and all the expenses they incur, a car or two, and college tuition looming on the horizon.
Your forties could be your most expensive decade of life.
The Good News
The good news is that you may be entering your peak earning years. Women reach their earning peak at 44 and men at 55. If one parent has set aside their career to stay at home to take care of children, the children might be reaching the age where you can re-enter the workforce to bring in more income.
It is important to see how you can get caught up.
Depending on how far behind you are, you may have to make significant cuts to your expenses. Obviously, you can look for small savings like cutting back the number of times you go out to dinner each month. If you have very little saved for retirement, you will have to make more impactful changes like downsizing your home, trading in expensive cars, or taking your children out of private school.
Fully Fund Your 401(k)
If you have not been maxing out your 401(k), there is no time to waste. Try to start doing it immediately and continue until you retire. The maximum contribution limits for 2021 are identical to the current 2020 limits. These are $19,500 per year for those under age 50 and an additional $6,500 per year for those over age 50.
Think it is too late to make a significant difference? If you began maxing out an empty 401(k) at age 40, you would have $1,319,691 by the time you retired at age 65. This would happen if you assumed a conservative 7% annual return and no employer contribution. Therefore, it is not too late.
Contribute to a Roth IRA
Open and max out a Roth IRA if you are eligible. For 2020, the limit is $6,000 (with an extra $1,000 for those aged 50 and older). There are income limits for a Roth IRA. If you are single and your modified adjusted gross income (MAGI) above $139,000, you cannot contribute to a Roth IRA. For married couples filing jointly, a MAGI at or above $206,000 renders you ineligible to contribute.
Reconsider Footing the Bill for College
I know you want to provide for your children, but if paying for their college education means taking away from your retirement savings, you must reconsider.
Your kids have more time to pay off student loan debt than you have to save for retirement. They might not thank you now, but they will thank you when they are not forced to provide for you in your later years.
It’s Not Too Late
If you are forty and do not have enough saved for retirement, don’t panic. It is not too late, but you should get started. It is almost never too late to save for retirement, but there will come a point where the rubber meets the road. You want to be comfortable in these years.
If you need help playing catch up or any other aspect of your retirement planning, Paradigm Wealth Partners is here for you.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Investing involves risk including loss of principal.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
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