How Much Should You Have Saved by 40?
[ad_1] The post How Much Should You Have Saved by 40? appeared first on Millennial Money. Approaching 40 years of age can be financially eye-opening. This is when all the life choices you made over the last two decades start catching up with you… for better or worse. So, how much should you have saved in your nest egg by 40? Keep reading to find out. Average Retirement Savings by Age 40 First of all, it’s important to remember that every situation is different. An acceptable savings strategy for one person may not necessarily be the best for another. That’s because drastic differences in people’s living expenses, family size, annual income, and future retirement benefits all directly impact your savings rate. With that said, always take your unique circumstances into account. Do you have a cushy pension plan you can rely on for income until you die? If so, you’re one of the lucky ones. Are you living in an expensive area where you’ll need to maintain a six-figure income to achieve a comfortable retirement? Then you better be saving aggressively. Either way, there are some benchmarks you can follow to stay on track. According to a Transamerica Institute study, the median retirement savings amount for people in their 40s is $63,000. For most people, $63,000 is much lower than the leading belief that you should have at least three times your annual salary saved up by age 40. This means that if you earn $70,000 each year, you’ll want to have at least $210,000 in retirement savings. A Look at the Numbers: Your Savings at 40 Next, let’s review the main expense categories you’re likely to see in retirement and how much you should have tucked away to cover each one. Emergency savings For starters, your emergency fund should have enough to cover at least six months’ worth of expenses. This is particularly important if you have a family. As you may already know firsthand, families are expensive, and the last thing a family wants to do is run low on cash. As the pandemic has taught us, this can easily happen if you lose your main source of income or face an unexpected financial hurdle. Having cash on hand also enables you to avoid debt, which is another key to financial freedom. For example, if you need to buy a car, and pay for it in cash, you can avoid taking out an expensive auto loan. Emergency Savings Amount: Save up for six months of expenses. For a typical 40-year-old, we’re talking between $20,000 and $40,000. If your living expenses are higher, you’ll need more. You can never have too much set aside. Learn More: Best High-Yield Savings Accounts 101 Ways to Save Money Healthcare expense savings Here’s an unfortunate truth about getting older: Health expenses start to pile up. According to the Employee Benefits Research Institute, most couples over 65 should have $180,000 to $360,000 saved up to cover out-of-pocket health-related expenses. Presently, you might be in good health and not so worried about this. Yet for many people, medical issues start popping up with age. Back problems, eye problems, digestive issues… the list goes on. When you add a spouse and kids to the mix, the costs simply multiply. More trips to the doctor, dentist, pharmacy, optometrist, and so on. The smart thing to do is to put money aside in a tax-advantaged health savings account (HSA) if you have access to one. If you can, max out your contributions each year. If you don’t have an HSA, your other option is to save for medical-related costs in your emergency fund. The last thing you want to do is spiral into debt if you have to cover an expensive medical procedure. Unfortunately, this happens to far too many people. Healthcare Expense Savings Amount: By the time you’re 40, couples should have roughly $60,000 saved and individuals around $30,000. If you double that number by the time you’re 50 years old and double it again when you reach 60, you’ll be in decent shape. Learn More: Best Health Savings Accounts How to Choose Health Insurance Retirement planning For most people, 40 is a career milestone. At this point, you probably have a decade or two of professional experience on the books. If you’ve been diligent about putting money aside, you may be able to start looking at early retirement. Alternatively, if you haven’t been great about saving up to this point, you still have two or three decades ahead of you to catch up. It won’t be easy, but you can still do it. Those who don’t get serious about a retirement plan could wind up being forced to live off of Social Security someday. That’s not a great outcome. So think about your retirement goals, and get moving. If you’re not currently using a broker to invest for retirement (e.g., Vanguard, Schwab, Fidelity, and TD Ameritrade), it’s time to find one. You could also consider hiring a financial advisor if you feel you can’t make significant progress on your own. General Retirement Savings Amount: As we covered earlier, a common practice is to have at least three times your annual salary saved up by the time you’re 40. So if you make $70,000 a year, have at least $210,000 put away in retirement accounts. If you make $100,000 per year, strive to have at least $300,000 put away. This may sound like a lot of money, but you need a lot of money to retire comfortably. Learn More: How to Retire at 50 A Guide to Saving for Retirement Home costs Hopefully, by the time you’re 40, you’ll own a home instead of renting. Homeownership is one of the best personal finance decisions you can make, especially if you have a growing family. By investing in your home now, you’re adding to your net worth with each mortgage payment. If you stay in the same home until retirement age, you may just have that home
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