By Jane Young, CFP, EA
At 40 you are almost half-way through your working life and should be entering your peak earning years. According to the Economic Policy Institute, the average American between 44 and 49 has a little over $81,000 put away for retirement. However, many 40 somethings have no retirement savings. Studies have found that at 40, you should have about two times your pre-tax income invested for retirement. According to the U.S. Bureau of Labor Statistics, the average salary for someone between 35 and 44 is $58.812 so you should have about $120,000 saved for retirement.
If you started saving and investing early in your career, you should be in good shape. However, if you are just getting started, you still have 20 to 25 years to catch-up. Focus on what you can do going forward. Unless you are one of the few who will receive a pension, it is up to you to plan and save for retirement. Now is the time to concentrate on maximizing savings.
Here are some suggestions on how to increase savings and prepare for a financially secure retirement:
- Develop a financial plan, decide when you want to retire, how much money you will need, and how much you need to save each year. A good rule of thumb is to save 15% of your income, increase this to 20% - 25% if you got started late. Use a retirement calculator or contact a fee-only financial planner to help you formulate a plan.
- Create a budget to determine how much you are spending and how you can increase retirement savings. You may need to trim some discretionary expenses to save more.
- Maintain an emergency fund of four to six months of expenses to protect your retirement funds from short-term surprises.
- Pay-off high interest credit card debt and personal loans to save more for retirement.
- Maximize your retirement plan contributions and take full advantage of your company match. Consider gradually increasing your contribution as your wages increase. When you get a raise, avoid “life-style” creep where your spending increases along with your income. Instead, use your salary increase to save more for the future.
- Maintain a diversified portfolio in a wide variety of stock mutual funds and interest earning investments. Avoid the temptation to take on too much risk by investing in the latest hot stock or to time the market.
- Maintain adequate insurance to protect your assets in the event of a catastrophic event.
- Do not sacrifice retirement to pay for your children’s college. They have options in the form of financial aid, student loans, and part-time work and the rest of their lives to cover education expenses. Your children will benefit more from your long-term financial security than some assistance with tuition.