Retirement is a financial milestone that requires careful planning, yet many individuals delay thinking about it until they reach their 40s. While it’s never too late to start saving for retirement, starting early in your career can make your golden years more comfortable. But what is the magic number you should aim to have saved for retirement by the time you turn 40? Let’s break it down.
What’s the Target Retirement Savings by Age 40?
Generally, financial professionals recommend having at least three times your annual salary saved by the time you hit your 40s. If you’re married, this rule extends to having three times your combined household income. For example, if your household earns $125,000 per year, your retirement savings goal should be at least $375,000 when you blow out the candles on your 40th birthday.
However, it’s important to note that this is a guideline, not a strict rule. Your retirement savings target may vary based on your specific circumstances, such as your lifestyle, location, and retirement goals. For instance, those living in high-cost-of-living areas like New York or Chicago may need to account for that when setting their savings goals. Conversely, if you plan to relocate to a lower-cost area after retiring, you might require less in savings.
On the flip side, individuals with dreams of extensive travel or choosing an exciting yet expensive retirement destination should anticipate a higher savings goal. In such cases, surpassing the three-times-salary benchmark by age 40 would be wise.
Tips for Reaching Your Retirement Savings Goal
Once you’ve established your approximate retirement savings target, the next step is devising a strategy to reach it. Here are some valuable options to consider:
1. Use a Tax-Advantaged Savings Account
One of the simplest and most effective ways to save for retirement is by utilizing tax-advantaged savings accounts, such as a 401(k) or an individual retirement account (IRA). These accounts allow you to contribute money before it’s taxed, and you can invest it in various options. Over time, your investments can grow, and you’ll take distributions during retirement. A workplace 401(k) plan becomes even more advantageous if your employer offers a matching contribution program.
2. High-Yield Savings Accounts
While tax-advantaged accounts offer benefits, you might also want some funds to be easily accessible. High-yield savings accounts are an excellent choice for this purpose, allowing you to earn interest while keeping your money within reach. These accounts typically offer significantly higher interest rates compared to traditional savings accounts, so take the time to find the best rate available.
3. Certificates of Deposit (CDs)
Certificates of deposit (CDs) are savings products where you deposit money into a bank for a fixed duration and earn a predetermined interest rate, often higher than that of regular savings accounts. This is an appealing option for risk-averse savers, as it provides a solid return on investment without the volatility associated with stock investments.
As you approach the age of 40, the general consensus among experts is that you should aim to have saved at least three times your annual salary for retirement. However, this is a flexible guideline that depends on your unique retirement aspirations and financial situation. Regardless of your savings target, various strategies, including tax-advantaged accounts, high-yield savings, and CDs, can help you secure your financial future. Remember, it’s never too late to start, but the sooner you begin saving, the brighter your retirement prospects will be.