What to Do When You’re Age 40 With No Retirement Savings

The sooner you start saving for retirement, the better.

The power of compounding interest can make even small contributions grow exponentially over time.

So, if you’ve waited until you’re 40 years old to start building your nest egg, you may have a lot of catching up to do.

But that doesn’t mean it’s impossible.

Learn how you define your retirement savings strategy and where to put your money to maximize your investments.

How Much Should You Have Saved at 40?

There’s no magic number you need to have saved by this point in your life because everyone is different. Your retirement savings goal is dependent on how much income you want to have in retirement.

But to offer a little guidance, Fidelity Investments suggests having three times your income set aside by the time you reach 40. Then going forward, the recommendations are:

  • 6 times your annual salary at age 50
  • 8 times your annual salary at age 60
  • 10 times your annual salary at age 67

Just remember, these are good rules of thumb, not hard-and-fast rules. Depending on how you want to spend your retirement, you may want to save more or less than that.

To get an idea of how much you should have saved by the time you retire, use an online retirement calculator -- you can get a ballpark figure to shoot for.

If you want a comprehensive analysis, consider working with a financial advisor. A good advisor can help you determine how much income you’ll need each year and how much you need to save now to make that happen.

An advisor will also consider complex factors, such as taxes, inflation, and Social Security. They’ll also run a simulation to consider hundreds or thousands of different scenarios with these factors. Doing this will ensure the most accurate recommendations.

There’s Still Plenty of Time

Starting your retirement savings at 40 might mean that you need to push off your retirement plans a bit. But it doesn’t mean you won’t have a retirement to look forward to.

The key is to avoid procrastinating any longer. To give you an idea of what waiting could cost you, let’s take a look at two scenarios.

In each, you need $1 million to retire at age 70, and you could get an annual rate of return of 7% until then.

In the first scenario, you start setting money aside for your retirement goal immediately. To achieve your goal of $1 million at age 70, you’d need to save roughly $9,894 per year or $825 per month.

If you wait another five years, however, that savings retirement increases to spikes to $1,231. Even waiting one year would put your monthly savings at $892, an increase of $67.

Of course, you may not be able to afford to save this much each month. But it’s still important to start saving what you can now because your returns will have more time to compound.

One thing that can help is if your employer offers a 401(k) with a contribution match.

According to Society for Human Resource Management, 76% of employers offer this perk.

As an example, let’s say your salary is $70,000 and you need to save $825 per month or 11.8% of your gross income.

If your employer matches up to 3% of your salary in contributions, that means you only need to save $650 per month. Your employer will make up the difference.

And if you can afford to save the full $825, the extra $175 per month could help you have even more income when you retire, or even allow you to quit working earlier.

3 Steps to Reaching Your Retirement Savings Goal

As soon as you know how much you need to save, the next step is knowing where to put your savings.

The current tax code offers benefits on certain accounts, but those accounts also have some limitations.

1. 401(k) or other employer-sponsored retirement account

As previously mentioned, the majority of employers that offer 401(k)s provide a contribution match to their employees. If your employer provides this perk, you effectively get an immediate 100% return on your matched contributions.

So, contributing at least enough to get the full match is a no-brainer. That said, if you want to save more, 401(k) contributions are limited to $18,500 per year until you’re 50 years old, at which you can add an extra $6,000 per year.

If your employer doesn’t offer a 401(k) plan, it may provide a different type of employer-sponsored account instead. Here are just a few examples:

  • 403(b) plans: Designed for employees of public schools and certain tax-exempt organizations, as well as certain ministers.
  • 457 plans: Designed for employees of certain state and local governments and certain tax-exempt organizations.
  • Thrift Savings Plan: Designed for employees of the federal government.

With these accounts, contributions are typically made before tax and are deductible when it comes time to file your taxes.

2. Individual Retirement Accounts (IRAs)

Let’s say you save enough in your employer-sponsored plan to get your contribution match or your employer doesn’t offer a plan or match. Your next best choice is an IRA.

There are two types of IRA, each with different tax treatments:

  • Traditional IRA: You deduct your contributions from your taxable income during the current tax year. Your earnings grow tax-deferred, and you’ll pay taxes on your gains when you withdraw them in retirement.
  • Roth IRA: You don’t deduct your contributions from your taxable income during the current tax year. Your earnings grow tax-free, and you won’t pay any taxes when you take distributions in retirement.

With each type, your contributions are limited to $5,500 per year, with a $1,000 catch-up option once you reach age 50.

Also, you’ll make contributions from your take-home pay rather than having them deducted before taxes on your paycheck.

One thing to keep in mind is that the tax benefits for each of these account types go away once you reach a certain income level.

Traditional IRA Vs. Roth IRA

Traditional IRA Roth IRA
Contributions may be tax-deductible. Contributions are not tax-deductible.
Pay taxes upon withdrawal. Earnings can be withdrawn tax-free and without penalties if the funds were in the Roth IRA for 5 years and you've reached age 59 1/2.
You must be under age 70 1/2 to contribute. You can contribute at any age.
Required minimum distributions (RMDs) are required starting at age 70 1/2. No RMDs required.

3. Taxable Accounts

If you’ve already maxed out your 401(k) and IRA contributions, your tax-sheltered options are limited.

If you’re saving enough to meet your retirement goal, you don’t need to keep going. But if you want to continue saving and your budget can afford it, consider opening a taxable investment account to do so.

To maximize your tax savings, use the buy-and-hold strategy. Short-term gains — gains you receive from investments you sell within a year of buying them — are taxed based on your ordinary income tax rate.

On the flip side, long-term gains — gains you receive from investments you sell more than a year after buying them — are taxed at the capital gains tax rate. This rate is much lower than ordinary tax rates and is usually between 0% and 15%.

Investment Approach

Once you decide where you’re going to save your retirement funds, the next step is to determine what investments to buy. Your best bet is mutual funds, which are a collection of various stocks, bonds, and other securities.

Mutual funds offer diversification that you won’t get from investing in individual stocks. And in some cases, they charge relatively low management fees.

Here’s a quick summary of the top options available to you.

Target-date funds

Pick a fund with a target date close to when you plan to retire, and it will base its investment strategy on your time horizon.

For example, it may invest more aggressively in the beginning.

Then it might change to more conservative investments as you approach your retirement date.

Index funds

These funds attempt to mimic a popular index for stocks, bonds, commodities, or other securities.

Some popular index funds track the S&P 500 stock index, for example.

Since there’s no special strategy or management need, these are relatively cheap but don’t provide much protection if the market tanks.

Exchange-traded funds (ETFs)

These function like conventional mutual funds. However, you can trade them funds like stocks on an exchange.

Also, their prices can change throughout the day, whereas conventional mutual fund prices update once a day as the markets close.

As a result, ETFs offer a little extra flexibility.

Maintain a Robust Emergency Fund

While saving for retirement may be one of your top priorities, avoid neglecting other important financial goals.

Most importantly, you’ll want to keep three to six months’ worth of expenses in an emergency fund.

Ideal Size of an Emergency Fund

To start... Ideal goal... Super safe...
$1,000 3-6 months of essential expenses 12 months of expenses

An emergency fund is critical to your financial health. If you lose your job or incur a significant unexpected expense, it could help you avoid going into debt.

Plus, you may not be able to withdraw cash from your retirement accounts without being penalized.

Also, taking early withdrawals from your retirement accounts can break a psychological barrier. It can make it easier to justify doing it again in the future.

Keep your retirement savings safe by maintaining a safety net for when you need it.

The Bottom Line

If you’ve waited until age 40 to start saving for retirement, you may feel like it’s too late. But depending on your goal and ability to save, it may be easier than you think.

Figure out how much you need to save, then decide where you want to put your money.

Most importantly, start this process as soon as possible to avoid further procrastination.

The sooner you start, the easier it will be to achieve your goal.

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