People in their 40s may not be saving enough for retirement.
Ideally, you should aim to have around three times your pre-tax salary saved for retirement by the time you enter your 40s in order to maintain your current lifestyle in retirement, according to Fidelity Investments. This means if you're in your 40s and earn $60,000 annually, you should aim to have around $180,000 already saved for retirement, for example.
However, most people haven't reached that recommended benchmark.
On average, Americans between the ages of 40 and 49 have $105,500 in their 401(k)s as of the first quarter of 2023, according to Fidelity Investments data provided to CNBC Make It. However, the median account balance is much lower at $34,100, meaning half of accounts hold more money and half hold less. The median is typically considered to be a better measure since the average can be skewed higher by a small number of accounts with larger balances.
For comparison, the median weekly earnings for Americans ages 35 to 44 is $1,223 which comes out to about $58,704 a year as of the first quarter of 2023, according to the Bureau of Labor Statistics. Median weekly earnings for Americans ages 45 to 54 is $1,239 or about $59,472 annually.
People in their 40s may have many competing financial priorities, such as caring for aging parents and saving money for their children to go to college that can complicate their ability to save for retirement, Marguerita Cheng, a certified financial planner and CEO of Blue Ocean Global Wealth, tells CNBC Make It. Cheng is also a member of CNBC's Advisor Council.
While people in their 40s may think retirement is a long way away, it's important for them to make saving for their post-work years a priority so that they'll have enough money to take care of themselves in the future, Cheng says.
Retirement will look different for everyone, and your savings goals will depend on what type of lifestyle you want to live during that period of your life. Here are two retirement saving tips to keep in mind.
1. Focus on your retirement savings rate
Your savings rate is the portion of your pre-tax income that you put toward your 401(k) or other retirement savings account. You should aim for a savings rate of at least 15% annually, inclusive of your employer's match if available, Fidelity recommends.
Investing at least enough to get the full matching contribution is essential, Cheng says. The most common matching formula used by employers is matching your 401(k) contributions by 50 cents for each dollar, up to 6% of your salary, according to the Plan Sponsor Council of America's research.
That means, hypothetically, if you're contributing 6% of your income toward retirement and your employer matches half of that 6%, you'll be at a savings rate of 9%. If your employer matches 100% of your contribution up to 6% of your salary, a 6% savings rate on your end would mean a 12% overall savings rate.
But merely meeting your employer's match may not be enough, especially if you have some catching up to do, Cheng says. You may need to contribute beyond your employer's match to reach the recommended 15% savings rate.
If you're not there yet, don't worry. It's OK to contribute what you can and increase your contributions by a little over time. You could raise your retirement contributions by 1% each year until you reach your savings rate goal, Cheng says.
2. Explore a Roth 401(k), if available
Many employers offer two types of 401(k)s: a traditional 401(k) and a Roth 401(k).
You may already be invested in a traditional 401(k) through your employer. Since this type of 401(k) is funded with pre-tax dollars, contributions to these accounts can be deducted from your taxable income for the year you contributed. However, you'll be taxed on withdrawals you make during retirement.
A Roth 401(k) is retirement savings account that allows you to make contributions with your post-tax dollars. Since the money you invest in a Roth 401(k) has already been taxed, you won't get an upfront tax break. In exchange, your investments grow in that account tax-free. You also won't have to pay taxes on withdrawals in retirement, as long as you're at least age 59½ and you've had the account for at least five years.
A Roth 401(k) can be an especially good option for those who aren't able to utilize a Roth IRA due to earning above the IRS's income limit for those retirement savings accounts, Cheng says. And by investing some of your retirement savings into a Roth 401(k), you'll know at least some of your income in retirement will be tax-free.
Just like with a traditional 401(k), you can choose to have your contributions deducted from your paycheck. But remember, your combined contributions to both accounts can't exceed the IRS's 2023 annual contribution limit of $22,500.
For example, if you put $18,000 toward the traditional 401(k), you could put the remaining $4,500 toward the Roth 401(k) for a combined total contribution of $22,500 across both accounts.
No matter what age you are, you shouldn't be afraid to seek the guidance from a financial professional, such as a CFP, when it comes to planning for retirement, Cheng says.
"It can be overwhelming. There's a lot of moving parts," she says. "Ask for help just to make sure you're doing everything you can."
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