Here's How Much Money You Should Have in Savings at 40 (2024)

When you reach your 40s, it's important to take a step back and assess your financial situation. This is the time when you should be in a stable financial position, and the goal is to have enough money in savings to cover any unexpected expenses that may come up. But how much exactly should you have saved by this point? Let's find out.

The benefits of saving early

The more money you save now, the better prepared you will be for future life events such as retirement or buying a house. Plus, investing now means taking advantage of compounding returns. This refers to the ability of investments to produce more gains over time simply by reinvesting your profits into similar investments instead of cashing them out. By doing this, your initial investment will grow much faster than if left untouched.

Regular contributions over time can add up quickly. Even small amounts can make a difference in the long run when compounded over years. So even if you haven't started saving enough yet, you still have time to invest and meet your long-term goals. The key is to get started now!

Delyanne Barros, Founder of Delyanne The Money Coach LLC and Host of CNN's Diversifying, stresses the importance of mending your relationship with money early, too. She said, "Young people should also set a goal to address any money trauma that they may have way before they're 40. Working with a therapist to Identify what these are and getting ahead of them can be a life-altering decision. Your attitude towards money will impact you in many different ways. Everything from your self-esteem during a salary negotiation to emotionally spending as a way to cope with stress. A healthy relationship with money is necessary to build and maintain wealth."

How much should you have saved?

The exact amount of money that you should have saved by age 40 depends on your individual situation, but there are some general guidelines that can help give you an idea of where you should be. According to a study by Fidelity, people in their 40s should aim to have at least three times their annual salary saved by this point. So if yours is $50,000, then you should strive to have $150,000 saved.

If possible, it's even better to aim for five times your annual salary saved by age 40. That way, if life throws an expensive curveball at you (such as medical bills), you'll be able to handle it without completely depleting your savings account. But what if you don't have that amount saved? Is it too late?

How much do you need in retirement?

Another way to see if you have enough is backwards planning. A good starting point is using a variation of the 4% rule. Many retirees have relied on this rule to help determine how much they should spend in retirement. While this rule isn't perfect and many believe the number should be lower, it is a good starting point.

Here's how it works: You add up all of your investments and withdraw 4% of that total during your first year of retirement. In later years, you adjust how much you withdraw to account for inflation and how long you live. This rule was meant to tell you how much you could withdraw from your retirement portfolio, but we can use it to backwards plan how much you need at retirement. Here is the altered equation:

Desired retirement income ÷ 4% = how much you need saved by desired retirement age

This rule works for any retirement age. Let's assume you want $50,000 a year in retirement and want to retire at 65. Using the 4% rule, you would need $1,250,000 by the time you are 65 and ready to retire.

$50,000 ÷ 4% = $1,250,000

How much do you need to save per month?

Now that you know how much you need by age 65, the next step is to calculate how much you need to save right now. This math is a little more complicated since you have to account for compound interest. Luckily, there are plenty of calculators out there, like the Savings Goal Calculator from the U.S. Securities and Exchange Commission.

You first enter your desired final savings, your initial investment, the number of years you have until you hit 65, and the estimated interest rate. Using the desired savings goal of $1,250,000, $1,000 in your retirement accounts, and a 10% annual interest rate compounded daily, here is how much you need to save per month, depending on when you start.

• Age 20: $108.66 per month
• Age 25: $185.97 per month
• Age 30: $315.92 per month
• Age 35: $537.25 per month
• Age 40: $922.78 per month
• Age 45: $1,621.27 per month

If you started earlier, you wouldn't need to save as much. But if you are 40 and still have 25 years before retirement, you still have plenty of time to invest and take advantage of compound interest. This also assumes you have $1,000 at age 40 to start with. If you have more saved up, then you don't need to save as much. For example if you are 40 and have $50,000 in your retirement accounts, then your monthly savings requirement would be $477.92, about half of your target if you only had $1,000.

This still may be a large amount to save every month. If it's too much, you can look at a part-time job in retirement, drawing from Social Security earlier, or adjusting your retirement age goal. These factors can significantly impact how much you need to save. The importance of this exercise is to help you better understand your savings goals and what options you have before it's too late.

Having enough money saved by age 40 puts you in a great position not only for managing any unexpected expenses, but also for planning ahead for retirement and other long-term goals. Of course, everyone's individual financial situation is different, so what works well for one person may not work as well for another. A great starting point is having three times your annual salary saved by age 40 or calculating your desired income in retirement and using a variation of the 4% rule to calculate how much you should save today. By proactively saving now and making smart decisions with your finances, you can ensure that your financial future looks bright!

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