KEY POINTS
- Beginning to save for retirement at the age of 40 is still a viable option.
- Get ready to allocate your funds into stocks in order to increase your savings effectively.
- You might want to think about putting in more hours to make up for lost time.
When the costs of living begin to accumulate, IRA If you have not started saving for retirement by the age of 40, it is not too late to begin. Do not worry or blame yourself for not having made contributions to a 401(k) plan before now.
Fidelity suggests having three times your annual salary saved by the time you reach 40, but many individuals may not achieve this goal early on. However, if you are behind and need to catch up, there are specific strategies you can use to grow your savings effectively.
Utilize the stock market to increase your savings.
By the time you reach 40, you are probably close to having worked for 20 years. This means you may have missed out on many chances to save money, which is unfortunate.
However, there is also positive news to consider. You may have around 25 years of work left. This period allows you the opportunity to make up for any shortfall in savings and enter retirement feeling much more secure.
In order to achieve this, you will need to do more than simply making space for IRA or 401(k) contributions. budget You will also be required to put your money into investments If you want your money to increase effectively, investing in stocks is likely your top choice.
In the last five decades, the stock market has provided an average yearly profit of 10%, considering both periods of significant growth and periods of decline.
Suppose you begin saving $300 per month for retirement at the age of 40 and continue for 25 years. By opting for a conservative investment approach with a focus on bonds and cash rather than stocks, you could potentially achieve an average return of 5% over this period, resulting in an approximate total of $172,000.
However, if you heavily invest in stocks and achieve a 10% profit in your investment, you could potentially retire with $354,000. This amount surpasses the average retirement savings balance of $200,000 for individuals aged 65 to 74 in the United States, as reported by the Federal Reserve.
Extending the amount of time spent working could also be beneficial.
One more strategy to compensate for years when you couldn’t save enough is to think about prolonging your working years. This approach can have dual benefits – increasing your retirement fund and preserving your current savings.
To illustrate further, suppose that rather than setting aside $300 per month from 40 to 65 as shown in the previous scenario, you continue doing so until you reach 67. With a 10% annual return, your savings could potentially grow to approximately $436,000, as opposed to $354,000.
Most of the $82,000 increase will not be from saving an additional $300 per month in retirement contributions for two more years. Instead, it will come from the returns on your investments in your portfolio, which you can keep untouched if you retire later.
If you have turned 40 without any money saved for retirement, be aware that: You are definitely not the initial individual in history to find yourself in that situation. However, keep in mind that there is a possibility to improve your situation. All you have to do is be ready to begin saving right away, make smart investments, and be open to working a bit longer than you originally planned.
