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People in their 40s may not be saving enough for retirement.
In fact, you should aim to have about three times your pre-tax salary saved for retirement by the time you enter your 40s to maintain your current retirement style, according to Fidelity Investments. This means that if you are in your 40s and earn $60,000 a year, you should aim to have about $180,000 saved for retirement, for example.
However, most people do not reach the recommended benchmark.
On average, Americans between the ages of 40 and 49 will have $105,500 in their 401(k)s in the first quarter of 2023, according to Fidelity Investments data provided to CNBC Make It. However, the median account balance was significantly lower at $34,100, meaning half of the accounts had more money and half less. The median is often considered a better measure because the average may be higher for a small number of accounts with large balances.
For comparison, the median weekly income for Americans aged 35 to 44 is $1,223 which will come out to about $58,704 a year in the first quarter of 2023, according to the Bureau of Labor Statistics. The median weekly income 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 attend college can complicate their ability to save for retirement, Marguerita Cheng, a certified financial planner and CEO of Blue Ocean Global Wealth, told 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 off, it’s important for them to make saving for their post-work years a priority so they have enough money to take care of themselves in the future, Cheng said.
Retirement looks different for everyone, and your savings goals will depend on what kind of lifestyle you want to live at that stage of your life. Here are two retirement savings tips to keep in mind.
Your savings rate is the portion of your pre-tax income that you put into your 401(k) or other retirement savings account. You should aim for a savings rate of at least 15% annually, including your employer’s match if any, Fidelity recommends.
Investing at least enough to get the full matching contribution is important, Cheng said. The most common matching formula used by employers is to match your 401(k) contributions at 50 cents for every dollar, up to 6% of your salary, according to research by the Plan Sponsor Council of America.
That means, hypothetically, if you contribute 6% of your income to retirement and your employer matches half of that 6%, you’re 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 means a 12% total savings rate.
But just meeting your boss’s match may not be enough, especially if you have something to do, says Cheng. You may need to contribute beyond your employer’s match to reach the recommended 15% savings rate.
If you haven’t, don’t worry. It’s OK to contribute what you can and increase your contributions over time. You can increase your retirement contribution by 1% each year until you reach your savings rate goal, Cheng says.
Many employers offer two types of 401(k)s: a traditional 401(k) and a Roth 401(k).
You may already be investing in a traditional 401(k) through your employer. Because 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 contribute. However, you will be taxed on the withdrawals you make during retirement.
A Roth 401(k) is a retirement savings account that allows you to make contributions with your post-tax dollars. Because the money you invest in a Roth 401(k) is already taxed, you don’t get an upfront tax break. In turn, your investments will grow in that account tax-free. You also don’t have to pay taxes on retirement withdrawals, 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 a better option for those who can’t use a Roth IRA because of income above the IRS income limit for retirement savings accounts, Cheng said. And by investing some of your retirement savings in a Roth 401(k), you’ll know that at least some of your retirement income will be tax-free.
Like a traditional 401(k), you can choose to have your contributions deducted from your paycheck. But remember, your combined contributions to both accounts cannot exceed the 2023 IRS annual contribution limit of $22,500.
For example, if you put $18,000 into a traditional 401(k), you can put the remaining $4,500 into a Roth 401(k) for a combined total contribution of $22,500 to both accounts.
No matter your age, you shouldn’t be afraid to seek guidance from a financial professional, such as a CFP, when it comes to planning for retirement, Cheng says.
“It can be overwhelming. There are so many moving parts,” he said. “Ask for help just to make sure you’re doing everything you can.”
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