How Much Should I Have Saved for Retirement by Age 40?

Happy birthday! You’re officially done with your 30’s. That chapter is closed.

Now it’s time to look ahead. Your 40’s are primed to be the best decade yet. You’ve made major strides in developing your relationships, career and confidence.

But there’s one nagging question in the back of your mind: Is your retirement on-track?

How much should you have saved for retirement by age 40?

We’ll tackle that question today.

Turning Age 40? Time to Get Serious About Retirement Planning

“You’ve still got a long way to go,” as the Alice Cooper song goes.

Well, yes, that’s true. Retirement is probably a couple decades away.

But you may be better off channeling your inner Fleetwood Mac: “Don’t stop thinking about tomorrow.” Especially if you haven’t saved much for retirement so far.

You’re in your 40’s now. It’s time to get serious.

Start with the basics. At a minimum, you should have at least one retirement savings account, such as a company 401(k) or 403(b) plan or an Individual Retirement Account (IRA). Better yet, you should have both types of accounts and contribute up to the maximum allowed level, which in 2014 is $17,500 annually for the 401(k) and $5,500 for the IRA.

Action Tip #1: To calculate how much retirement money you’re currently on-track to have, sign up for a free account with Jemstep Portfolio Manager. It will tell you what your current portfolio will provide you during retirement. It will also give you recommendations on ways to optimize your portfolio.

Keep Your Retirement Accounts Focused On Growth

Since you’re not going to be making withdrawals from your retirement accounts any time soon, you should keep your investment strategy focused on growth. If you are 40, you’re about 25 years away from retirement. Most of the time, stocks outperform bonds over a given 25-year period. (The notable exception to this was the period from the stock market crash in 1929 until after the Second World War.) That means that it’s generally considered a good idea for you to keep a substantial portion of your portfolio in stock funds.

Of course, there’s no guarentee that stocks will be up 25 years from now. You need to balance the equity side of your portfolio with a fixed-income component that fits your risk tolerance. But you can ride out shorter-term volatility, thanks to your timeline.

How much of your portfolio should you divide between stocks and bonds?

Tools like Jemstep’s Portfolio Manager can help you design a stock-bond diversification plan that’s custom-tailored to your individual circumstances. Plus, it makes unbiased, expert recommendations on how to invest so that you can make the most of the money you are saving for retirement..

Action Tip #2: Regularly rebalance your portfolio at least once per year, bringing each asset class back to its target weight.

Make Saving for Retirement a Top Priority

You probably have more than one investment and savings goal. It’s possible that, in the mix of other priorities like children’s education, buying a home and other big-ticket items, retirement has gotten the short end of the stick.

It’s time to change that. Make retirement planning a top priority.

Given your income level and other financial obligations, is retirement saving a challenge? If so, then think creatively about ways you can find more savings.

There are many ways you can boost your income. No, we’re not talking about those cheesy “earn $10,000 a month sitting at home” come-ons. We’re talking about real opportunities for people with diverse skill sets ranging from writing to computer programming, accounting to painting.

Action Tip #3: Brainstorm ways to boost your income, cut your expenses, or both. Create a list, review and add to it regularly. You can put this extra money aside for retirement.

So How Much SHOULD You Have by Age 40?

There’s no specific amount that you should have saved for retirement by age 40. The ideal amount is based on personal factors, such as your income and your retirement goals. If you want to retire at age 55 and live in luxury, you’ll need substantially more saved by age 40 than a person who wants to retire at 68 and live modestly.

As a general rule-of-thumb, you’ll need at least 70 percent of your pre-retirement income to be comfortable after you retire. In other words, if you earn $100,000 annually right now, you’ll want to aim for a retirement income of at least $70,000.

If you’re 40, it’s certainly not time to panic about your retirement savings. Retirement planning is a marathon, and you’re roughly midway along.

Don’t burn yourself out. Keep a steady pace from year to year. Make gradual asset allocation shifts along the way as you get closer to retirement. Tools like Portfolio Manager can help you make those changes.

And have fun! Your 40’s can be one of the richest, most rewarding decades of your life. Smart retirement planning will help to keep the good times rolling in the decades to come.

Are you turning 40 this year? Are you saving for retirement?