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People in their 40s may not be saving enough for retirement.
Ideally, you should aim to save about three times your pre-tax salary for retirement by the time you hit your 40s, in order to maintain your current lifestyle after retirement. According to Fidelity Investments. This means, for example, if you’re in your 40s and earn $60,000 a year, your goal should be to already have about $180,000 saved for retirement.
However, most people fall short of that recommended benchmark.
As of the first quarter of 2023, Americans ages 40 to 49 will have an average of $105,500 in their 401(k), according to Fidelity Investments data provided to CNBC Make It. However, the median account balance is much lower at $34,100, meaning half of the accounts have more funds and half have less. The median is usually considered a better measure, as the average can be highly skewed for a small number of accounts with large balances.
For comparison, the median weekly income for Americans ages 35 to 44 is $1,223, which will be about $58,704 annually as of the first quarter of 2023. According to the Bureau of Labor Statistics. The median weekly income for Americans between the ages of 45 and 54 is $1,239, or about $59,472 annually.
People in their 40s may have many competing financial priorities, including: Caring for an aging parent and saving money for a child’s college education can complicate one’s ability to save for retirement, says certified financial planner and chief of Blue Ocean Global Wealth. CEO Margherita Chen told CNBC Makeit. She is also a member of CNBC’s Advisory Council.
People in their 40s may think retirement is a long way off, but it’s important to make retirement savings a top priority so that you have enough money to support yourself in the future. Chen says.
Everyone’s retirement situation is different, and your savings goals will depend on what kind of lifestyle you want to lead during that period of your life. Here are his two tips to keep in mind when saving for retirement.
The savings rate is the portion of your pre-tax income that you invest in a 401(k) or other retirement savings account. You should aim for a savings rate of at least 15% annually, including matching employers where possible. Recommended by Fidelity.
At least enough investment to receive the full matching contribution amount is essential, Chen said. According to a study by the America Plan Sponsor Council, the most common matching method used by employers is matching contributions to a 401(k) at 50 cents per dollar, or up to 6% of his salary. That’s it.
So if you contribute 6% of your income towards retirement and your employer contributes half of that 6%, your savings rate is 9%. If his employer contributes up to 6% of his salary and he contributes 100%, if the employer’s savings rate is 6%, the overall savings rate will be 12% of his.
But simply matching an employer may not be enough, especially if you need to keep up with your job, Chen said. To reach his recommended 15% savings rate, you may need to contribute above your employer’s standards.
If you haven’t gotten there yet, don’t worry. It’s okay to contribute as much as you can and gradually increase your contribution over time. Retirement benefits could be increased by 1% each year until the savings rate target is reached, Cheng said.
Many employers offer two types of 401(k): the traditional 401(k) and the Roth 401(k).
You may have already invested in a traditional 401(k) through your employer. His 401(k) of this type is funded in pre-tax dollars, so contributions to these accounts can be deducted from your taxable income in the year you donate. However, post-retirement withdrawals are taxable.
A Roth 401(k) is a retirement savings account that you can donate in after-tax dollars. Funds invested in a Roth 401(k) are already taxed and are not tax deductible up front. In return, your investment in that account will grow tax-free. Also, as long as he’s 59½ years old or older and the account has been in his 5+ years, he won’t have to pay taxes on his retirement withdrawals.
A Roth 401(k) is a particularly good option for those whose income is too high to access a Roth IRA. IRS income limits For retirement savings accounts, Chen says. And by investing some of his retirement savings in a Roth 401(k), he finds that at least some of his retirement income will be tax-free.
Like a traditional 401(k), you can choose whether contributions are deducted from your paycheck. Please note, however, that your total contributions to both accounts cannot exceed the IRS 2023 Annual Contribution Limit of $22,500.
For example, if you invested $18,000 in a traditional 401(k), you would invest the remaining $4,500 in a Roth 401(k) for a total contribution of $22,500 in both accounts.
Regardless of your age, Chen says people should not be afraid to seek advice from financial experts such as the CFP when it comes to planning for retirement.
“It can be overwhelming. There are a lot of moving parts,” she says. “Ask for help to make sure you’re doing the best you can.”
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