"Excu-u-use Me" Series: The Fretful 40-Somethings

Our 40-something, seldom-if-ever savers are far behind schedule in the median savings category with an estimated balance of barely $60,000 – not even approaching the old rule-of-thumb bromide of needing to save at least three times one’s salary by age 40.

It seems reasonable to assume that most 40-somethings are individuals in their prime. Folks with 15-20 years of work and life’s experiences. Folks who’ve paid their dues and have incomes that reflect this experience and know-how. And hopefully, the college graduates among them have finally paid off those hefty student loans, freeing up disposable income for other purposes – including saving and investing, perhaps?

Oh, no! Here comes a new set of excuses. The mortgage payment is bigger because they bought a larger home in their late 30s or early 40s. And why? Well, an extra kid popped up and/or friends were buying larger homes. Must keep up with the Joneses…the Johnsons…the Jacksons. Also, those darn older kids need their own transportation – and the oldest one is heading off to college with the middle youngster already a junior in high school. And some of those Million Dollar Habits still lurk in the weeds.

Those Worrisome Bromides

Predictably, our 40-something seldom savers are far behind schedule in the median savings category with an estimated balance of barely $60,000 – not even approaching the old rule-of-thumb bromide of needing to save at least three times one’s salary by age 40. Fidelity recommends that individuals have savings of three times their annual salary by age 40. So, if your salary is $55,000, you should have a balance of $165,000 already banked; at age 45, four times their annual salary; and six times that level by age 50. Read more in The Average Retirement Savings by Age | Investopedia. Whether a family is behind schedule or not (being a bit of a pessimist, I’m guessing they’re behind), it’s time to start maxing out those 401(k) or 403(b) contributions. And while they’re at it, open one of those Roth IRAs and max that sucker out, too.

To reach Fidelity’s benchmarks, consider putting salary increases toward retirement savings. And after paying off student loans, commit those payments to the retirement nest egg as well.

Did I hear you say, “Yeah, sure.” Well, just remember, you’re way behind schedule and the catch-up years are disappearing fast. In 2019, the maximum contribution to an IRA is $6,000. So, just do it! Get in a hurry. And quit smoking and impulse buying. You’re certainly not getting any younger and time is of the essence. Yes, you have good and valid reasons not to save – bigger mortgages, kids in or heading for college, and car payments stretching out beyond seven years, etc. But you also have good and valid reasons to save… and fewer years to do so.

Again...Do the Math

Using the same assumptions as in previous blogs (saver invests $440 per month at 6.45% compounded annually) except for the new start date of age 40, here are the numbers: the median savings of the 40-something group is $60,000 versus the early saver’s group of $212,500; at age 50, using the new numbers, the savings of the 40-something group is $185,600 versus the early saver’s group of $470,500; and at age 65, the savings of the 40-something group is $605,700 versus the early saver’s group of $1,333,200.

The value of starting to save early in a career and the associated value of compounding bigger numbers for longer periods of time really does make a startling difference in how financially comfortable you are in retirement. In this hypothetical case, over $727,000 worth of difference. Holy Molyl! If only…