Your 40s might just be the most exciting — but also the most expensive — decade of your life. For many, these years are marked by growing families, promotions at work, perhaps a new house (and accompanying mortgage), and bills (internet, car payment, medical expenses, etc).
And in the midst of this whirlwind of a time, you’ve got a retirement plan to tend to and possible college tuitions to fund. These savings priorities tug at your wallet from all directions. So, if you’ve wondered, “Am I saving enough?” you’re not alone.
While everyone’s life is different (and your specific savings situation is personal to your financial circumstances, lifestyle, and future goals), being aware of benchmarks and ranges can help you know if you’re on the right track — and whether you need to turbo-charge your savings for a few months.
With that in mind, here’s a guide to help take some of the guesswork out of where you should be financially in your forties.
- Saving for emergencies
- Saving for retirement
- Saving for everything else (a new home, child’s education)
Saving by Age 40 for Emergencies
That’s why it’s so important to have an emergency fund, which is cash you set aside in a savings account for unforeseen expenses, like a sudden change in employment, a broken furnace, or the family pet suffering a major sickness or injury.
While an emergency fund is a key pillar of financial health, only 39% of Americans have enough cash on hand to cover a $1,000 emergency, according to Bankrate.
Ideally, your emergency fund should contain at least 3 to 6 months’ worth of living expenses — so if worse comes to worst, you can cover all your essentials, from your mortgage to groceries to prescriptions, without worry for a couple months.
The typical 35- to 44-year-old American spends $5,933 per month on essential and nonessential expenses, according to the 2018 Consumer Expenditure Survey.
That means the average 40-year-old should have $17,799 to $35,598 in their emergency fund. Of course, your emergency account should be based on your living expenses, so if you spend more or less than $5,933, you’ll want to adjust accordingly.
|How much should you have saved for the following?|
|Savings Goal||General Rule||Average Amount|
|Emergency fund||3–6 months' worth of expenditures||$17,799 to $35,598|
|A car||$20,000 to $55,000|
|Down payment for a home||20% home value||$15,930 to $63,720|
|College for your kids||$35,160 to $203,600|
Pro tip: The funds in your emergency account should be accessible at a moment’s notice. This money shouldn’t be tied up in real estate, investments in the stock market, or even a certificate of deposit, which might trigger a penalty or tax consequence if withdrawn early.
Consider keeping this cash in a liquid savings account — preferably one that earns a higher rate of interest than a standard checking account, such as our Online Savings Account. That way you can access your money when you need it, without jumping through hoops or paying a penalty fee.
If your emergency fund isn’t as robust as the average listed above, don’t fret. It’s never too late to begin to save. With our savings booster tools like recurring transfers and Surprise Savings, you can put your emergency fund on autopilot to power up your cash growth.
Socking away as little as $100–$150 a month for two years adds up to $2,400–$4,200, which can go a long way toward helping pay off any future unexpected costs that are sure to arise.
Retirement Savings in Your 40s
The general rule of thumb for how much retirement savings you should have by age 40 is three times your household income.
The median household income in 2018 was $63,179, so by that measure, someone in their late thirties to early forties should have around $189,537 saved for retirement.
Let’s say that you’re married, and you and your spouse have an annual household income of $95,000. You should aim to have $285,000 set aside by 40. And for a single 40-year-old who earns a $60,000 salary per year? You should have $180,000 saved in your retirement account.
Pro tip: When looking at these numbers, it’s important to remember that every person and situation is different. Ask yourself: How much is your annual salary? What’s your goal retirement age? What type of things do you hope to do in retirement?
If you want to live in high style while traveling the world, for example, you’ll likely need even more than the recommended 3x your household income rule. But if you plan on downsizing your home and spending your time and money on the same hobbies you always have, chances are you might not require quite as much.
Either way, don’t endure sleepless nights if your current retirement nest egg falls short of the 3x recommendation. While the reality of retirement may feel closer than ever, you still have time to contribute to your retirement account.
Those who begin putting money toward their retirement plan early are better off than those who don’t, thanks to compound interest, which is interest earned on your initial principal and your accrued interest. But if you are just joining the retirement savings party — or stepped on the dance floor later than others — you have options as you get closer to retirement.
Employees who contribute to a 401(k), 403(b), or 457 can contribute up to $19,500 a year, as of 2020. Once you reach 50 years of age, you’re eligible to set aside an additional $6,500 annually in catch-up contributions.
|2020 Contribution Limits for IRAs and 401(k)s|
|Under 50 years of age||Catch up contributions (50+ years of age)|
|IRA (Roth and traditional)||$6,000||$1,000|
Those who contribute to an IRA (Traditional or Roth) can contribute up to $6,000 annually, with those age 50 or older eligible to contribute an additional $1,000 each year in catch-up contributions. Ally Bank deposit IRAs offer a competitive rate of return, plus the security of FDIC Insurance.
Although catch-up contributions might not feel relevant to your 40-year-old self, who is worried about where your savings stand now, they’re a good option to keep in mind down the line, if you feel overwhelmed about recovering lost savings time. Plus, later, when you’re nearing retirement and the kids are out of the house, you could also reallocate the money you’ve spent on your children to retirement and increase your savings that way.
Finally, don’t forget about Social Security. If you’re still feeling panicked about the current state of your retirement fund, monthly Social Security benefits may help provide a cushion during retirement. But keep in mind, the average monthly benefit is $1,358, so planning to rely solely on Social Security during retirement could leave you facing a tight budget and a less comfortable retirement.
Saving for a New Home, Children’s College Fund, and More in Your 40s
Once you feel comfortable that your emergency fund, retirement nest egg, and savings habits are on par with (or above) target amounts and aligned with your financial goals, it’s time to think about other things you might want to save for.
Maybe your family has grown out of its home or car, and it’s time to upgrade. Or you want to ensure your children don’t face student loan debt, so you want to up your contributions to a 529 College Saving Plan or a savings account that can offer a competitive rate of return, such as a Certificate of Deposit (CD) or a Money Market Account.
Or perhaps your mind is wandering to something more fun, like checking an item off your bucket list, going on a family vacation, or planning a romantic anniversary trip for just you and your significant other.
Regardless of what you’re saving for, prioritizing your goals and creating a plan is essential. With our Online Savings Account, you can divvy up your savings goals using the buckets tool — making it easy to organize and track your various savings priorities all in one easy-to-access account.
Not only will a savings plan lessen (or even eliminate) the pain when the eventual payment comes due, it will also help you avoid dealing with high-interest credit card payments, a financial pitfall that can force even the most diligent savers off track.
Your 40s can be a busy time of competing priorities — especially when it feels like several savings goals are demanding your attention all at once. But by prioritizing your different financial needs, sticking to a plan, and having solid savings targets in mind, these years are a great time to implement savings habits to carry through to subsequent decades — and all the way to retirement.
In your 40s and ready to get your savings on track?