Here we’ll talk about how much savings you should have at 40. In addition, we’ll discuss the benefits of budgeting, emergency fund, retirement age and how to calculate how much money you need for retirement.
The Typical American Savings
Most Americans Don’t Save Enough Money; Saving Requires Sacrifice
According to Business Insider, the average American Family has approximately $40,000 put aside in savings and investments. While this may sound like a lot of money, it’s not. Think of your monthly expenses and then consider for how long you could live on $40,000. Finally, the answer is you need much more money than you have now.
Understandably, it’s difficult to know how much savings you should have at 40. Everyone has to pay rent or a mortgage, pay for food, electricity, water and in many cases, a car loan. Life is expensive.
Saving money can be difficult. In many cases, saving requires that you make sacrifices in your life. For example, you might have to continue driving an older car instead of buying a new one, or do home repairs yourself instead of calling a professional for help. Obviously, no one enjoys making sacrifices.
Budgeting Helps You Save
Retirement is Within Reach if You Use a Budget and Take Control of Your Finances
If you are thinking about how much savings you should have at 40, then you are thinking about the future. Furthermore, what you are really asking is, “do I have enough money to retire?” To answer the question about money, we need to find out more information about how you spend money and your assets.
Budgeting is one of the critical steps that can help you take control of your life and answer these questions. In addition, preparing a budget allows you to not only know where your money goes, but also allows you to plan where your money will go in the future. Finally, it’s important that your money works for you, not against you.
In the process of taking control, we also prepare ourselves for better quality of life by having more money. Having more money means that you have more power to dictate the kind of life you want, especially in retirement.
How Budgeting can help you:
- Improve your credit score
- Save for emergencies
- Save and invest for retirement
- Stop wasting money and curb bad habits
- Promote a healthy, meaningful lifestyle
- Buy a new home or upgrade your existing home
- Obtain financial freedom
Once you’ve completed your budget, you will be better prepared to answer the question about how much savings you should have at 40.
Determine How Much Money You Need to Live on
You Will Need 70-80% of Your Current Salary for Retirement Expenses
While thinking about budgeting, take a closer look at how much money you need to live on each month. For example, what basic amount of money do you need each month to cover expenses? You need enough money to pay for a place to stay, food, electricity, etc. Don’t include things like vacations, luxury items or entertainment. Once you determine how much you need to live on, you can then start to figure out what retirement expenses look like.
Another common rule of thumb for estimating how much money you need when you retire is the 70-80% Rule. In other words, many experts believe that you will need at least 70-80% of your current income to make ends meet. For example, if you bring home $3,000 each month, then you will likely need approximately $2,100-2400 each month in retirement. This is a realistic way of estimating what you need to retire if you don’t want to do complicated calculations or spend a lot of time on the topic.
The Age That You Will Retire
How old will you be when you retire? This is one of the questions that you want to answer so that you can gauge your progress toward retirement. Ultimately, it will help you determine how much savings you should have at 40. In addition, you can set goals for how much money you need when you reach the milestones of 50 and 60 years old.
First, if you live in the United States and were born after 1960, you may be eligible to retire at age 67. Second, if you were born earlier than 1960, then the age requirement is 66. These are the ages where you may be eligible for Social Security Benefits. Consequently, you can look at the United States Social Security Benefits Website for additional details. They also offer a retirement calculator and benefits planner there.
If you want to narrow down how much money you will need for retirement, there are four primary factors needed.
- Current Age
- Retirement Age
- Monthly Cost of Living (Estimate)
- Life Expectancy
First, if you take your current age and subtract your retirement age, then that gives you how many years you will have to save for retirement. For example, if you plan to retire at 67, and you are 40 years old, then you have 27 years to save (67-40 = 27).
Next, how long will you live? Men and women live to be different ages. According to the World Bank, Americans live to be an average age of 78. So if you subtract 67 from 78, then you will need savings that will last for 11 years of retirement.
Finally, calculate how much money you will need annually (70-80% of normal salary) and multiply it by 11 years. This gives you the pot of money you will need to retire. So, using data from earlier examples, if you make $3000/month (12 x 3000 = $36000/year), we’ll multiply it by 80% to be on the safe side. Then, 36000 X .80 = $28,800/yr. You can survive on $28,800/yr.
Then, let’s find out how much money you need for all of your retirement. Note, this is an estimate. Many people live to be much older than 78, so you may consider adding a few years to your calculation to build a cushion.
Total Dollars Needed for Retirement (from example above):
$28,800/year X 11 years = $316,800
How much money you need to save each year to reach your retirement goal:
$316,800/27 = $11,733 each year (or $977/month)
Note, this doesn’t account for compounding interest on investments, which usually help you greatly when it comes to saving for retirement.
Always Keep an Emergency Fund
Unfortunately, emergencies happen to all of us. Having money for an emergency is critical. Many investment and debt consultants recommend that you start with $1,000.
Emergencies can come in many forms. Examples of emergencies you should be prepared for include medical issues, home repairs, car repairs, natural disasters, etc.
Saving for emergencies should probably be one of the first things that you do, even before saving for retirement. Make it a priority in your budget and you will rest better at night knowing you have prepared for the future.
Save Money Every Paycheck
Put Aside 10-15% of Your Regular Income for Investment
One of the habits that you want to form that will help you reach your goal is to start saving each paycheck. Make it a habit to take 10-15% of each paycheck and save it. After a short time, you will realize that you don’t even miss the money.
Make saving 10-15% of each paycheck easy by setting up an automatic money transfer, either to your investment account or to your savings account. For example, each time your paycheck is deposited into your checking account, have an automatic transfer set up that moves money into your savings account. Some people even have a savings account that is in a different bank to reduce the temptation of raiding the account.
One of the keys to their success is having a consistent source of income. Every month, or each paycheck, successful investors divert 10-15% of their earnings to investment(s). An example would be investing in a 401(k), Investment Retirement Account (IRA) or Real Estate. Year after year, your money will grow and work for you to create wealth.
Saving a small portion of your regular earnings is far from a new concept. Financially successful people have been doing it for hundreds or thousands of years. Read The Richest Man in Babylon to learn more.
The Art of Saving Money
Saving Money teaches you the habit of not spending and allows you to take advantage of opportunities
Saving money is a lost art. Historically, people’s lives depended on saving money. If a natural disaster struck or just bad luck, people could fall back on the money they saved to stay alive. Today, life is easier. Credit is widely available to most people and we frequently borrow money for cars, houses and purchases on credit cards.
But, saving money is critical to your retirement for several reasons. First, learning to save money requires that you not spend all your money. Legendary investor, Warren Buffet, famously said that the most important rule of investing is “to not lose money.” So, don’t spend all your money. Instead, save some money. Saving money is an excellent habit to learn. And saving will help you figure out how much savings you should have at 40.
Second, saving money will give you the confidence to seize opportunities when they arise. When people live paycheck-to-paycheck, they waste their time struggling with bills, instead of focusing on future wealth creation. In addition, as your income becomes more limited in old age, you will depend on cash savings to pay for things like medical care and expenses.
Start Saving Today
It’s never too late to start saving and investing. If you don’t have any savings and you are 40 years old, you need to make a big change today. Even if you can’t save enough to reach your goals, start saving anyway. Every Dollar you save or invest today is growing. Furthermore, the more that you procrastinate, the more difficult accumulating wealth becomes. Therefore, it’s best to start saving today.
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