Seriously, how could I possibly retire by 45? Well, it may be possible, depending on the size of your 401k by age 40. Have you asked yourself, “What percentage of income should go to retirement savings? Or, “How much money should I have in my 401k?”
So, Happy Birthday! It’s not your birthday? Well, it will be sometime in the next 365 days. Let me ask – have you turned 40 yet?
People say that reaching 40 is a turning point, and certain biological changes take place. Your hair may be turning gray. You may need “cheaters” to read the small print. You may even consider yourself to be an adult now. Truth be told, you are not ancient, like you thought people in their 40s were when you were a teenager or even a twenty-something.
If you turned 40 sometime ago, you can probably fondly remember that milestone. I do, as I received a cookie bouquet from my younger brother … and the cookies were dinosaurs!
When you turn 40, it’s a magical age, and you can no longer deny the fact you are heading toward retirement. Have you started to set aside your nest egg?
The years you have to accumulate your retirement savings are passing away, and the time is now to attend to these issues! Don’t delay. I don’t mean to be a doomsday dweller, but wise people have been planning ahead for retirement much earlier than age 40; so let this birthday milestone be your wake-up call!
Maximize What You Invest in Your 401k.
Hopefully, you haven’t been totally ignoring retirement, and it is likely that you have set aside some funds through your employment. Most folks have started funding a 401k by age 40. For sake of illustration, let’s assume you have $10,000 saved so far for retirement in a 401K.
You have likely heard of terms like 401ks and IRAs. But it is very likely that you aren’t maximizing these vehicles. Are you matching your employer’s contribution? Have you met with a financial counselor to look at other options?
Let’s also assume you are carrying no debt other than your mortgage, and that you have set aside some emergency savings funds to cover unexpected, big expenses that would otherwise drain your income. Is “Savings” even a budget line item on your monthly budget? It should be, and – according to Dave Ramsey – you should be investing AT LEAST 15% of your income right away.
Here’s some good news! Folks in the 45-54 age range are at or approaching their peak earning years. Congratulations! If you are earning $55,000 per year, you could invest $8,250 per year toward retirement. And, over the next twenty years (age 45-65), you’d have more than $585,000 for retirement. Not too shabby!
Reduce debt and increase savings.
Do you still have a mortgage? What are you doing to pay it off faster? This should be your number one priority. Don’t stop saving the 15% toward your retirement. Think of the benefit – you’ll own your home and not owe another cent to the bank so you can enjoy your retirement. You’ll need less retirement savings if the big chunk (your mortgage) is now longer a budget line item.
If your mortgage is paid off before you retire, which is the goal, you can take the money you were paying the bank, your old mortgage payment, and add it to your retirement savings. Your nest egg will grow larger than if you had not had that “extra”.
Do the math. If you’re 55 now, and your mortgage is paid off, and let’s say that gives you an additional $1,000 per month. By the time you turn 65, you will have put in an additional $12,000 per year for ten years or $120,000 more, just from your mortgage payment! And that doesn’t even begin to take into account the interest you will have earned.
If you’re 40 years old – you’ve got time on your side!!!
What a difference a little more time can make for the amount of retirement savings you’ll have available! The longer you are able to work, and this is not an option for everyone, the better for your retirement. So, if you’re in good health and enjoy your job, work longer.
These ideas are aggressive, and you may have to make sacrifices to pull this off. But if you commit to it, you can be successful in making some significant lifestyle strides for the future. So in the short term, you may need to buckle down, so that you can relax in the long-term.
Don’t try to go this alone, either. Enlist the help of your financial professional to help you choose your investment plan wisely to maximize the return on all the funds you are saving.
The time is now. Don’t wait for a “better” time. You might be waiting a long time. Find someone you trust to help you get started.
You don’t want to be years down the road, like many of us, wishing you’d started sooner. You don’t have to wait until your 40th birthday to put these plans in place either. If you start funding a 401k well before age 40, maybe you can retire by age 45. The important thing is to get started — and the sooner the better. What are you waiting for?!