Looking at our finances at first, I could not tell if we were even on track for retirement while we keep on working towards saving all these years. But, how should my finances look like in my 40s? How much savings should I have by now in order to reach our financial goals?
I figured I better create a checklist to make sure we actually meet some of the critical milestones before we get too far off track. And hopefully, this list can be helpful to others who wonder about similar questions as well.
Pay off high interest debts or student loans
Did you know that the average interest rate for credit cards is 17.3%? That is a very expensive debt. Especially when compared to national average savings rate of 0.09%, according to the FDIC. If you still have high interests debt (other than mortgage), you should first try to eliminate it as fast as you can. Hopefully, by age 40, you have paid off all of your student loans already.
Most credit cards charge compound interest rates. If you pay your balance in full every month, there is no interest.
However, if you carry a remaining balance at all, the interest is calculated based on the entire balance of the month even though you paid it down and it starts compounded daily from the day of the purchase, not just after the due date.
Compound interest accrued daily, instead of 17% annually, interest compound based on the balance at the end of the day. As a result, the total interests is actually costing more than you thought.
So, pay off credit card balance in full every month to avoid interest. Also, make sure you have auto payments scheduled prior to due date to avoid late penalty fee. And, to set yourself for long term financial success when you hit 40, first pay off any debts, student loans and credit card balances and continue on good credit card habits.
Set aside a solid emergency fund
The rule of thumb is to have 3 to 6 months of living expenses covered when it comes to saving in emergency fund. I think that’s a reasonable benchmark for young couples.
For a family with multiple children, I think a minimum of at least 6 months is needed because for an unexpected event like a layoff or job loss, it may take at least 6 to 9 months to get a new job while you still have a mortgage to pay. Let’s be honest, getting a new job is only going to become more difficult for middle aged people and once we reach 40 and beyond.
With the said, how much of emergency fund is enough really depends on each household since everyone’s lifestyle, living expenses, financial obligations, geographical locations, stage of lives, health are all so different. You should do what you and your family is comfortable with and always have a backup plan.
Contribute towards retirement savings
If you didn’t start saving for retirement from when you were 25 or 35, it is still not too late to start now. You will have to supercharge your savings amount every year. At 40, if you are at the peak of your income level, you should contribute to the maximum limit to catch up on your savings for the next 10 to 15 years.
How much money will you need in retirement? A quick and easy way to estimate is using the “Multiple by 25” rule by multiplying your desired annual income by 25. For example, if you need $100,000 to cover your annual expenses, you will need $100,000 x 25 = $2.5 million in your retirement savings.
Have three times your annual salary saved
Now that you know how much you need in retirement, you are wondering how is your current savings looking. By the time you reach 40, you should aimed to have saved 3 times your current salary. For example, if you are earning $100,000, you will want $300,000 in your retirement savings when you hit 40.
Buy life insurance
Life insurance is meant for protecting your family who depends on you for financial support. It is a decision that is better made earlier than late because the older you get the more expensive the premiums will be. Life insurance can be a way to provide living expenses for your family, pay for mortgage, pay off debts, cover funeral expenses for the surviving beneficiaries.
Term life insurance has the options of 10, 20 or 30 years coverages with most offer coverage up to 60 years old. In most recent years, with several new insurance companies require no medical exams making the application process super easy. Ladder Life is one of those companies and offers competitive pricing.
Establish a will
If you care about how your assets are going to be disbursed, then you need a will. If you have minor children, a will allows you to make informed decisions about who will take care of your children as their legal guardians. Having a will clearly spelled out can help surviving family and loved ones from unnecessary confusions during the most difficult time. In addition, make sure you have beneficiaries designated for each of your financial accounts (savings, investments, retirement accounts, etc).
Saved for kids college education
Speaking of children, have you started saving for your kid’s college education? Between savings for emergency fund, retirement fund and college education fund, it’s just not easy to fully load all these accounts. But, if you plan to finance your kid’s college education, then it must have to start by now even with small contributions.
Ask yourself if you want them to attend a public or private college, an in-state or out-of-state, the more research you do earlier on and the more specific you make your planning, the better chances you will save enough towards funding your child’s education.
If you know which college you may want to send them, you will be better prepared for how much they will need for their 4 years college education. I recommend researching the cost of the colleges that you are interested in specifically and not rely on the national average cost because the cost varies significantly.
Review your retirement plans
If you plan to retire early and have not yet reached the financial freedom you desire, it is time to create strategies that will bring you closer to your goals. Whether it is through making extra income by working at a second job, diversifying your income streams, investing extra money. The next milestones could be to have 6X your annual salary saved by the time you hit 50. Whatever it is, review your plans to keep your retirement on track.
What are the action steps you are prioritizing today? Anything else that I missed in this list? Share your insights as I’d love hearing from you.