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Americans in Their 40s Struggle to Meet Retirement Savings Goals; What Are the Steps to Take?

According to data from Fidelity, the median 401(k) balance for individuals aged 40 to 49 stands at $38,600 as of the fourth quarter of 2023.
Cover Image Source: Planning early for one's retirement in crucial (representative image) | Pexels | Photo by Andrea Piacquadio
Cover Image Source: Planning early for one's retirement in crucial (representative image) | Pexels | Photo by Andrea Piacquadio

In a recent report by Fidelity Investments, it has been highlighted that Americans in their 40s are facing challenges in accumulating sufficient retirement savings, with the median 401(k) balance hovering below recommended targets. According to data from Fidelity, the median 401(k) balance for individuals aged 40 to 49 stands at $38,600 as of the fourth quarter of 2023. This figure underscores the pressing need for proactive financial planning among this demographic to ensure a comfortable retirement. While surpassing $40,000 in retirement savings places individuals ahead of many peers in the same age group, financial experts caution that additional measures are necessary to secure a stable financial future.

Pexels | Photo by Towfiqu barbhuiya
Savings (representative image) | dUnsplash | Photo by Towfiqu barbhuiya

Fidelity's guidelines suggest that individuals in their 40s should aim to have three times their annual salary saved for retirement. For instance, an individual earning $80,000 annually would ideally have $240,000 set aside for their post-work years. Numerous impediments have hindered the ability of individuals in their 40s to enhance their retirement contributions. One significant factor is the timing of their entry into the workforce, which coincided with the absence of key tax system reforms, such as auto-enrollment and auto-escalation in employer-sponsored 401(k) plans.

Anne Lester, a renowned retirement expert and author of “Your Best Financial Life: Save Smart Now for the Future You Want” points out that individuals in this age cohort missed out on the benefits of these reforms, which automatically enroll employees into their company's 401(k) plan and incrementally increase their savings rate annually. "They were not the beneficiaries of all of the reforms that have happened in the 401(k) system in the last 15 years," Lester explains to CNBC Make It. "Many Gen Xers have changed jobs, and maybe they’re now contributing, but they missed out on saving in those early years if they didn’t sign up themselves." Additionally, individuals in their 40s often face the challenges of being part of the "sandwich generation," responsible for managing expenses associated with both childcare and caregiving for elderly parents.

Pexels | Photo by Pavel Danilyuk
Planning retirement savings (representative image) | Pexels | Photo by Pavel Danilyuk

Anne Lester emphasizes the financial strain this dual responsibility places on individuals, stating, "It just takes a huge bite out of your wallet. I think as people are inevitably allocating scarce and finite resources, you may find yourself contributing less than you should." If you're in your 40s and your retirement nest egg isn't quite where you envisioned it, there are strategic steps you can take to align your savings trajectory.

Firstly, gaining clarity on your current retirement savings status is paramount. Understand the dynamics impacting your account balance, including market fluctuations. While market volatility can influence your overall savings, your savings rate remains within your control. It's imperative to maximize your contributions, particularly to capitalize on any employer matching programs offered by your company. Fidelity suggests targeting a savings rate of 15%, inclusive of employer contributions.

For those lagging in retirement savings, short-term adjustments may be necessary to ramp up contributions. Anne Lester advises, "If you’re in your 40s and have saved zero for retirement, you may be looking at a savings rate of 30-plus percent." While daunting, gradual increases via tools like auto-escalation can ease the transition. As financial responsibilities shift, such as decreased childcare expenses, reallocating those funds towards retirement can expedite savings growth. Lester underscores the importance of preemptively planning for these shifts, saying, "Mentally plan for that now so that you’re not feeling poor or deprived when you get that a little bit of extra money."