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👴 Why save before 40

👴 Why save before 40

and strategies for late starters

Michael Wight, Jason Phillips & Trajan King
January 10, 2025

In partnership with

Retirement Download

Strategies for a successful retirement

The Importance of Starting Retirement Savings Before 40

If you haven’t begun saving for retirement by the time you reach 40, it’s crucial to reconsider your long-term financial plan.

According to retirement experts, failing to start early can result in significant challenges down the road, as saving more in your later years may not be enough to live the retirement you envision.

Why Starting Before 40 Matters

At age 40, it’s not just about saving more money; it’s about making strategic decisions for the future. Without early savings, you’ll face difficult choices in retirement. You might need to continue working, significantly reduce your spending, or make substantial lifestyle changes, such as downsizing your home or moving to a more affordable area.

The key here is that you are taking choices away from your future self if you don’t save early. By delaying retirement savings, you may limit your options in your later years.

The Benefits of Saving Early

Ideally, retirement savings should start in your 20s, as this allows your investments to grow over time, taking full advantage of compound interest. However, a significant number of young workers are not saving for retirement.

According to recent Bankrate data, 26% of Gen Z workers (ages 18–27) didn’t contribute to their retirement savings last year.

While finances may be tight in your early 20s, missing contributions for one year isn’t a major setback. Still, waiting too long can mean missing out on important opportunities, especially if your employer offers a 401(k) match. The money you leave on the table through missed contributions is something you’ll never recover.

The Math Behind Early vs. Late Savings

Saving early not only gives your money more time to grow but also means you can contribute a smaller portion of your income.

Experts generally recommend saving 15% of your annual income, including any employer match. However, if you wait until you’re 40, you’ll need to increase that amount to 25% or more.

For example, if your goal is to retire with $1 million by age 65 and you start saving at age 25, you would need to contribute $381 per month, assuming a 7% annual return. If you wait until 40, you’d need to save $1,234 per month to reach the same goal.

Use this Retirement Calculator to know how much you need to save to reach your retirement goal.

While it’s still possible to reach $1 million by starting at 40, the amount you must save each month is considerably higher, which may not be realistic for many people.

Building the Habit of Saving

Starting early has an additional benefit: it helps you build the habit of saving.

Saving consistently at a young age not only allows your money to grow but also makes it easier to continue saving over time. It reduces the intimidation factor, gradually reprogramming your mindset to see yourself as someone who saves and invests.

By developing this "savings muscle" early, you set yourself up for financial success and increased freedom in the future, allowing for more choices as you age.

Strategies for Late Starters

Starting retirement savings after 40 may seem daunting, but it’s never too late to build a solid financial foundation for your future. Here are actionable steps to help late starters catch up:

Maximize Contributions

Take full advantage of retirement accounts like 401(k)s or IRAs by contributing the maximum allowable amount. For those over 50, the IRS permits catch-up contributions, allowing you to contribute more annually than younger workers. This can significantly accelerate your savings.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) created the catch-up contribution provision, thus allowing older workers to set aside more earnings for retirement.

In 2024 and 2025, the catch-up contribution limit for IRAs is an additional $1,000, bringing the total contribution limit to $7,000 annually, plus the $1,000 catch-up allowance for individuals aged 50 or older.

For 401(k) plans, the catch-up contribution limit is $7,500 for 2024 and 2025, on top of the annual contribution limit of $23,500. This same $7,500 catch-up contribution applies to participants in 403(b) plans and Thrift Savings Plans during the same period.

Participants in SIMPLE IRA plans can make catch-up contributions of $3,500 in 2024 and 2025, in addition to the standard contribution limit.

Leverage Employer Benefits

If your employer offers a matching contribution for your 401(k), prioritize contributing at least enough to receive the full match. This is essentially free money that can boost your retirement fund.

Cut Unnecessary Expenses

Revisit your budget to identify areas where you can cut back. Redirect funds from discretionary spending, such as dining out or streaming subscriptions, to your retirement accounts.

Our Budget Calculator can come in handy.

Consider a Side Income

A side hustle can provide additional income specifically for retirement savings. Whether it’s freelancing, consulting, or monetizing a hobby, the extra earnings can make a big difference when invested.

You can even consider dividend income. Check Dividend Download for the latest on dividends, including top dividend picks for retirees.

Invest Wisely

Late starters may need to adopt a slightly more aggressive investment strategy to make up for lost time. While higher-risk investments can yield better returns, they also carry the potential for losses. Consider consulting a financial advisor to create a diversified portfolio suited to your timeline and risk tolerance.

Delay Retirement, if Possible

Postponing retirement can allow you more time to save and reduce the number of years your savings need to support you. Additionally, delaying Social Security benefits can increase the amount you receive monthly.

This, however, is a controversial topic because experts seem divided on it. There are both pros and cons to delaying retirement. Here’s an interesting video on the topic:

Automate Your Savings

Set up automatic contributions to your retirement accounts to ensure consistent saving. Automating the process reduces the temptation to spend and ensures that saving becomes a regular habit.

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