By the time you are in your mid-40s, you expect to have accomplished most of your financial goals- own a home, have several cars, pay off your mortgage, and have a fat nest egg.
However, if you haven’t managed to tick off any of these goals from your checklist, there is still time to make a turnaround. While you may not have as much time as individuals in their 20s and 30s, there are a couple of things you can do to improve your financial situation.
How much savings should you have by age 45?
The size of the nest egg you should have by age 45 may vary depending on your situation, lifestyle, and financial goals.
While there is no one-size-fits-all savings target, there are several guidelines that you can use to determine how much you should have saved.
Fidelity recommends that by age 40, you should have saved 3x your annual salary for your retirement, while by age 50, you should have saved 6x your annual salary. For example, if your annual salary is $100,000, you should aim to have saved $300,000 by age 40, and $600,000 by age 50.
Based on the above guidelines, it means that by age 45, you should aim to have saved 4.5 times your annual salary. If your annual salary is $100,000, you should aim to have saved $450,000 by age 45.
No Savings at 45: What can I do?
If you are 45 with no savings, it is time to get serious about building a nest egg. At this age, you might still have several decades of work to get back on track with your savings.
Here are some smart moves you can make to get back to building a nest egg fast:
Set retirement goals
Start by determining the desired lifestyle in retirement and the amount you will need to support that lifestyle. For example, if you plan to travel a lot in retirement, you will need to have saved more to meet the cost of airfare, hotel fees, meals, etc. As you travel to different countries, have liquid cash to use on your day-to-day expenses.
Extend your career
If you are looking at no savings at 45, you should consider extending your career and use the extra years to stash more money for your retirement and keep the existing nest egg intact.
If you are 45, and you plan to retire at 65, meaning you have 20 years of work remaining, you can choose to extend your retirement by 5 to 10 years, so that you have more time to catch up with your retirement savings.
If you contribute $800 every month for the next 20 years, your nest could compound to $400,000, assuming a 7% annual return. If you extend your career by another five years, and you continue contributing $800 every month for the extra five years, your earnings will grow by an extra $207,000 for a total of $607,000.
You should be mentally prepared to work longer hours so that you don’t become mentally and financially drained.
Take advantage of 401(k)
If you have a 401(k) plan with your employer, you should start contributing to the plan as soon you become eligible to participate in the workplace retirement plan.
For 2023, you can contribute up to $22,500 to your 401(k) plan; if you are age 50 or older, you can contribute an additional $7,500 in catch-up contribution, for a total of $30,000.
Most employers offer a 401(k) match, either a partial or dollar-for-dollar match, on employee contributions. If you are eligible to receive a match, you should contribute enough to get the full match and get a 100% return on your money.
Get out of debt
If you have too many debts like student loans, credit card debts, and mortgage payments, you won’t be able to stash enough for your retirement. Your priority should be to pay short-term debts first followed by long-term debts.
You can use the debt snowball method to pay off debts fast so that you can free up cash to put in your retirement savings plans. Once you’ve paid most of the debts taking up a huge chunk of money, you should contribute at least 15% of your income for retirement.
Free up more cash for savings
If your paychecks get maxed out by living expenses, you should re-examine your budget to identify ways of freeing up some cash. Check for any unnecessary expenses in your budget or any expenses that can be trimmed.
For example, if you have unused space in your home, you can choose to downsize and save some money off your housing costs. If downsizing gives you an extra $600 every month, you can top up your contributions by an extra $600, for a total of $7,200 at the end of the year. If you prefer not to downsize and instead rent out the extra space, you will get an extra income that you can use to boost your retirement savings.
If you have two cars in your home, you can choose to unload one car and remain with a single car that you can share with your spouse. Selling one car will not only give you a lump sum payment, but it will also free up thousands of dollars in gas, maintenance, and insurance costs annually. You can redirect the cost savings to your retirement savings plans.
Invest aggressively
If you are trying to catch up with your retirement savings, you should invest aggressively to make up for the lost time. While stocks tend to be more volatile than other investments such as bonds, they can deliver high returns in the long term. Alternatively, you can build a well-diversified portfolio that comprises stocks, bonds, broad market index funds, etc.
Final Thoughts
Getting to 45 with no savings can create a lot of fear, but it is a situation you can recover from. Instead of resigning to the notion that you won’t afford your retirement, you should take steps to manage your finances better and start building your nest egg. If you don’t take action immediately, you could go into your 50s with the same no-savings problem, and it will be harder to catch up.