Play the Percentages: Early 40s

March 15, 2005

Rande Spiegelman
CPA, CFP®, Vice President of Financial Planning, Schwab Center for Financial Research

In "How Much Should You Save for Retirement? Play the Percentages," we looked at the percentage of your pretax salary you should be saving now to have a good chance of maintaining your lifestyle over a 30-year retirement.

We started with these assumptions:

• No previous retirement savings—you're starting from zero. If you already have retirement savings (and you're a Schwab client), you can log in and use the Schwab Retirement Planner to run your own numbers.
• You plan to spend 70%¹ of your preretirement, pretax income in retirement, adjusted for inflation and highly likely to be sustainable for roughly 30 years (assumes retirement at age 65).
• Social Security or other income will provide 25% of your retirement income needs each year. Your portfolio will have to provide for the rest of your spending needs in retirement. (We assume a conservative-to-moderate portfolio allocation in retirement, with no intent to leave a portion of the portfolio to any heirs.)
• Your preretirement income will grow (at least enough to keep pace with inflation) during your working years.
• You average a compound annual return of 8% on your preretirement investments, with 2.5% inflation.

Here's a recap of our broad recommendations for how much you should be saving.

Saving for Retirement 

Early 40s

Let's take a closer look at the numbers if you're in your early 40s. Again, the sooner you start, the lower the percentage of your salary you need to save for the rest of your working years, provided you stick with it. And remember, these are minimum targets—if you can save more, all the better.

What People in Their Early 40s Should Be Saving for Retirement

Advice for people in their early 40s

• Your goal should be to max out your 401(k) or other employer retirement plan, taking full advantage of any matching contributions. If you work for yourself, max out a self-employed retirement plan such as a SEP-IRA or QRP/Keogh plan.
• For extra retirement savings, consider the benefits of a deductible traditional IRA or Roth IRA, if you're eligible. If you still need to put away more (and can afford it), save and invest the rest in a brokerage account.
• College for your children may be looming. Have you investigated less-expensive public universities closer to home? What about a couple of years at the local community college first and taking out a low-rate, tax-deductible student loan? See "The Parent Trap: College vs. Retirement" for more.
• Were you able to refinance your mortgage at a lower interest rate? If so, what have you done with the savings? Instead of spending the difference, consider putting it toward your retirement.
• When you get a raise, don't automatically raise your standard of living—earmark as much of the increase as you can for retirement savings.

Keep in mind these are only general guidelines to help you plan for a secure retirement. Everyone’s situation and goals are different. If you'd like to take a closer look at your unique circumstances, Schwab can help.