By the time you reach age 40, you should already be well on your way to building a strong retirement nest egg. But there are a few other milestones to shoot for well before retirement age:
- Have a solid emergency fund
Emergencies can happen at any age, but most Americans aren’t financially prepared for them. Whether your car is making an ugly noise, your water heater suddenly breaks, or you find yourself in the hospital after an accident, or you lose your job, these types of expenses are guaranteed to pop up at some point. And if you don’t have the cash to pay for them, your only options include taking out a costly loan, putting it on a credit card and racking up debt, or pulling money from your retirement fund. Ideally, you should have enough stashed away to cover 3 to 6 months’ worth of living expenses in the event of a job loss or unexpected expense.
- Pay down all high-interest debt
Not all debt is bad, but high-interest debt (like credit card debt) can be toxic. This type of debt can take years to pay off, and you could end up paying thousands of dollars in interest alone. The longer it takes to pay down debt, the more you’ll be paying in interest. By paying down all your high-interest debt by the time you reach 40, you’ll be able to make better use of that money by investing it in your retirement fund or stashing it away in an emergency savings account.
- Have 3 times your salary saved for retirement
By age 40, you should have an established retirement fund. While there’s no concrete number as to exactly how much you should have saved by this age, Fidelity recommends having three times your annual salary saved by the time you turn 40. It’s never too late to start saving, but the earlier you start, the easier it will be. At 40, you still have plenty of time before retirement. But it’s also important to be setting financial goals for yourself to ensure you’re on the right track.
- Paid off at least 25% of your mortgage
If you’ve just obtained a new a 30-year mortgage at 40 years old, by just paying the minimum, you won’t be able to pay off your home’s mortgage until your age 70 – right at the point of retirement. That means you won’t have much saved up for your retirement or anything else you’d like to do once you don’t have to work anymore. Getting a mortgage early or paying more than the minimum can easily save you thousands and cut off years to your mortgage by the time you retire.
- Own at least 1 investment (not including your home)
No one can guarantee that Social Security will be around by the time you retire. That said, it’s best to have some kind of investments by now, so it can mature by the time you retire. Real estate, Certificate of Deposits, Stocks, and even government bonds are all very investments – be sure to consult your financial adviser first. But we highly recommend that you stay away from lottery tickets and baseball cards.