How Much Should I Have Saved by 40?

I am going to have 40th birthday in a few years (I can’t believe it, when I was in my 20’s I thought that when I turn 30 I would feel old) so I thought I would see how much I should have saved by 40, according to conventional measures and standards.

One might not necessarily follow these ‘goal posts’ or ‘milestones’ set forth by society, it is still good to know what they are. I approach tracking my investing portfolio the same way.

I don’t mind comparing my portfolio performance against benchmarks such as the S&P500 and the TSX/S&P500 so I can see where I stand.

I had thought about how much I should have saved up by age 35 and that birthday came and went and I am feeling more and more comfortable with how financial independence is getting closer and closer for me.

How Much Should I Have Saved by 40?

So much has happened in the past decade in my 30’s. I found my life partner, I got married, I gave birth to two children, I got my first serious health scare, and of course, I feel more tired than I ever have because of parenting and the lack of time to yourself with young kids.  This stage of your life is busy.

In your forties as you grow older, you have developed skills that make you valuable, you have have more than one source of income, and you have also be accustomed to a higher standard of living compared to your 20’s and 30’s.

In your forties your pre-retirement income will also be higher than previous decades.  

So, how much should I have saved up by 40?

Retirement Planning: The Definition of “Saved” is “Saved for Retirement”

When people wonder how much they have ‘saved’ it’s different from saved in net worth.

When you are talking about how much I should have saved by age 40, it means how much retirement savings I should have by 40.

To me having this amount saved and set aside for retirement is more related to a liquid net worth and having liquid assets invested in the stock market. Someone can have a large home equity “house rich” but be cash flow poor and liquid assets poor. Unless they sell their home they currently live in to downsize, or move to a lower cost of living location, it is difficult to extract cash from your primary residence to fund your lifestyle.

The same goes for high net worth individuals in Canada, this is calculated using liquid net worth and investable assets.

I highly recommend people who are using the TFSA as a $95,000 savings account with 2.50% interest at most, to save for their retirement in their TFSA and not use the TFSA as a mere savings account.

Average Savings by Age in Canada (Age 40)

What’s the average savings rate of 40 year olds in Canada?

According to Statistics Canada, the median net worth in 2019 of a 35 year old to 44 year old is $234,400.

When you look at median, it doesn’t tell us the average, but tells us the middle number if we were to plot the lowest net worth of a 35 to 44 year old and the highest net worth.

Here’s the difference between using median networth vs average net worth– the more accurate one that reflects where more Canadians and American 40 year olds stand in terms of net worth, is to look at the median net worth.

Average Retirement Savings at 40:  United States

What about how much a 40 year old in the US should have saved up?

For our American neighbours to the south per CNBC, the average net worth for households age 35 to 44 is $436,200 USD and the median net worth for a 40 year old household roughly is $91,300 USD in 2019.

How Much Money is a 40 Year Old One Percenter?

What net worth does it take to be considered part of the 1% 40 year olds who are considered the wealthiest in Canada?

The Kickass Entrepreneur has shared the top 1% net worth in the age group of age 40 to 44 in Canada to be $2,434,417.20 and the median net worth for the same age group to be $174,000.

I am assuming this is individual net worth and not household- this post does not specify.

So it would be reasonable to multiply it by two if you are looking for individual net worth of the 1% Canadians. I am assuming this net worth includes real estate and primary residence and not just liquid assets.

Yes, the top 1% in Canada are rich.

If you are a single parent obviously these numbers may not be reflective of where you stand as it is more difficult to save as a single parent than it is with a dual person household.

Although this is older data from 2012, Moneysense shows that those who are single or unattached have less wealth than a family of two or more aged 35 to 44.

What about the how much a 40 year old saves on average a year?

There isn’t too much data but we do know that because of the pandemic, people had been saving much more than before because of the lockdown.

During 2020 when much of Canada was locked down because of COVID-19 pandemic, the net savings for Canadians were much higher than normal.

As you can see from Statista, the way I interpret this, households with people aged 35-44 saved an average of $21,800 net in the first three quarters of 2020.

How Much Savings I Should have at 40

According to CNBC and US based retirement plan provider, Fidelity, you should have 3 times your annual salary saved up in your retirement accounts when you hit age 40, if you want to retire before age 67.

Let’s say your annual salary is $75,000, you should have $225,000 saved up for retirement.

On a retirement portfolio with $225,000 and a 3.5% yield, this would provide $7875 in annual income to cover your expenses in retirement.

These benchmark indicators are to be taken with a grain of salt and should be seen as just that “recommendations”. This is because some people don’t work full time or perhaps they worked full time before but now they have switched to working part time.

Everyone’s life journey is different, and everyone’s expenses in retirement and lifestyle in retirement will be different.

Now that we know the ‘recommendations’ of how much you should have saved up by 40…here are some ways that you can save up twice your annual salary by 40, earmarked for retirement.

How Do You Save Up Three Times Your Annual Salary By Age 40?

To save up three times your annual salary by age 40 and keep your retirement goals realistic at 65, there are a few things you can do to make sure you build your nest egg.

To be honest it is simple to understand but more difficult to execute. Everyone knows the simple formula of saving money (more than you earn) and investing the amount you save, but actually completing this task is more difficult and problematic than people believe it to be.

There are some baby steps that you could take to make saving money (three times your annual salary) easier on yourself.

Track your Net Worth

I couldn’t recommend this enough as an influence for your financial decisions.

You won’t know where you need to go if you don’t know where you currently stand. I use Wealthica to track my investment portfolio and net worth– it is known as the Personal Capital of Canada. Instead of net worth though I have been keeping track of my investment portfolio.

It starts off when you are young, tracking your net worth to get rid of your student loan debt, then tracking your net worth to calculate your annual investment contribution.

I find it similar to dieting- calorie counting for a few weeks was quite eye opening for me. It is similar to tracking your net worth, you don’t realize where you are until you take a closer look at it.

Your habits will change accordingly.

You can’t know where you’re heading to unless you know where you come from.

Take Advantage of your RRSP and TFSA

Before you invest in a non-registered account, you have to take advantage of the RRSP and TFSA first.  They are great investment vehicles for the tax benefits.   I take my tax refund from my RRSP and use it to fund my TFSA so that I can maximize the $6000  to $7000 contribution annually. 

Putting money towards these tax-advantaged savings grow tax-deferred.  The money invested will supercharge your retirement nest egg personal savings.

If you have any investments in your non-registered accounts for retirement, and you have not maxed out your RRSP and TFSA contribution limits, please correct that as soon as possible!

Catch-up contributions are important for these tax-advantaged accounts, and employer contributions and employer match also helps you reach your financial goals.

Related: RRSP vs TFSA Which One to Invest in First?

 

Related: RRSP vs TFSA Which One to Invest in First?

Pay Yourself First (And More Importantly, Invest It)

To save $81,000 in five years from age 35 to age 40, assuming you are making $75,000 already. You will have to boost your savings to 20% of your gross income which is $15,000 a year, or about $1250 after taxes and other work deductions every month socked away. 

It is important to pay yourself first regular savings and then invest it (in addition to making sure your investment returns are up to par)

Earning 1% on a high interest savings account or a money market fund will not beat the high inflation that we will be dealing with and it will not grow your wealth especially if you have to pay marginal rate tax on that 1% in interest income.

Owning income generating assets in Canada will help increase your net worth and investments.

Related: Do This with Your Pay Cheque to Build Wealth

Focus On Adding Income Streams and Income Generating Assets

As mentioned, income generating assets are of utmost importance in your financial independence journey. The average millionaire does not have just one income stream (their job), they have multiple.

Invest and get passive dividend income or find different ways to side hustle (like getting rid of stuff you don’t want that might be someone else’s treasure). 

Even applying for new chequing accounts in Canada to earn $300 a pop might be a new income stream.

Focus on Asset Allocation

Even though we have had an epic bull market (minus the crazy shortest crash in history in early 2020), there will be at time when the market will crash.

The market will crash eventually and you will want to be prepare and not panic.  

You can start DIY investing and buy a one ticket ETF at a cost of 0.25% compared to the average mutual fund fees in Canada of over 2.25%. 

ETFs are free to purchase with Questrade.

Lower Your Expenses

Another way to increase your savings is to lower your expenses.

I check for ways to lower my monthly expenses, such as my cell phone bill or Internet bill. 

You will be surprised at the instant savings, especially if you call for banking related expenses to lower and you have a relationship with the financial advisor.

These financial decisions are simple but powerful.

High-Yield Savings: The Bigger Picture at Age 40

Although I admit I am not looking forward to more wrinkles, I look forward to my 40’s, or fourth decade in life.

By around the age of 40, my investment portfolio should be in the 7 figures and I hope to have achieved financial independence, even if I have not retired yet.  

The compounding effect really is obvious when you have a larger portfolio which will be the case in your 40’s compared to your 20’s.  You will not be needing to contribute as much if you start younger than if you starting saving money approaching retirement.

Even 100 a week in your twenties will make a big dent towards supplying income in retirement.

Pretty soon, you’ll be making more portfolio income per day (unrealized gains of course) than you will in your day job. That will be a surreal feeling- even more surreal is having monthly unrealized gains that are larger than your monthly day job pay cheque.

More importantly, my children will be school age at this time, and I hopefully will have more time to myself while they are in school to work on my blog, to read more dividend investing books or personal finance books, to garden, and to sit in silence and think… in between shuttling them to their extracurricular activities of course.

This will be the decade that my children will be able to travel more easily too- I am looking forward to planning for more traveling around the world.

How Much Should You Have Saved by 40?

Although I admit I am not looking forward to more wrinkles, I look forward to my 40’s, or fourth decade in life.

By around the age of 40, my investment portfolio should be in the 7 figures and I hope to have achieved financial independence, even if I have not retired yet.  

The compounding effect really is obvious when you have a larger portfolio which will be the case in your 40’s compared to your 20’s.  You will not be needing to contribute as much if you start younger than if you starting saving money approaching retirement.

Even 100 a week in your twenties will make a big dent towards supplying income in retirement.

Pretty soon, you’ll be making more portfolio income per day (unrealized gains of course) than you will in your day job. That will be a surreal feeling- even more surreal is having monthly unrealized gains that are larger than your monthly day job pay cheque.

More importantly, my children will be school age at this time, and I hopefully will have more time to myself while they are in school to work on my blog, to read more dividend investing books or personal finance books, to garden, and to sit in silence and think… in between shuttling them to their extracurricular activities of course.

This will be the decade that my children will be able to travel more easily too- I am looking forward to planning for more traveling around the world.

You may also be interested in:

• Properly reviews
• Average Savings by Age in Canada

What did you enjoy most in your 40’s?