Remember when you were a kid and you couldn’t wait to be older? If you're 40 or thereabouts, congratulations. You've made it.
Middle age brings more than just graying hair and fat that's harder to shed than it ever was before. Forty is a nice round number and a great place to pause, check in with your finances and take inventory of the money milestones you've reached — and those that are still proving to be elusive.
The following is a list of the most important middle age money markers. Most of the milestones you'll read about below are general benchmarks that don't apply to everyone equally. If you're not even in the ballpark of some of them -- or all of them -- don't panic. The full retirement age for people born in 1960 or later is 67 years old, which gives you more than a quarter-century to catch up, change your habits and make up for lost time. But keep in mind, you're on the other side of the hump now and time is not something you want to lose too much more of.
Last updated: July 19, 2021
A Few Months of Cash Reserves
By middle age, you should have money saved in an emergency fund so that you can weather a job loss, medical emergency or other unexpected financial storm. The pandemic completely changed conventional wisdom on the traditional emergency fund, as even the most prudent and committed savers didn't have enough cash on hand to endure a year of crisis.
According to Vanguard and many other financial firms and experts, however, the virus was an outlier and the old rules of emergency funds still apply. By 40, you should have three to six months' worth of savings set aside to get you through the rough patches that are always right around the corner.
A Brokerage Account
If you had siphoned some of every single paycheck into an investment account from the time of your first job as a teenager, you might have been able to retire by age 40. But if life happened and you didn't get the chance, join the club. The good news is, 27 years is still a lot of time to play catchup.
Money in a savings account loses value to inflation. If you want your money to make money, you’ll have to take some risk and invest it in the stock market — and that requires a brokerage account. There was a time when high costs shut average people out of the market. Today, you have your pick of free brokerages — M1 Finance, Firstrade and Robinhood, to name a few — that are available to investors on shoestring budgets with no experience.
Three Times Your Salary in Retirement Savings
According to CNBC, Fidelity and conventional wisdom in general, you should have three times your annual salary saved for retirement by age 40. If you make $50,000, for example, you should have $150,000 banked in your 401(k).
If you don’t have an employer-based retirement fund, it’s up to you to open a self-directed account like an IRA or Roth IRA — you can do it right there in your brokerage account from the last section. You still have time, but none to waste. Start now.
Life insurance is not a one-size-fits-all financial decision, but there are a few standards for someone entering their fifth decade of life. In almost all cases, if you have children, you need life insurance. The same goes for aging parents, a spouse or domestic partner, or anyone else if they depend on all or part of your income. If you want to leave an inheritance to heirs but you don’t have any assets to will them, life insurance is for you, as it is if you want to make sure your final expenses are covered.
There are many different kinds — term, whole, universal, variable, etc. — that serve many different needs. You’ll have to conduct that research on your own, but one thing is certain — 40 is neither too old nor too young to invest in the security that comes with life insurance.
An Estate Plan
Death is an uncomfortable subject for everyone, and while 40 is hopefully too early to start worrying about the inevitable, it’s certainly not too early to start planning for it. If you have children, you need an estate plan. Likewise if you have aging parents, real estate, a 401(k) or other retirement fund, investment accounts or a basic desire to have your wishes carried out should you die or become unable to make decisions on your own while still alive.
It’s not a pleasant subject, but it also doesn’t have to be an insurmountable task. Estate planning at LegalZoom, for example, starts at $179 and comes with legal advice from a qualified attorney.
A College Savings Plan
If you have children — even if you’re a brand new parent — they may look small now, but the clock never ceases to tick. The average cost of a college education is now $107,280 for a public school and $219,520 for a private school, according to College Board.
Unless you’re able to come up with that kind of cash when the time arrives, you have two options — saddle your kids and yourself with parent/student debt when they’re done with high school or start saving now.
A special account called a 529 makes saving for college easy, and it also comes with lots of other benefits, including tax deductions, tax-free withdrawals, tax-deferred growth and gift tax benefits. There’s no limit on what you can contribute to 529 funds, you control the investments and you can access your money when you need to.
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