I'm 40 years old with a household income of $240K — and savings of $550K. Can I stop saving for retirement now?
If you're in your 40s with $550,000 saved, you’re well on your way to a secure retirement.
But, have you done so much to set yourself up for success that you can stop saving entirely and just rely on compound growth to get you the rest of the way over the finish line?
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The answer to this question depends on your goals and objectives for your later years — but, in most cases, giving up your efforts to invest now will likely mean having to make sacrifices in retirement. Here’s why.
Your nest egg may need to be bigger
Let’s say you hope to retire at 60. If you’re in your 40s with savings of $550,000, the money you’ve invested means you have a big head start towards a secure future.
Assuming a 10% average annual return, investments of $550,000 could turn into around $3.7 million in 20 years’ time. If you withdraw 4% annually — which is traditionally viewed as a safe rate that will ensure your money doesn’t run short — that would provide around $148,000 in annual income.
Although that might seem like plenty, there’s a few things to remember.
First and foremost, your salary will probably increase over time. If you’re earning $240,000 now, you’ll probably earn $356,627.38 in 20 years, assuming a 2% annual raise. Social Security replaces, at most, 40% of pre-retirement income and less for high earners. So, if you're hoping to maintain close to the same standard of living and want to replace 90% of what you were earning, you’re going to fall short by around $30,000.
Inflation is also going to eat away at that $148,000, meaning it's going to have a lot less buying power in 20 years’ time.
When you've had decades of earning a substantial sum and built your life around a big income, settling for less simply may not make sense — especially when you can easily avoid that fate by saving a little more over the rest of your working life.
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There are other benefits to continuing to save
Even if you’re confident you won’t fall short in retirement if you stop saving now, there are other reasons you may want to continue socking some money away for your later years.
If you don't keep saving, you'll miss out on all the financial advantages of retirement investing.
You’ll pass up any free money that comes from an employer match to 401(k) contributions. You’ll also miss out on some pretty substantial tax benefits. If you’re earning $240,000 and file your taxes as a married joint filer, you’re likely in the 24% tax bracket. A $10,000 401(k) contribution could cut your taxes by $2,400.
Not saving more now also limits your options later. If you decide you want to stop working at 55 instead of 60, for example, you'd want more money in your accounts to fund years of retirement before you become eligible for Social Security — and to pay for medical insurance before Medicaid eligibility begins.
The bottom line is there's very little reason not to keep saving when you’re earning $240,000. You can find a good balance so you’re able to invest a bit and enjoy life now while ensuring you have ample cash for not just a secure future but a retirement full of endless opportunity.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.