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Starting to Invest in Your 40s? Here’s What It Could Take to Catch Up
What’s the most important thing you need to start investing? It’s not a big pile of money. If you’re 50 or younger, the biggest asset you have is time.
Even if you start out with small contributions to a 401(k) or individual retirement account (IRA), compounding will make your investments increase in value over time. Just like small seeds can grow tremendously if given enough water and sunlight, time can grow your nest egg.
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What to know about 401(k) matches
There’s a powerful resource within your 401(k) that can help you jump-start even the smallest amount of savings. Most employers — more than 80%, according to one survey from the Plan Sponsor Council of America (PSCA) — will match a portion of workers’ 401(k) contributions. The average maximum available match is a little less than 5%, the PSCA found.
This pre-tax benefit is essentially free money. Make sure you contribute enough receive your full company match.
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How much should you save?
When saving for retirement, it’s better to start sooner, even if that means starting smaller. How little can you save and still make a difference? You might be surprised to learn that you can start building a nest egg with a mere $50 a week.
Here’s some quick math to put it in perspective using the roughly 10.5% average annual growth the broad-based S&P 500 index has gained going back to 1957 (though keep in mind that market growth in any given year can vary widely, and past performance doesn’t guarantee future returns). If you save $50 a week (roughly $217 monthly) starting today, your contributions would add up to a little over $26,000 in 10 years. Compare that to waiting another five years, then saving twice as much — $100 a week or about $433 a month — for the next five years.
Although your total contributions are the same at slightly more than $26,000 the end result is anything but: Contributing $50 a week for 10 years nets you more than $42,600, versus roughly $32,200 if you contribute $100 a week for five years.
That difference of more than $10,000 is thanks to the magic of compounding. If you’re starting to save in your 40s, you don’t have as much time on your side as someone in their 20s, but you can still make a meaningful difference for your nest egg by consistently contributing to your savings accounts.
If you need help planning, use the Securities and Exchange Commission’s online calculator to see how much your money could grow over time.
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Automate your savings
If you have a 401(k), contributing enough to earn your employer match is a good first step. But you don’t necessarily need a 401(k) to start cultivating your nest egg.
You can also set up an IRA, determining if a traditional pre-tax account or a Roth account funded with post-tax dollars will be better for your financial situation. Major online brokerage firms like Vanguard, Fidelity and Charles Schwab make it simple to open these accounts.
The best set-it-and-forget-it tactic to make sure that you stay on track is automating your retirement savings. Link your new retirement account to your checking account and set up automatic weekly or monthly transfers into it.
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Don’t let a lack of investing experience keep you on the sidelines. Putting contributions into a passively-managed target-date index fund using your intended retirement year as the target will get the ball rolling, keep your costs down and let you start taking advantage of market growth.
And don’t wait for the “right time” to invest or be afraid that it’s too late. The right time is now, since steady contributions now are better than playing catch-up later. Even small amounts, if consistently and prudently invested in a low-fee index fund within a tax-preferred retirement account, can grow significantly over time.
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The $292M crypto hack exposed DeFi’s weak spots. Here’s what must change, insiders say
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Prediction markets are ditching the ‘casino’ label to become a regular part of how people track the news
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