By the time we hit 40, many folks start to think about what life will be like in retirement. That includes taking a long look at your brokerage accounts.
At 40, you still have a few decades of retirement savings to go, which means you don't (necessarily) need to be concerned over every little detail of your retirement lifestyle. In other words, while you're still relatively young, you can probably get by with a rough estimate of your future personal finance needs when evaluating your current investment and savings accounts.
A simple, but very generalized, rule of thumb that some experts use says savings equal to 10 times your pre-retirement income will allow you to retire at the age of 67 without changing your lifestyle. This would give you savings roughly equal to 45% of your expenses, with Social Security making up the difference.
By this math, you'd need around three times your income saved by the age of 40 to meet that goal.
Once you know how much you should have saved to reach your retirement goals, then you can evaluate your accounts.
The first thing to look at is where your 401(k) stands, if you have one. (Some employers offer 401(k) retirement accounts, but you can't open it on your own.) If your employer offers a 401(k), it's likely the first place you put your retirement savings, for two reasons:
How much you save in your 401(k) beyond your employer match requirement will depend on your savings and tax strategy. If you max out your 401(k) each year but want to save more for retirement, then an IRA account or traditional investment account would likely be your next step.
The amount of money you should have in your brokerage accounts, including your IRA and regular investment accounts, will be your baseline number -- at 40, that would be 3 times your income for our rough estimate method -- minus whatever you have in your 401(k).
Let's look at an example: If you make $60,000 a year, then the 3x estimate would be $180,000. If you have $100,000 in your 401(k), then you should have at least $80,000 in your brokerage accounts to be on track to meet your goal. However, if you don't have a 401(k), then your brokerage account balances should add up to the entire $180,000.
It's important to keep in mind that generalizations like the 10x rule are best used as quick-and-dirty estimates -- not rock-solid strategies for your retirement planning. That's because the reality of retirement is a lot more complicated than such a simple estimate takes into account.
For one thing, the 10x rule makes one really major assumption: that a large portion of your retirement income will come from Social Security. Unfortunately, if you're only 40 years old now, there is a chance that Social Security may not be around by the time you retire.
The simplest way to estimate your retirement numbers without Social Security is to use the 4% method. The 4% method says that you should have enough retirement savings that you can live off of a 4% return each year. For example, someone who needs $60,000 a year ($5,000 a month) in retirement would need: $60,000 / 0.04 = $1.5 million in savings.
Using the 4% method gives you a number that should provide at least 25 years of consistent income. Though, ideally, your savings will be generating an annual return at least equal to what you're withdrawing, meaning it can last much longer.
Of course, since you won't be retiring for some time, you also need to consider the impact of inflation on your savings. To do that, take your total savings number and pop it into a good inflation calculator to get an idea of how much more you'll need to save to make up for the expected rate of inflation before you retire.
Whichever method you choose to evaluate your retirement progress, don't be too dismayed if you're a bit behind where you should be. With several decades of income still ahead of you, there's plenty of time to make up for any savings shortcomings.