Here's What Happens When You Start Saving for Retirement After 40

A career shift, divorce, or big medical expense can dry up a savings account. That's not so big a blow when you're in your early 20s, or maybe your 30s. But eventually, one starts to wonder whether their retirement savings are too little, too late.

Perish the thought. 

If you feel underequipped for retirement, you're not alone. The typical 40-something American only has $35,000 saved in their 401(k), not nearly enough to fully fund retirement. Truth is, millions of savers are right there with you, wondering how to make up for lost time.

Americans can start saving for retirement at any point, and they should: The perks are enormous. Here's what happens when you start saving for retirement after age 40. 

You lose a big chunk of short-term income

At 40 years old, the typical retiree-in-training has about 25 years to save. But how much is enough? Suze Orman, a well-known finance guru, advises folks to save 10% of their income at bare minimum. But middle-aged savers might want to save closer to 20%, or possibly more.

There are at least three ways to calculate how much you need to save. The simplest is to estimate your final income (the income you anticipate making pre-retirement) and multiply that by 10.

For example: Say you anticipate making $80,000 pre-retirement. To maintain your current lifestyle, you'd want to have $800,000 saved up. You'd have to save $32,000 per year at 40 years old to hit $800,000 by retirement age…

…assuming you didn't invest your retirement savings, therefore putting your money to work. Typically, you want to invest your savings. That way, it takes you less work and time to save more. Consider the magic of compound interest if you haven't already.

Regardless, saving for retirement will cost you in the short term. But the perks make a solid retirement strategy worth considering. 

You become more financially stable

There are a lot of "how to retire" articles floating around the internet, but many ignore the why. Why retire? What's the point of losing all the income right now for uncertain gain later on? It boils down to stability. By the time you're 65, you can anticipate the following:

• Medical bills
• Loss of autonomy
• A change of pace

According to RegisteredNursing.org data, by the time you reach 65 years old, average healthcare costs are $11,300 per person, per year in the United States (that's two to three times the average yearly bill in your 20s). Plus, health and life insurance grows more expensive. Retirement savings help you cover what insurance won't.

I've seen my grandmother and three grandparents lean on family and medical services to get them through tough times. Everything from dementia to cancer can rob a person of the bodily functions younger folks take for granted. Retirement savings can cover nursing costs, hospital visits, and housing (even if that means paying a live-in family member's rent).

With age comes the desire to slow down. Take long walks along the beach. Indulge in your hobbies. Visit grandkids. Retirement savings gives retirees the flexibility to work part time, take those much-needed vacations, and live at their own pace.

How to reach your retirement goal

Saving for retirement after 40 may be difficult, but the path is well-trod. Financial advisors like Suze Orman and Dave Ramsey suggest straightforward retirement strategies that pretty much all come down to earning interest on savings.

Orman recommends savers take advantage of any 401(k) match employers offer. Employer matching is as close to free money as things get. Barring a 401(k), Orman recommends investing in a Roth IRA, another tax-advantaged retirement account.

Typically, the closer you are to retirement, the fewer risks you want to take with your money. Should the stock market crash for 10 years, you may be forced to withdraw less than you put in. That means tweaking your investment strategy to ensure your money is low-risk high-reward. How you distribute your savings matters. 

You can secure a comfortable retirement by doing two things:

• Taking advantage of tax-advantaged retirement accounts.
• Adjusting your investment strategies as you get closer to retirement. 

Don't let a late start discourage you; a stable retirement is achievable with dedication and smart financial planning.