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

Your 40s are a good age to buckle down on the retirement savings front. At that point, you're midway through your career, and, ideally, you're earning a high enough wage to support steady IRA or 401(k) plan contributions.

But to be clear, your 40s are by no means an optimal time to first start saving for retirement. It's much better to start in your 20s or 30s to give your money more time to grow. So if you've missed that boat and are first kicking off retirement savings efforts in your 40s, be prepared to part with a decent chunk of money month after month.

The problem with waiting till your 40s to save for retirement

The money that goes into your IRA or 401(k) shouldn't just sit in cash. Rather, you should be investing that money so it grows into a larger sum over time. And when it comes to investing, the more time you have, the better.

The stock market's average annual return over the past 50 years has been 10% before inflation, as measured by the S&P 500's performance. So investing $300 a month in an IRA or 401(k) at an average annual 10% return from age 25 through age 65 would result in a nest egg worth almost $1.6 million. That's a nice amount of money to retire with.

But watch what happens when you cut that window by 15 years. Let's say you start saving and investing $300 a month for retirement at age 40 with the goal of wrapping up your career at age 65. Assuming that same 10% return, you're looking at a nest egg with a value of just over $350,000. And while that's certainly not a negligible amount of money, it may not be enough to sustain you in retirement.

Remember, you need to limit your retirement plan withdrawals as a senior so your money lasts as long as you need it to. For years, experts recommended a 4% annual withdrawal rate, though some people will now tell you that 4% is too aggressive. But even if we go with it, a nest egg worth around $350,000 will give you $14,000 a year of income if you live until age 90. Even when factoring in Social Security, it's not just a ton of money.

You may need to ramp up your monthly contributions

If you're 40 or older and have yet to start saving for retirement, then you may need to prepare to part with more than $300 a month to amass a nice amount of wealth. Right now, IRAs max out at $6,500 a year for savers under the age of 50, and $7,500 for those 50 and over.

Let's assume these limits don't change over time, even though they're likely to. If you max out your IRA between the ages of 40 and 65 and score an average annual 10% return in your IRA, you'll end up with a nest egg worth $670,000. Withdraw from that sum at 4% a year, and it gives you almost $27,000 in annual income for 25 years.

But either way, amassing a nest egg of $1 million or more is, frankly, going to be difficult if you don't start saving for retirement until you reach your 40s. This isn't to say that it can't be done, but it may require you to part with a lot of money on a monthly basis. So if you're not yet 40 and you're reading this, consider it your wake-up call to start funding your IRA or 401(k) as soon as you reasonably can.