Are you on track, or are you playing catch up?
For some Canadians, that may feel like plenty of time to ramp up their retirement savings, especially if expensive childcare years are behind them. For others, starting to save for retirement at 45 can feel like they missed the window on savings growth.
I’ll turn 45 this summer, and so I felt compelled to take on the assignment about saving for retirement at this age. While I’d like to think I’m in a better financial position than most Canadians my age (Lake Wobegon effect, perhaps?), I’m also keenly aware that I’m closer to my 60s than I am to my 20s. Retirement planning is a chief concern.
Indeed, according to the latest annual retirement study conducted by IG Wealth Management, while 72% of Canadians aged 35- and over have started saving for retirement, 42% of them are doing so without a retirement plan, and 45% are confident they know how much money they will need for retirement—granted, that’s a tough question to answer.
Saving for retirement
If you’ve read David Chilton’s classic, The Wealthy Barber (Stoddart Publishing 2002), you’ll know a popular rule of thumb is to save and invest 10% of your gross (pre-tax) income for retirement. Simply “pay yourself first” with automatic contributions to your retirement accounts and you’ll be in good shape for retirement. (You can download The Wealthy Barber Returns for free.)
But not everyone has the ability to save in this linear fashion. For instance, those who work in public service as a nurse or a teacher already have a significant portion of their paycheques automatically deducted to fund a defined benefit pension plan. Should they also save 10% of their gross income for retirement? Of course not! In fact, they might find it impossible to do so.
Similarly, couples in their 20s and 30s who are raising a family are faced with a host of competing financial priorities such as childcare (albeit temporarily) and more expensive housing costs.
What this means is a 45-year-old with little to no retirement savings might actually have 15 to 20 years of pensionable service in their workplace pension plan. It might mean that a 45-year-old with little to no retirement savings just got out of the expensive childcare years and now finds themselves flush with extra cash flow to start catching up on their retirement savings.
What percentage of pre-tax income should young parents (early 30s) save for retirement?
— Boomer and Echo (@BoomerandEcho) September 30, 2021
The “rule of 30” for retirement savings
That’s why I like the “rule of 30,” popularized by retirement expert Fred Vettese in his book of the same title (ECW Press, 2021). Vettese suggests that the amount you can save for retirement should work in tandem with childcare and housing costs. (Read a review of Vettese’s latest book, Retirement Income For Life.)
