In your 50s you’ll likely experience several financial changes at once — and they’re all for the better. Typically, you’ll find yourself in your peak earning years while you naturally benefit from a decline in spending on things that don’t actually contribute to your day-to-day lifestyle. In fact, there’s probably ample time to provide yourself with a comfortable retirement, even if you start your 50s with no financial savings whatsoever.
Supercharge your savings
Now is the time to figure out how much you need to save. Start by taking your gross income and subtracting income taxes, savings, mortgage and debt repayment, providing for your children, and work expenses. What’s left is the amount you’ll probably want to keep spending on yourselves once you’re retired.
Even if you’ve made no headway on saving in your 40s, you’ll probably be able to save a bundle in your 50s. Here’s how to do it. Pay off your mortgage and other debts as soon as possible. Help your kids get a good education, but then get them financially independent.
Most Canadians are able to accomplish those two things by their early 50s, if not earlier. The trick then is to whisk the money that used to go towards your mortgage and the kids away into savings. If you haven’t saved much to date, you probably have loads of unused RRSP room. So when you start to put serious money away, you should be able to earn big juicy tax refunds. When you get all those factors going for you, you should be able to save as much as 30%, even 40% of your gross income if you set your mind to it, says Malcolm Hamilton of Mercer Human Resource Consultants.
If you and your spouse can do that for 10 years while earning average salaries or better, that should provide enough for a typical middle-class retirement in itself. If you supercharge your savings for longer, or you earn more, you could do even better.
Can you retire early?
If you do particularly well at saving in your 50s, you may be able to retire in your early 60s instead of at age 65. But early retirement requires a much bigger nest egg than you might think. Firstly, of course, your savings have to last for a longer retirement. Secondly, government pensions and other senior support plans generally don’t kick in until age 65, so you’ll burn through a lot more of your own savings every year before then.
To find out how much more you’ll need, try starting with what you would need to retire at age 65 and work backwards. Say you think you’ll need $50,000 a year to live on in retirement (all figures are in today’s dollars to remove the effect of inflation). At age 65, you might get $30,000 a year from government pensions and require $20,000 a year from your savings. Assuming a 4% withdrawal rate, that entails a nest egg of $500,000. If you make the conservative assumption that your investments will just keep pace with inflation during the years leading up to age 65, that means you will need an extra $50,000 in your nest egg to cover every year earlier you retire. So if you were to retire at age 63 instead of age 65, you would need $600,000 instead of $500,000.
If saving that much is beyond reach, you have other options. Many people shift down to part time work to bring in extra income for a few years. Of course, if your investments do exceptionally well, or if you have a defined benefit pension plan, then retiring early will prove easier.
The top financial lessons from my 50s — Glenn Kohaly
I write, do photography and sell ads for boating magazines. I work eight months of the year and take the summers off. I’m now 62 and my adviser tells me I can afford to retire. But I truly love what I do, so I’m not ready to retire yet.
I’m in a good position now because of the planning I did in my early 50s. I tracked all my spending over a year and I used it to figure out how much I thought I’d need to live on in retirement. When I looked at what I earned and what I spent, I didn’t see a pretty retirement. So I realized I had to be more diligent about saving, and invest wisely.
It all starts with putting a buck away, but my wife Virginia and I didn’t totally sacrifice today for tomorrow. We drive a nice car, but we bought it used. We like to travel, but I get online and save money by carefully planning our own trips. Lately we bought a time share on resale at a fraction of the original price. It’s just another way to enjoy the finer things without spending a lot.
You should invest in what makes sense to you. For some people it is stocks. For me, in my 40s and 50s, it was rental properties. Or you can invest in yourself. If you’re an electrician and want to get out on your own, buy a truck, some tools and some advertising and get going. The overall goal is always the same, to grow your money in a reasonably safe manner and earn a reasonable return.
I sold most of my properties about three years ago when prices got really high. Now I have my money in exchange-traded funds (ETFs). I like ETFs because they give me a broad basket of investments without the high fees of mutual funds. These days we live a good middle-class life. We’re prepared for the future and we have adequate funds to enjoy today. I think our situation shows that it is totally possible for ordinary people to build up a solid retirement fund.