After you reach your 50s, chances are you can start to see financial independence somewhere on the horizon. But there are still things you probably need to do to bring your financial objectives within grasp.
The key is make good use of the time you have. It’s a good idea to do some ballpark financial projections to get a rough idea of where you stand. That in turn will help you figure out roughly how much you will need to save. Fortunately, you probably have reached your peak earning years and should be able to turn them into your peak savings years without too much sacrifice.
Get a ballpark figure
If you’re wondering how much you’ll need to save, here’s how to make rough ballpark calculations to estimate the size of nest egg you’ll need to retire at age 65. My advice is to do the calculations in today’s dollars, with the effects of inflation removed, so you can assess everything based on current purchasing power. Say you’re a couple who plans to spend $57,000 a year in retirement on everything (including spending on taxes) starting at age 65. Then subtract government pensions, which might amount to $32,000 a year combined if you both had long careers at average-paying jobs or better. Also subtract company pension payouts if you have them.
If there’s no private pension, that leaves you with the need to draw $25,000 from your nest egg each year. To afford that at 65, you will need a nest egg that is about 25 times that amount, or $625,000. For more on figuring out how much you need in retirement, go to moneysense.ca/magicnumber.
Max out your savings
With a rough road map of your retirement goals, now is the time to ramp up your saving. But first, you need to 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 do that by their early 50s, but if you’re one of the growing proportion of Canadians who need a bit longer, do it as quickly as you can. Once you reach that point, the key thing is to redirect all the money that used to go towards your mortgage and the kids into saving. If you haven’t saved much to date, you probably have loads of unused RRSP room. So when you start to put away serious bucks, you should also be able earn big juicy tax refunds, which you should also save. When you get all those factors going for you, you should be able to salt away 25% to 40% of your gross income if you set your mind to it.
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, even if you’ve reached the start of your 50s with nothing in the bank. For singles it’s a little harder. They need a bit bigger nest egg on a per person basis because they can’t usually share expenses in retirement. Therefore, if you’re single, it helps to get into super-saving mode a bit earlier.
Pick the right moment
If you do a particularly good job of building up savings in your 50s, you may have given yourself the option of retiring in your early 60s instead of at age 65. But retiring early requires a substantially bigger nest egg. First, of course, your savings have to last for a longer retirement. Secondly, you generally only get full government pensions and senior tax perks after you reach age 65 to 67. So you’ll also need help from your nest egg to bridge the period until you can collect full government support. (You can start the Canada Pension Plan as early as age 60, but the payout rate is reduced as a result.)
Fortunately, you usually have lots of options if your rough projections end up short. For starters, you might have an opportunity to save more without feeling it too much. You may be tempted to ratchet up your lifestyle once your mortgage is paid off, which is fine if you have lots of money or that’s really what’s important to you. But at least consider seriously whether you’ll get the most value out of spending it now compared with later. You can earn compound returns on the money you salt away and you don’t get a do-over on saving the money once it is consumed.
If you’ve looked at what you could reasonably do now to get your finances on track but you’re still somewhat short in your projections, don’t panic. At this stage, no one has a precise idea of what will be important to them in retirement anyway, so you should only be trying to get your finances generally in reasonable shape using fairly conservative assumptions. As we’ll see in the next section, there will still be plenty of opportunity to improve your plans and your finances as you get closer to retirement.
Your 50s is a great decade where you can expect to be at the peak of your earning abilities—that is, unless you suddenly find you’re downsized from a well-paying position. If you sense that your job is in jeopardy, start adjusting your lifestyle now. “Even with severance and employment insurance payments, a job loss can mean months in lost earnings,” says Annie Kvick, a certified financial planner in Vancouver. “I have a client who knows she may be laid off in nine months, and she’s preparing now. She’s cutting expenses, delaying the purchase of big-ticket items and ensuring she has an emergency line of credit in place.”
If you do get laid off, talk to your company’s human resource department before leaving. “You can often arrange to have a severance package paid out over two years to minimize taxes,” says Kvick, who also suggests seeing an employment lawyer to ensure your severance package is fair. Pay a visit to your local employment office, too. “They have a lot of free training courses that people miss,” says Kvick. “They’re worth checking out.” You may even want to consider tapping into your savings if you require money for retraining—the Lifelong Learning Plan lets you withdraw up to $20,000 from your RRSP if you’re attending school, and you’ll have10 years to pay it back.
In the meantime, start networking right away and explore options to bump up your income while you’re still job hunting. “Rent out a room in your home or take in an international student,” suggests Kvick. “Be resourceful and you’ll do just fine.”
Lessons I Learned In My 50s
The most simple yet profound lesson that Dan and Rose Chobotik’s 50s taught them was that sticking to a savings plan works. At the tail-end of that decade things finally got easier for the Sutton, Ont., couple. “We’ve always worked hard because we’d set a lot of goals,” says Dan, now 61. But being a small-town insurance advisor was exhausting. “I loved my job and we did well, but I was rarely home,” he says. During those years, Rose, now 57, kept busy running the administrative side of the business and taking care of their daughter. “In our work, you don’t get a pension, so we’ve had to be disciplined,” explains Dan.
Those initial years were tough. It was all about paying the household bills and setting aside at least 10% into RRSPs and an RESP. But it slowly paid off. This disciplined approach meant accelerated mortgage payments and, 20 years after they first bought the family home—just after Dan turned 50—they were mortgage-free. Then, they were able to focus solely on their nest egg. Dan and Rose never imagined retiring early, but thanks to years of saving they were able to stop working when Dan reached age 59. Now their days are filled with volunteering, as well as leisurely golf games in the sun. The key to satisfying retirement is simple, says Dan. “Stay disciplined, stay goal-oriented and have fun.”