Jamie, 59, is inching closer to retirement, but after going through a nasty divorce, his emergency fund and savings have been wiped out. He still has a 401(k) (the American equivalent of an RRSP), a pension and some investments, but his divorce will impact the value of those assets.
Without additional savings to supplement those assets — which will be divided up with his ex — he’s worried he’ll have to delay retirement or do some serious downsizing.
If you’re in a situation like Jamie, here are three crucial things to do right now to help cobble together a comfortable nest egg.
1. Calculate a new retirement number
You can’t plan a roadmap if you don’t know where you’re going. Since Jamie had a retirement plan with his ex-wife, he now has to create a new one for himself.
That means he’ll need to calculate a new ‘retirement number’ — the target amount you need to live the life you want in retirement. A rule of thumb is to save 10 to 12 times your final salary.
That number should take into account the age at which he wants to retire, his annual salary, his expenses and savings, as well as investment portfolio performance. It should also take into account the standard of living he wants to maintain in retirement.
Depending on his final retirement number, he may have to make a few adjustments, such as working a few years longer than he planned or perhaps downsizing his standard of living. He may even change his retirement plans altogether, like working part-time at a side hustle or moving out of the country.
While the divorce wiped him out, Jamie still has some retirement income. Since he will soon qualify for the Canada Pension Plan (CPP), he can use this to supplement any savings he manages to cobble together before he retires.
At 59, the earliest he could claim his CPP retirement benefit is one year from now, at age 60. However, if he starts collecting CPP at 60, his payments would decrease 0.6% each month — or 7.2% per year — up to a maximum reduction of 36%.
If he waits to claim his benefit after the age of 65, Jamie will see his payments increase by 0.7% each month — or 8.4% per year — up to 42% by age 70.
2. Understand the rules of dividing retirement assets
While his savings may be depleted, Jamie still has a pension, Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA). It’s important to review your existing retirement accounts and understand how divorce will impact the division of those assets.
This can be made more complicated because the rules on dividing pensions and assets vary from province to province, so it’s a good idea to consult a divorce lawyer and financial advisor.
During a divorce, traditional pension plans, such as CPP, are subject to provincial division laws. For instance, in Ontario and British Columbia, the money incurred can be divided equally between spouses or even allocated based on other factors determined by the court, such as the duration of the relationship, date of separation, as well as eligibility and entitlement.
Funds that you’ve contributed during the course of your marriage to a RRSP are considered marital property in most provinces, although each has their own rules on how the funds are allocated during the separation process. For a regular RRSP, contributions made by the plan holder using their own income would not typically be subject to division. However, any instance of growth or increase in the value of the RRSP during the marriage may be subject to division.
Thankfully, any contributions to a TFSA are typically not subject to division, as each spouse is able to retain their right to their individual assets accumulated throughout the marriage.
3. Develop a new retirement savings strategy
Once you have a new retirement number in mind and understand how much you’ll have left over after divvying up your retirement assets, you can come up with a new retirement savings strategy. This should also factor in at what age you plan to claim your CPP retirement benefit.
For someone in their late 50s, it’s harder to catch up — you won’t benefit from the power of compounding — but it’s not impossible to cobble together some savings.
Jamie may need to cut back and live on less so he can direct as much as he can into savings. He may want to start by building up an emergency fund (to cover about three to six months of expenses) and paying down any high-interest debt. From there, he can start rebuilding his retirement savings.
That includes maxing out his RRSP, especially if his employer matches his contributions.
The maximum contribution limit for a RRSP in 2025 is $32,490. Additionally, any unused contribution room from previous years can also be added to your limit in the current year.
Jamie may also want to work with his financial advisor to explore his investment options and optimize his portfolio to meet his new goals. While his marriage may be over, it doesn’t mean his retirement dreams have to be.
Sources
1. Government of Canada: When to start your retirement pension
2. Canada Life: What happens to your pension in a divorce or separation? (Jul 18, 2023)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
