Picture John, a 42-year-old who hasn’t started putting away money for retirement yet. He doesn’t have any savings or even an emergency fund set aside for unexpected expenses, and he’s starting to panic. Sound familiar?
If you’re in your 40s and haven’t put much thought into retirement savings, now’s the time to get serious. The need to set specific, realistic goals for retirement savings becomes crucial at this stage in life.
It’s not too late to make a dent in building your retirement fund, but the clock is ticking. Here are some strategies to help you catch up and set yourself up to maximize savings.
Better late than never
Starting to save for your golden years in your 40s might not seem ideal, but it’s critical for your financial future. Retirement is closer than you think, and delaying savings means less time for compound interest to work its magic.
You may not have decades of growth like someone who started in their 20s, but there’s still time to make an impact. Relying on just your monthly Canada Pension Plan (CPP) benefits isn’t a good idea since, depending on your lifestyle and overall health, expenses can add up quickly. And keep in mind that CPP benefits are only meant to replace about 33% of your retirement income — you’re expected to account for the rest.
An emergency fund is also key. Life throws curveballs, whether that be a job loss, medical issues or unexpected car repairs, and without savings, you could end up deep in debt. Having a financial cushion helps you handle these surprises without relying on high-interest loans or credit cards.
As you age, your expenses change. You might support kids in college or care for aging parents, and savings will help with these rising costs, including health care. Starting now gives you the resources to cover future needs.
Saving in your 40s also offers tax breaks, like Registered Retirement Savings Plan (RRSP) contributions, that lower your taxable income. If you expect a higher tax bracket in retirement, a Tax Free Savings Account (TFSA) is worth considering, since withdrawals are tax-free.
Don’t forget about inflation. As living costs rise, your savings will help keep pace.
And if your own financial well-being isn’t incentive enough, saving also benefits your loved ones, whether through being able to leave an inheritance or help with big milestones.
Even if you start saving later, it’s better than not starting at all. The earlier you begin, the more time you have to adjust your goals and strategies.
It’s never too late to invest in yourself
So, now that you know the “why,” here are some strategies to help you with the “how.” Let’s use the case of John from earlier.
John’s first move should be to get a clear picture of his finances. That means tracking all current income and expenses, either through a simple spreadsheet or a budgeting app. By categorizing spending, he can identify areas to cut back, such as frequent dining out or underutilized subscription services.
Let’s say John also happens to have $8,000 in high-interest credit card debt. This should be tackled first. He can either use the debt snowball method (paying off the smallest balances first) or the debt avalanche method (starting with the highest interest rate debt).
Paying more than the minimum payment is key to getting ahead and, whenever possible, adding an extra $100 or $200 each month. He could also consider using any tax refunds or bonuses to chip away at the balance faster. Another option is exploring balance transfer credit cards with 0% APR for 12-18 months to avoid interest while paying off the principal.
Once John has a handle on his finances, it’s time to build that emergency fund. He should aim to save at least $1,000 to cover small unexpected expenses like car repairs or a reduction in work hours.
Setting aside $100 to $200 each month can help, and opening a high-interest savings account will make the fund grow faster. Ideally, he’d reach a point where he has three- to six-months’ worth of savings shored up.
Now turning to his retirement nest egg: John should start by contributing to an employer-sponsored RRSP, if that’s available to him, particularly to take advantage of any matching contributions.
Let’s say John is aiming for a retirement income of $50,000 a year. He can use the 4% rule to help him figure out how much to save. It suggests that he withdraws 4% of his savings annually once he retires. So, to hit that $50,000 target, he’d need to have $1.25 million saved up by the time he leaves the workforce.
To speed up savings, John can cut back on expenses or find ways to boost his income. He should review monthly subscriptions and consider canceling or downgrading ones he rarely, if ever, uses.
Cooking at home instead of dining out could save hundreds each month. Depending on his lifestyle, downsizing his housing or getting a roommate might help too. On the income side, John could explore side gigs like freelancing, rideshare driving or a part-time job. Selling unused items around the house can also generate extra cash.
Ideally, John would track his progress on his wealth-building journey. He should continue to review his budget and savings monthly to stay on track and adjust as needed.
As his financial situation improves, he can increase his savings rate and explore additional investment options for retirement, like a taxable brokerage account. And it certainly wouldn’t hurt if he looped in a professional to help figure out a plan that works best for him.
Sources
1. Government of Canada: Canada Pension Plan enhancement
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
