Oct. 7: BEST FROM THE BLOGOSPHERE

October 7, 2024

Retirement still feasible for 40-year-olds with no pension – but it takes work and commitment

So, you’ve hit the big 4-0 and are beginning to realize that life after work is no longer as far away as it once was.

If you’re 40 and aren’t a member of a pension plan, can you still fund – on your own – a decent retirement income for yourself?

According to a recent article in MoneySense, the answer is yes – but it will take a little work on your part.

“The key is to try to mimic the pay-yourself-first approach by setting up an automatic contribution to your registered retirement savings plan (RRSP) to coincide with your payday. A good rule of thumb to strive for is 10 per cent of your gross income. Remember, in most cases the employees blessed with a defined-benefit pension are contributing around the same 10 per cent rate (sometimes more) to their pension plan. You need to match those pensioners stride-for-stride,” MoneySense suggests.

OK, this makes sense – preauthorized contributions on payday mean you won’t have time to spend the money on something else, and after a while, you won’t miss it.

The article takes the example of “Johnny,” who makes $90,000 per year gross and contributes 10 per cent — $9,000 – annually to his RRSP. If he gets an average return of six per cent each year for 25 years, he’ll have $493,780.61 in his RRSP by age 65.

This example does not factor in any growth in Johnny’s wages. If his salary goes up each year and he continues to contribute 10 per cent to his nest egg, he’ll be contributing more than $9,000 per year, the article notes.

If Johnny got a three per cent raise annually for 25 years, MoneySense adds, then his RRSP will be more like $700,000 by age 65.

Assuming his mortgage is paid off, the article notes, Johnny will be able “to spend $40,000 per year (inflation-adjusted) until age 95.”

He will, the article adds, also get about $25,000 per year from the Canada Pension Plan and Old Age Security if he takes them at age 65.

That’s the second key point here – step one is to save 10 per cent of your gross earnings in an RRSP annually, and step two is to keep working until 65, and to collect government benefits at that age. “Working until 65 ensures he will get a robust retirement pension from the contributory CPP, plus he’s lived in Canada all his life and can expect to receive 100 per cent of his OAS benefits,” the article notes.

Retiring without a mortgage is another important aspect of this example.

“The ace up the sleeve for Johnny’s retirement is his mortgage-free home. It amounts to equity he could tap by downsizing, selling and renting, taking out a line of credit or using a reverse mortgage if he found himself needing cash flow or a lump sum of money in retirement,” the article explains.

This sounds great, but MoneySense notes that it can be greater. If Johnny were to also save three per cent of gross earnings in a Tax Free Savings Account, he will have an additional $355,000 in savings, bringing his total to over $1 million.

The TFSA would allow him more money to withdraw each year, boosting his income to $45,000, the article reports.

Another tactic Johnny could employ would be to delay his CPP and OAS until age 70, when he would get “42 per cent more CPP and 36 per cent more OAS,” the publication notes.

This article makes a lot of sense. Our late Uncle Joe was a strong believer in the “pay yourself first” concept of putting 10 per cent of your gross income into savings, and then living on the rest.

The Saskatchewan Pension Plan (www.saskpension.com) works well for “pay yourself first” savers. SPP allows you to set up pre-authorized contributions that can coincide with your pay dates. Or, you can set up SPP as a bill via online banking and pay yourself as well as the power, heat, and other bills. While Johnny will have to figure out what to invest in, SPP does that heavy lifting for you, in a professionally managed pooled fund. And when it’s time to withdraw money, SPP offers the chance of a lifetime monthly annuity payment or the more flexible Variable Benefit option.

Check out SPP today!

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MoneySense

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