How to start saving for retirement at 45

Are you on track, or are you playing catch up?

For some Canadians, that may feel like plenty of time to ramp up their retirement savings, especially if expensive childcare years are behind them. For others, starting to save for retirement at 45 can feel like they missed the window on savings growth.

I’ll turn 45 this summer, and so I felt compelled to take on the assignment about saving for retirement at this age. While I’d like to think I’m in a better financial position than most Canadians my age (Lake Wobegon effect, perhaps?), I’m also keenly aware that I’m closer to my 60s than I am to my 20s. Retirement planning is a chief concern.

Indeed, according to the latest annual retirement study conducted by IG Wealth Management, while 72% of Canadians aged 35- and over have started saving for retirement, 42% of them are doing so without a retirement plan, and 45% are confident they know how much money they will need for retirement—granted, that’s a tough question to answer.

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Saving for retirement

If you’ve read David Chilton’s classic, The Wealthy Barber (Stoddart Publishing, 2002), you’ll know a popular rule of thumb is to save and invest 10% of your gross (pre-tax) income for retirement. Simply “pay yourself first” with automatic contributions to your retirement accounts and you’ll be in good shape for retirement. (You can download The Wealthy Barber Returns for free.)

But not everyone has the ability to save in this linear fashion. For instance, those who work in public service as a nurse or a teacher already have a significant portion of their paycheques automatically deducted to fund a defined benefit pension plan. Should they also save 10% of their gross income for retirement? Of course not! In fact, they might find it impossible to do so.

Similarly, couples in their 20s and 30s who are raising a family are faced with a host of competing financial priorities such as childcare (albeit temporarily) and more expensive housing costs. 

What this means is a 45-year-old with little to no retirement savings might actually have 15 to 20 years of pensionable service in their workplace pension plan. It might mean that a 45-year-old with little to no retirement savings just got out of the expensive childcare years and now finds themselves flush with extra cash flow to start catching up on their retirement savings.

What percentage of pre-tax income should young parents (early 30s) save for retirement?

— Boomer and Echo (@BoomerandEcho) September 30, 2021

The “rule of 30” for retirement savings

That’s why I like the “rule of 30,” popularized by retirement expert Fred Vettese in his book of the same title (ECW Press, 2021). Vettese suggests that the amount you can save for retirement should work in tandem with childcare and housing costs. (Read a review of Vettese’s latest book, Retirement Income For Life.) 

In this case, a couple would allocate 30% of their gross income towards childcare, mortgage repayment and retirement savings. In your 20s and 30s, this might mean allocating very little (between 1% and 5%) towards retirement savings while dealing with temporary but expensive daycare costs.

It goes without saying that retirement savings should be increased accordingly once those temporary costs subside, and ramped up further once the mortgage is paid off—ideally five years prior to retirement. (Read: How much do you really need to retire in Canada?)

Mortgage plus daycare expenses and retirement savings

Let’s look at an example of common expenditures as a percentage of gross income by age:

Notes: These are five-year averages. For the group aged 36 to 40, the data assumes the couple upgrades their house at age 40.

Is 45 too late to start saving for retirement? 

Looking at savings through the Rule of 30 lens does indeed cut some slack to 30-somethings for not prioritizing retirement. But giving yourself permission to save less in your 30s doesn’t mean continuing to slack off into your 40s.

Instead, you have a responsibility to redirect “extra” cash flow towards retirement savings to make up for lost time. Resist the temptation to add even more “temporary” expenses, such as financing a new vehicle or trailer, which will only postpone retirement savings further.

Is 45 too late to start saving for retirement? Not if you can intentionally start saving (and investing) more than 10% of your gross income. You’ll need to make up for lost time, so saving 10% won’t cut it at age 45 and beyond. Remember, going back to those age-based savings milestones, you’d want somewhere between 4.6 times to 6 times annual income saved for retirement by age 50, and 8 times to 8.5 times annual income saved by age 60.

Continue to ramp up your savings into your 50s, ideally putting away a minimum of 15% to 20% or more toward retirement. Once the mortgage is fully paid off, boost your savings further by contributing up to 30% of your gross income towards your retirement funds.

Starting to save for retirement in your 40s

If you’re 45 or are entering your 40s without much in the way of retirement savings, take heart knowing there’s still time to reach your goals.

First, determine how much extra cash flow you can direct toward savings. Then, you need to come up with a list of financial goals and priorities.

I’d recommend using this philosophy to guide your savings decisions:

• Optimize your registered retirement savings plan (RRSP): Optimizing your RRSP can mean contributing enough to bring your taxable income down to the bottom of your highest marginal tax bracket. Or it can mean not contributing at all if you’re in a lower tax bracket.
• Maximize your tax-free savings account (TFSA): Strive to contribute up to your lifetime limit and, once you’ve caught up, max out your annual room each year.
• Prioritize short-term goals: List all your other financial goals—such as buying a new car, taking a dream vacation, paying down the mortgage, funding non-registered investments, whatever—and then acknowledge that you can’t fund them all at once. Prioritize and direct any extra cash flow here.

The key is to get started, knowing you can make a lot of progress over the next two decades. A concerted effort to save and invest 15% to 20% of your gross income towards retirement can turn a modest savings balance into a six-figure nest egg.

It’s not too late

As I’ve abruptly come to realize this year, at age 45 I’m a lot closer to retirement age than I am to my college years. This is also a time when Canadians reach out to a financial planner for guidance. As the IG Wealth survey noted, nearly half of those surveyed don’t have a retirement plan.

Recent research by personal finance expert Preet Banerjee, PhD, also suggests that simply having a financial plan is a key factor that leads to successful financial outcomes.  

What this all means is that your 40s is still an opportune time to reach out for expert advice from a financial planner to assess your current situation and future goals, and come up with a financial road map to get you to retirement.  

And, 45 is not too late. Armed with a plan and a willingness to contribute a good percentage of your gross income, a comfortable retirement is within reach.

Read more about saving for retirement:

• How to model retirement income in Canada
• What’s my RRSP contribution limit?
• TFSA vs RRSP: How to decide between the two
• How much should I have in my RRSP?

About Robb Engen, QAFP

Robb Engen is a fee-only advisor who will work with you to achieve your financial goals by creating a financial plan with actionable steps along the way.