How Much Should You Have Saved by 40? There's No Magic Number
Written by Caroline Cakebread
Wednesday, October 3rd, 2018
If you're in your 20s or 30s and living in Canada, chances are you're feeling financially pinched. You might have student debt, you might be starting a family, and you could be trying to buy a home. Given all that, you'd be forgiven for putting retirement savings at the bottom of the list.
No Time Like the Present
But this is exactly the time that's ideal for thinking ahead and saving. The more you can put aside before you hit the big 4-0, the further ahead you'll be when you get close to retiring. The question is: How much should you aim to have?
What's the Magic Number?
Financial experts have tried to boil it down to an easy-to-use formula. Last year, for example, NBC's Jean Chatzky advised people to save three times their annual salary by the age of 40. So, by this formula, if you're earning $50,000 a year, you'd have $150,000 saved when you turn 40. I'll admit that I like the simple approach – but that number isn't exactly realistic when you're trying to prioritize saving, life expenses and debt repayment.
The reality is that there's no magic number to show you where your retirement savings should be at 40. But that doesn't mean you can't take a by-the-numbers approach to setting yourself up for a healthy retirement – starting when you're in your 20s and 30s.
Here are six helpful numbers to put retirement savings in perspective based on your unique needs:
This general rule of thumb (from none other than U.S. Senator Elizabeth Warren) is a bit more helpful because it puts your savings in context. For every paycheque, take 50% to pay for necessities (food, housing), 30% for discretionary spending (dining out, travel) and 20% toward savings (if you're earning $50,000 a year, then aim to put $10,000 into retirement savings annually).
This is the amount of debt held by Canadian households – a record high. Whether you've got a student loan, mortgage, or credit cards, it's important to balance your savings with debt repayment. Having debt doesn't mean you can't also be saving for retirement – but you should aim to pay off any high-interest debt (i.e. credit cards) as a top financial priority.
This is the maximum dollar limit for registered retirement savings plan contributions for 2018. You'll want to make the most of your RSP contributions every year, maxing out where you can and taking advantage of unused room from previous years.
This is the average monthly Canada Pension Plan (CPP) payment for Canadian retirees. When you're planning for retirement, remember that you'll likely have other sources of income like CPP and Old Age Security. And, if you're lucky enough to have one, a workplace retirement savings plan – joining your company pension plan is especially important if your employer matches your contributions. Otherwise, you're leaving money on the table.
This is the average inflation rate in Canada so far in 2018. Inflation is the rate at which the price of goods goes up every year – it means your money is worth less with every passing year. Remember: $100 today is going to buy you a lot less in 30 years when you're getting ready to retire.
This is the life expectancy of the average Canadian – live this long, and you'll need to fund nearly 17 years of life in retirement. You'll need to save enough to cover it.
Combined, these numbers go beyond a one-size-fits all formula. Once you understand how they affect how much you need to save and why, you can create a plan that works for you – and hit your 40s on a solid financial footing.
This article or video (the “Content”), as applicable, is provided by independent third parties that are not affiliated with Tangerine Bank or any of its affiliates. Tangerine Bank and its affiliates neither endorse or approve nor are liable for any third party Content, or investment or financial loss arising from any use of such Content....
The Content is provided for general information and educational purposes only, is not intended to be relied upon as, or provide, personal financial, tax or investment advice and does not take into account the specific objectives, personal, financial, legal or tax situation, or particular circumstances and needs of any specific person. No information contained in the Content constitutes, or should be construed as, a recommendation, offer or solicitation by Tangerine to buy, hold or sell any security, financial product or instrument discussed therein or to follow any particular investment or financial strategy. In making your financial and investment decisions, you will consult with and rely upon your own advisors and will seek your own professional advice regarding the appropriateness of implementing strategies before taking action. Any information, data, opinions, views, advice, recommendations or other content provided by any third party are solely those of such third party and not of Tangerine Bank or its affiliates, and Tangerine Bank and its affiliates accept no liability in respect thereof and do not guarantee the accuracy or reliability of any information in the third party Content. Any information contained in the Content, including information related to interest rates, market conditions, tax rules, and other investment factors, is subject to change without notice, and neither Tangerine Bank nor its affiliates are responsible for updating this information.
Tangerine Investment Funds are managed by Tangerine Investment Management Inc. and are only available by opening an Investment Fund Account with Tangerine Investment Funds Limited. These firms are wholly owned subsidiaries of Tangerine Bank. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.