Retirement saving: Your pre-retirement years

A little power-saving will get you where you want to be.

Illustration by Joel Kimmel.

You’re in your late 40s or 50s, you’ve finally paid off the mortgage and your kids are financially self-sufficient. You’re starting to make plans for your life when you stop working, but you don’t have much money set aside. Is it time to panic?

Fortunately, you can probably still achieve a comfortable retirement, but you should get serious about catching up. Start by taking stock. Add up the savings you have now, then consider how much you still need to save. If you want to enjoy a typical middle-class retirement or a bit better starting at age 65, you should plan to have your house paid for and between $250,000 to $1,000,000 (in today’s dollars) in savings per couple, or $325,000 to $850,000 for a single person. Assuming government benefits of $15,000 per person per year, that will give you $40,000 to $70,000 a year per couple before tax, or $28,000 to $49,000 per single, also in today’s dollars. (These figures assume you don’t have a traditional employer pension.) Now compare your current savings to your target. The gap will determine how much you need to save.

What can you do to catch up if that gap is enormous? First, try “power saving.” You’ve probably noticed that in this stage in life you have a larger capacity to save. That’s because many major midlife expenses start to fall off around now. You finish paying off the mortgage, and your kids graduate from college and start to support themselves. At the same time, you’re probably at the peak of your earning power. All you have to do is redirect the money that used to pay the mortgage and support the kids into your RRSP. You should be able to save with a vengeance without missing the cash, since it didn’t contribute to your lifestyle anyway.

You even get a tax break. If you haven’t saved much to date, you probably have loads of unused RRSP contribution room, so you’ll enjoy big tax rebates on the money you redirect into your nest egg (though you will have to pay tax on money in your RRSP when you take it out).

All of this adds up. If you have an average or better salary and invest your RRSP rebates, you should be able to save more than 30% of your gross income. Do that for a few years and it will grow into a large sum. For example, say you and your spouse are 55 and you plan to keep working for 10 years. If you manage to save 35% of your combined gross income of $120,000 per year, you can accumulate $420,000 in today’s dollars, even assuming your investments merely keep pace with inflation. Assuming you’ve also paid off your mortgage, that’s enough for a middle-class couple to retire on in reasonable comfort even if you have no other savings and no employer pension.

If power saving doesn’t get you far enough, or if you never had the expenditures on a home and kids, then you might find the effort is not as painless. In that case, consider a “lifestyle diet.” Your lifestyle has probably expanded over the years as your salary has grown. It may have happened so gradually that you scarcely noticed. At this stage, you’re probably enjoying many of the finer things in life that are well beyond what you could have afforded decades earlier. You spend less than you earn, so it feels manageable. But now you need to save more, so the spending on your “overweight” lifestyle needs to drop.

First, go through all the major discretionary items on which you spend money and order them in terms of expense and importance. Then try to cut back on expenditures that are relatively unimportant but costly. How much you need to cut depends on how overweight your lifestyle is relative to your resources. But a word of warning here: it’s probably no longer sufficient to cut modest indulgences, such as a few restaurant meals, to bring spending into line. You may need to make serious reductions. If you buy new high-end vehicles every four years, you may need to scale that back—and if you opt not to, then your vacation or clothing budget will need significant rollbacks. If that doesn’t take you far enough, maybe you can still buy upscale cars, but go for the older and less-luxe models, and keep them longer.

The beauty of starting your lifestyle diet now is that it gets you ready for a standard of living you can continue to afford in retirement. “Before retirement, bringing your standard of living down increases your savings,” says Malcolm Hamilton, who recently retired from Mercer Human Resource Consulting. “After retirement, bringing your standard of living down cuts your expenses.” Better to make smaller cuts now that you can sustain than be forced to make much more draconian ones later.

You probably have additional options for boosting your nest egg. You may not need so big a house now that your kids have moved out. Working longer than planned can also have a big impact. Another year on the job gives you the double whammy of one more year building up savings and one less year of using them up.

One way or another, if you’re creative and flexible, there’s lots you can do to catch up sooner or later. “People are surprisingly good at making those adjustments,” says Hamilton. “It’s not that they want to do it, but if they have to do it, they find a way.”

David Aston, CFA, CMA, MA, is a retirement expert at MoneySense magazine