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Planning your retirement at 40

  1. Draw up your balance sheet and monthly budget
  2. Save
  3. Formulate your retirement savings strategy
  4. Make your will
  5. Check on your insurance coverage

Does it seem too early to start planning for your retirement? Does dealing with your children, career and home leave you with too little time to think about it? Yet it's going to take a good-sized nest egg to enjoy retirement because that nest egg will have to last for the rest of your life!

By tackling it now, you'll have time on your side. It's never too early–or too late–to start planning for retirement.

Draw up your balance sheet to get a clear idea of where you stand financially. It involves making a complete list of your assets (home, car, investments, etc.) and debts.

Take the time to pull together all of the documents required so that you have the accurate amounts. After that, you can do the calculations using the following tool: Your personal balance sheet (PDF, 179 KB).

The balance sheet will tell you whether your net worth is positive or negative. This will let you know what kind of financial leeway you have for saving. If you don't have any leeway, drawing up a monthly budget will help you take control of your finances. Even if your net worth is positive, a monthly budget will help you allocate your expenses and build your savings.

Monthly budget

Have you already tried a budget that didn't work? Do you find it boring? True, this process takes organization and discipline, and it takes time to draw up your first budget. But once you have gotten into the habit of tracking your spending, it becomes very satisfying.

Creating a budget means knowing where your money goes, which will give you real control over your finances. When you have a clear picture of your income and expenses, you'll know how much you can put toward savings or paying off your debts.

If you have debts, don't be discouraged. This tool can help: List your debts and make a plan to pay them off (PDF, 224 KB).

Tools and tips

The importance of a monthly budget

How to establish an effective budget in 3 steps.

Read tip - 3-step savings plan

Why some budgets don't work

Accuracy and self-discipline are key to sticking to your budget.

Read tip - Why some budgets don't work

Balance sheet: So you know where you stand

Listing your assets and debts gives you a clear picture of your financial situation.

Read tip - Assessing your financial situation

Debts to pay?

Where to start.

Read tip - 5 steps to problem-free finances

My budget tool

Available exclusively to Desjardins caisse members, the My budget management tool gives you an accurate picture of your everyday income and expenses.

Learn more - Budget management tool - My budget

In order to save, you need to take action and include it as an expense in your budget, just as if you were paying a bill. Set a realistic goal. In an ideal world, 10% to 15% of your income should go toward savings.

Not enough leeway? Start by aiming for 2% or 5% of your income.

Emergency fund

The first step in planning for the future is an emergency fund. Having a reserve allows you to deal with the unexpected (major repairs, unemployment, etc.) without having to go into debt. Your emergency fund must be big enough to cover your expenses for at least 3 months.

Consider a TFSA. This savings account is perfect for an emergency fund. Interest accumulates tax-free, and withdrawals are not taxable.

Once you have put together the emergency fund and paid off your debt, you're ready to start saving for retirement.

All savings matter

With retirement savings, what matters is getting started, no matter how little you can put away. If you don't have a lot to spare, start by putting away a few dollars a week or by saving up your change every day, for instance.

It's often possible to cut down on some expenses. For example, you can shop around for home and car insurance, your telecommunications bundle, eat out less often, reduce impulse buys, etc. You can also reduce the interest costs on your mortgage and credit cards.

If impulse buys often throw your budget out of balance, here are some questions to ask before you start: How to avoid impulsive purchases.

Avoid temptation

Consider having the amount you want to save automatically transferred to a savings account every time you get paid. You'll be less tempted to spend it.

Invest. By putting your money into various investment securities, not only will you be putting your money to work, it will also be harder to cash your investments in if you feel like spending what you've saved.

Maximize your contributions

A number of useful plans are available: RRSP contributions reduce your taxable income, and the interest earned accumulates tax-free. To get the most out of these advantages, make the maximum contribution allowed (18% of your income, up to a ceiling of $22,450 in 2011).

If your employer offers a group retirement savings plan (pension fund), make sure you make the biggest contribution allowed, which will get you the maximum contribution from your employer.

Maximize your interest by contributing early

Getting into an RRSP and a TFSA early puts time on your side. Thanks to compound interest and time, small amounts quickly turn into big ones.

For example, based on an annual interest rate of 5%

  • Alexandre started contributing to an RRSP in 1991, putting in $1,000 a year.
  • His twin sister Stéphanie contributed $2,000 a year, starting in 2001.
  • In 2011, Alexandre has $34,719 in his RRSP, while Stéphanie's contains $27,992.
  • Although they put in the same amounts–a total of $20,000 each–Alexandre put time on his side by starting to make contributions earlier than his sister did.

To do your own calculations, use this calculator: How much will your regular instalment savings be worth?

Borrowing to contribute to your RRSP

Borrowing to increase your RRSP contribution can be beneficial. The trick is to use your tax refund to lower the balance of the loan. For more information, see Borrowing to contribute to your RRSP can be beneficial.

Tools and tips

RRSP at a glance

To better understand the basics of the registered retirement savings plan.

Read tip - RRSP 101

TFSA at a glance

Find out how a TSFA works.

Read tip - Understanding TFSAs

Saving: Getting started is the main thing!

Tips for turning your little nest egg into a big one.

Read tip - 3-step savings plan

How much will you need to retire comfortably?

The 70% rule

Estimate the average gross annual income from your 3 best years of work, and apply the 70% rule.

Why 70%? Some of your expenses will decline or even vanish (work expenses, mortgage), others will be stable (food, car), and others will go up (recreation, health care).

If your estimated annual income is $40,000, you will need $28,000 a year or $2,300 a month. If your income is $70,000, it would take $49,000 a year ($4,080 a month) to maintain your lifestyle.

Of course, the 70% rule might not apply if you have ambitious retirement plans.

Public plans

Payments from public plans are almost never enough to cover 70% of your work income.

For example, in 2010, the federal Old Age Security plan's maximum monthly benefit was $661.69. The maximum amount paid by the Québec Pension Plan is $960 a month.

Note that these are the maximum amounts these plans pay. Among other things, they're lowered if your retirement income exceeds some levels.

Private plans

If your employer offers a supplemental pension plan (pension fund), you will have an additional monthly amount to draw on. However, the amount you get will depend on the type of plan you contributed to and what it contains.

For more information on different private pension plans, go to Flash RetirementQuébec, Private pension plans.

Determine how much you need to save

Do you want to have a monthly income of $2,300 in 25 years? Do your calculations show that your income from public and supplemental pension funds will be $1,700? This means you need to plan so that your personal savings close the gap of $600 a month.

How much do you need to save as of now to provide that $600 a month income? For your calculations to be accurate, your projections need to consider a number of aspects: inflation, benefit factor, future income factor, discount factors.

A lot of terms! A financial planner is the right person to turn to in making these kinds of projections.

You can also consult the Guide to Financial Planning to Retirement (PDF, 3.2 MB) produced by RetirementQuébec. The guide contains calculation tables (pp. 22–27) for assessing how much you need to save to achieve your retirement goals.

The Régie des rentes du Québec also offers a number of retirement planning tools online. One of the tools allows you to simulate your retirement income very accurately: CompuPension. To use it, you have to sign up for the clicSÉQUR account and find some documents. There's a simplified tool, as well: SimulR.

Invest

Once you know how much you have to save to enjoy your retirement, you need to put your savings where they can earn as much as possible, preferably sheltered from tax: the RRSP and TFSA offer this benefit, which is not trivial.

Get help from a professional to make the best investment decisions. A financial planner is trained to show you a structured savings plan that takes your means and needs into consideration.

You can also make your own investment decisions, but you don't become a self-directed investor overnight–it takes solid knowledge, time and discipline.

Tools and tips

Choosing a financial planner

What to ask.

Read tip - 3 questions to ask before choosing a financial planner

Do you have what it takes to be a self-directed investor?

In-depth knowledge, good tolerance for risk, and discipline are the keys to a self-directed portfolio.

Read tip - Managing your own portfolio

Planning for retirement goes hand in hand with estate planning. To make life easier for your loved ones in the event of death, draw up a will, a mandate in case of incapacity (power of attorney) and a living will.

You'll also have to appoint a liquidator. To make things easier for your loved ones, a heritage inventory is also highly recommended. This document is an accurate list of your assets and debts. It also states where the important documents the liquidator will need are stored.

A will is especially important if you are a common-law spouse. In fact, if you die without a will and the house is in your name, your common-law spouse will not be treated as an heir and will not be entitled to anything.

Once you're clear about your estate, inform your loved ones of your wishes, explaining your decisions. This will lessen the risk of conflict and dispute in the event of death.

If you've already done your estate planning, consider reviewing it regularly to adjust it to life events, good or bad: birth of a child, purchase of property, loss of a loved one, separation or divorce, etc.

When you make your will, find out about the tax impacts of your decisions. When you die, the tax authorities treat your property as if it has been turned into cash, as if you had sold your car and home, and cashed in all of your RRSPs at once. The tax bill can be heavy, and the tax authorities must be paid first, before property is distributed to the heirs.

Consult a financial planner to find out how to reduce the tax authorities' bite upon your death.

Useful links

  • Ministère de la Justice du Québec: Wills
  • Éducaloi: Testaments (in French only)

A variety of personal insurance is available. It helps meet your or your loved ones' needs in the event the worst arises: death, disability, illness.

Talk to a financial planner or insurance advisor to look at your needs. You can decide if you need coverage and, if so, which coverage is the best for you.

For example, the professional can suggest you take out life insurance, or recommend changing life insurance you already have. In the event of death, your beneficiaries will receive a tax-free amount.

Tools and tips

Do you need life and health insurance at retirement?

Read tip - Do you need life and health insurance at retirement?

Is disability insurance really that important?

Read tip - Is disability insurance really that important?

Until what age should you take out life and health insurance?

Read tip - Until what age should you take out life and health insurance?

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