It's not as big a problem as you might think. The key is to try to mimic the approach of paying yourself first by setting up an automatic contribution to your registered retirement savings plan (RRSP) to match your payday. A good rule of thumb to aim for is 10% of your gross income. Remember, in most cases workers blessed with a defined benefit pension put as much as 10% (sometimes more) into their pension plan. You need to match the pensioners step by step.
How much will you save if you are 40 and have no pension
Let's look at the example of non-pensioner Johnny, a late starter who prioritized buying a home at age 35 and didn't save a dime to retire at age 40. Now Johnny is ready to get started and wants to donate 10% of his $90,000. -total annual income for retirement investments.
He does this for 25 years with an annual return of 6% and accumulates about $500,000 by the time he turns 65.
Remember that this does not include any future salary growth. For example, if Johnny's salary increases by 3% per year, and his savings rate continues to be 10% of gross income, the dollar amount of his contributions will increase accordingly each year.
This subtle change increases Johnny's RRSP balance to just over $700,000 at age 65.
How government programs can help non-pensioners
A $700,000 RRSP—combined with expected Canada Pension Plan (CPP) and Old Age Security (OAS) benefits—is enough to maintain the same standard of living in retirement that Johnny enjoyed during his working years.
This is because once the loan is paid off, he will no longer be saving for retirement, and he can expect his taxes to be significantly lower in retirement.
CPP and OAS will add about $25,000 a year to Johnny's annual income (in today's dollars), if he takes his benefits at age 65. Both are guaranteed benefits paid for life and indexed to an increasing amount.
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