How Much RRSP Should You Have at 40?

Some links in this post are from our partners. If a purchase or signup is made through our partners, we receive compensation for the referral. 

Trying to figure out how much money you should have in your RRSP at 40 can be difficult.

You see, 40 is an interesting age.

You aren’t…old, but you officially aren’t young either.

You’ve been working for a while, but you still aren’t close to retirement.

Regardless of where you are in life, one thing we all want is peace of mind. Peace of mind that you’re on the right track for retirement.

So this often begs the question amongst Canadians, how much RRSP should I have at age 40?

People want to know they’re on the right track! And that they’ll be able to retire comfortably, and rightfully so! Who wouldn’t want that.

In short, you should have roughly $58,000 in your RRSP by age 40 if you want to retire a millionaire.

This answer is based on the following assumptions.

1. You wish to retire with at least $1,000,000.
2. You won’t retire until you are 65.
3. You will contribute an additional $3,000 a year until you retire.
4. You can generate an average annual return of 10%

Now first, many of you might be thinking, well I don’t even have an RRSP open yet, which if that is the case – I’d recommend Wealthsimple Invest.

The sign-up process literally takes a matter of minutes, it’s all online – and of course it’s completely free. But secondly, you also might be thinking, there is no way those numbers are right.

But they really are! Check them for yourself! Solid returns and compound interest is a magical thing.

If you are thinking these assumptions are a bit much, let’s talk it out for a second.

First off, everyone wants to retire with a million dollars, I think we can move on from assumption number one.

Secondly, according to Statistics Canada, the average Canadian retires at age 64. So work with me here a little, give me one year! At the very least, you can agree that retiring at 65 is not an outrageous assumption based on the historical data.

It could be younger for some and older for others, but you get the point.

My third point, contributing $3,000 a year. That’s only $250 a month, which is 15% of a $20,000 salary!

Trust me, if I can do it, you can do it. Earning $20,000 is a very conservative assumption.

My last assumption, and arguably the most controversial one, generating a 10% annual return. I can already hear people now, “that’s impossible!”.

False, the S&P 500 Index has generated an annual return of 10%-11% over the last 90 years. In other words, the average market return over the last 90 years has been around 10%.

And that is average, we’re not breaking any records here.

Anyways, all of this to say – these are all very achievable assumptions and not just unrealistic expectations that I’ve used to try and make my point.

What is an RRSP?

Chances are you have a general idea of what an RRSP is, but since we’re here, let’s give a quick recap.

Think of an RRSP as a special type of savings account that is primarily used for your retirement savings.

An RRSP in itself is not an investment, but more so like a bucket to hold all your retirement investments.

If you’re wondering why you’d invest in an RRSP as opposed to a normal investment or savings account, here are few reasons:

1. Contributing to your RRSP directly reduces your taxable income. For example, if you earned $55,000 in a year, but you contributed $10,000 of that to your RRSP, your taxable income is only $45,000. In other words, you pay less in taxes.
2. Your investments Grow Tax-Free. As long as you keep your money within your RRSP, all of your investments will grow tax free and they are 100% protected from government taxation until you withdraw it.
3. You can invest and hold assets within your RRSP. Unlike a typical savings account, where you basically just loan your bank cash and generate a small return (less than 2%), you are able to invest in high return investments within your RRSP. Some of these investments include ETFs, Mutual Funds, Individual stocks, bonds, and GICs.

Our article Top 9 Benefits of Investing in an RRSP goes into more depth on some of the advantages associated with investing in an RRSP.

But at the end of the day, if you are generating taxable income in Canada, I would highly recommend opening and contributing to an RRSP.

The federal government doesn’t give away gifts like this everyday, take advantage!

What if I only start my RRSP at 40?

Okay, so you’re 40 years old and you haven’t started contributing to your RRSP yet. You’re actually okay, but you have to get started ASAP.

Because guess what, 50 is too late, it just is.

While you can still take advantage of compound interest, you won’t have as many years to let it grow, so you just have to invest more each year.

So let’s do some math. We already know you need to have $58,000 in our RRSP at age 40 to retire a millionaire.

But if you have nothing in your RRSP at age 40, you will need to invest $9,500 a year to reach that $1,000,000 mark by age 65.

Again, this is assuming you work until 65 with a 10% average rate of return.

So it is definitely possible! Most personal finance experts state you should invest and save 15% of your pre-tax income. So if you make $64,000 a year, you can easily do this!

$64,000 x 15% equals $9600.

If you make less than $64,000 then invest a little more than 15%, and if you make more than $64,000 then you can probably invest less than 15%.

This is not to suggest you should wait until you are 40 to begin your RRSP contributions, the earlier the better.

Those who start this process in their 20s won’t have to contribute as much each year as those who begin at 40,  but hey, life happens.

The point I want to drive home here is 40 years old is not too late for you to start investing in your RRSP.

Not only can you save a lot of money those 25 years, but with smart investments and the power of compound interest, you can become a millionaire by the time you retire.

Quick Note #1 – One thing I would advise against is going after risky investments to generate an above average return.

This strategy rarely works and it can cause detrimental damage to your financial situation.

As you won’t need this money for another 25 years, a little bit of risk in your RRSP portfolio is a good idea. But don’t go overboard, this is your retirement we’re talking about here.

Related Financial Geek Article: The Pros and Cons of an RRSP [5 of Each]

Conclusion

Okay, let’s wrap this up.

How much RRSP should you have at age 40? You should have roughly $58,000 in your RRSP account by age 40.

Assuming you contribute an additional $3000 a year until you retire at 65, and you generate a 10% return, you’ll be retiring a millionaire.

What if I only start my RRSP at 40? If you have $0 in your RRSP at 40 – that’s okay, but you’re going to have to contribute more than $3000 a year to reach that millionaire retirement status.

You will have to more than triple your annual contributions to roughly $9,600. More difficult yes, but still very doable.

To conclude, this is all a personal preference. maybe you don’t need $1,000,000 for retirement. Or maybe you’d prefer lower risk, fixed income investments. It is really up to you!

Just find out how much you want to retire with, how much return you can generate with the risk you’re willing to accept, and then calculate what your contributions need to be using a Compound Interest Calculator.

While you still have many working years ahead of you at 40, retirement is slowly starting to poke its head around the corner and it’s vitally important you financially prepare for it.

And finally, if you are wondering how much RRSP you should have at age 30, then check out a similar article on my blog title How Much RRSP Should You Have at Age 30?

Thanks for reading!

Geek, out.