How much you need to retire in Canada is as individual as you are. It all depends on the kind of lifestyle and retirement that you want. Will you be traveling around the world or relaxing at home? Do you intend to work into your 70s or are you hoping to retire before you hit 60?
There are a number of theories for working out how much you need to save to retire comfortably. [2]
There are, however, a few good rules of thumb to consider when saving for retirement:
Rule of 10%
This rule recommends setting aside 10% of every paycheque for retirement.
Rule of 20
Not everyone agrees the rule of 10% is enough. Some, instead, suggest the Rule of 20. The rule of 20 states that you should save $20 for retirement, for every $100 you make.
Rule of 72
The rule of 72 is a calculation that looks at how long it takes your investments to double, with the same rate of interest for the length of the investment. Divide 72 by the annual rate of return, and you get a rough idea of how long it will take you to see your investment double.
Rule of 4%
The rule of 4% looks at your planned withdrawals. The rule states that your withdrawals every year should equal about 4% of what you have saved. Once you figure out what you need to live off of, you can better determine how much you need to save in total.
X25 Rule
This rule suggests that you should assume 25 years of retirement. Therefore, you should determine what your annual income should look like upon retirement, and times that by 25 and that’s how much you should have in retirement savings when it’s time to stop working.
70% Rule
With this rule, consider your current income. Then, save to retire with an amount that would allow you to live off of 70% of your original income, for the remainder of your retirement. [3]
Start with calculating your guaranteed retirment income
The first step in knowing how much you need to retire in Canada is to add up all income, including any company or private pension plans, personal or spousal RRSPs, other savings, and annuities. Be sure to also include payments from the government – specifically the Canada Pension Plan (CPP) and Old Age Security (OAS).
The amount you’ll receive from CPP will depend on how much you’ve contributed. The maximum is $1,154.58, but the average monthly payment in 2019 is only $664.41. Remember, you can increase the amount you receive by up to 42% if you wait until you’re 70. The maximum you will receive from OAS is $601.45 per month, but this amount depends on how long you’ve lived in Canada.
If your retirement planning calculations include your investments, it’s important to consider the tax implications and impact on your future portfolio. You will pay income tax on any RRSP/RRIF withdrawals.
Working out your retirement expenses
The second step in calculating how much money you need to retire is knowing all of your retirement costs. Once you’ve retired, some of your expenses will be considerably lower. There will be no commuting costs and you won’t need to buy business clothes or other work-related expenses.
That being said, today more Canadians are carrying debt into retirement. From credit card debt to mortgages, retirees are faced with a list of expenses in life after work that can put pressure on them to sell their home, downsize or rent. When looking at your retirement expenses, it is important to:
- Include any debt or loan payments, including credit cards
- Calculate your usual household expenses, such as mortgage or rent payments, utilities and municipal taxes
- Factor in an emergency fund and a realistic entertainment or discretionary spending budget
- Remember to set aside enough at the end of the year to pay the tax man
Now is also the time to work out the expenses related to the type of retirement that you want. How much will it cost to travel or spend winters abroad, simply maintain your current home or do the renovations you always dreamed of? Consider your hobbies or whether you’ll want (or need) to give financial support to adult children or grandchildren. Include all the costs you’ll need for your ideal retirement.
Time to calculate the difference
The final step in knowing how much money you need to retire is to work out the difference between your annual income and expenses. For example, if your annual income is going to be $40,000 and your expenses are $80,000, you’ll need an extra $40,000 per year for a comfortable retirement.
Using the 4% rule (from the example above), how much you would need to save for retirement would be $1,000,000. If you find income and expense calculations to be too confusing, it’s a good idea to use a retirement calculator designed for Canada.
Using retirement calculators
Accurately working out compound interest, rates of return and inflation are beyond most people, so this is where retirement calculators come in handy. Be careful, though, as some retirement calculators are quite limited, plus it helps to use a retirement calculator specifically designed for Canada.
The Government of Canada’s retirement calculator is really useful. It allows you to enter RRSP and TFSA account information, as well as CPP and OAS details and income from company and private pensions.
This retirement savings calculator from BMO also takes into account your preferred investment style (the risk level you are willing to tolerate) and delivers a customized report detailing how much you will need to save to reach your retirement goal.
A Canadian retirement income calculator can be a really helpful tool to not only work out how much you need to save to retire, but also when you will be able to retire. [2]
Understand Inflation
Inflation is the rising cost of consumer goods and services. In Canada it’s calculated using the consumer price index (CPI). The CPI tracks how the price of more than 600 consumer goods and services purchased by Canadians changes over time.
Impact of inflation on the cost of goods and services
In recent years, the average rate of inflation in Canada has been 2% per year. This means the cost of goods and services has been rising by 2% every year.
When saving for retirement, keep in mind that goods and services will cost more in the future. You can predict how much more goods and services may cost by looking at rates of inflation in past years.
Figure 1: How much a $100 item increases in cost over time because of inflation
Impact of inflation on pensions and savings
The amount you get from public pensions, like the Old Age Security (OAS) pension and Canada Pension Plan, is protected against inflation. This means as the cost of living goes up, the value of your benefit goes up as well.
Not all employer pensions are protected against inflation. Ask your pension administrator or employer whether your pension is protected against inflation.
Personal savings and investments, such as mutual funds or guaranteed investment certificates (GICs), are usually not directly protected against inflation. Your savings need to grow by at least the rate of inflation. If not, the amount of things your savings can buy in the future will be less than what they can buy now.
For example, something bought for $100 in 2002 would cost $129.92 in 2016. If your income isn’t protected against inflation, you may have a hard time maintaining your lifestyle in retirement as the cost of goods and services increases. [4]
How to save for retirement
Once your retirement planning calculator has worked out how much money you will need to retire, it’s time to work towards that goal. Starting to save at an early age is really important if you’re going to comfortably reach your retirement savings goals.
By starting early, you’ll benefit the most from compound interest (a process where you start earning interest on your interest). If, for example, you started saving $750 a month at age 30 and retired at 65, you could save just over $1 million*.
To save the same amount of money if you started at 40 years of age, however, those monthly amounts you would have to tuck away would skyrocket to $1,542. By delaying your start by just 10 years, you will have to make up for it by doubling the amount you save each month. [2]
How to invest for retirement
Canadian Pension Plan (CPP)/Quebec Pension Plan (QPP)
You pay into CCP your entire income-earning life. You finally get to reap the benefits of that when you retire.
Upon retirement, you start to receive monthly payments from the Canada Pension Plan Investment Board. The payments are based on how long you contributed and how much you contributed. You can start to cash in any time after age 60. No matter how long or how much you contribute, though, I think we all realize that these monthly payments won’t be anywhere near enough to sustain a liveable life. Some sort of supplementary retirement savings is necessary.
Old Age Security Pension (OAS)
This is a lesser-known benefit that everyone in Canada qualifies for once they hit age 65. This applies whether or not you have ever been employed, or are currently employed. You do not pay into the plan as you do with CPP. And payments are based on how long you’ve lived in Canada.
Guaranteed Income Supplement (GIS)
Unlike the previous two pension plans, GIS is specifically for lower-income individuals. It is a supplement to OAS for people who need it. Your income-tax declarations determine whether or not you qualify for GIS.
Pension Plans
Employee pension plans come in various forms. Some are self-directed, others are employer-sponsored, and some are a mixture of both. No matter the option, it’s best to take advantage of any opportunity where your employer helps you save for retirement.
Under some plans, employers exclusively contribute to a retirement plan that is vested. That means you can take it when you leave, after a certain number of years of service. It pays out in full, upon retirement, after a certain number of years of service.
Other plans allow you to set money aside per paycheque towards your retirement. Your employer may or may not contribute a percentage or dollar amount based on what you yourself contribute. Some employers don’t contribute into a plan, but still allow you to create forced savings by offering the option to set aside funds into an RRSP before it ever hits your paycheque.
RRSP
When thinking about how much money you need to retire, consider your Registered Retirement Savings Plan (RRSP). An RRSP is a savings account designed to help Canadians save money for retirement. Contributions to RRSPs are protected from income tax and come in many different types of investments. Any funds earned through these investments are also protected from tax for as long as they remain invested. This allows you to grow your portfolio in time to retire comfortably.
RIFs
A Retirement Income Fund (RIF) is a tax-deferred retirement plan that is the successor to the RRSP. You can open a RIF after the age of 55. After the age of 71, which is when you must close your RRSP, the entirety of your RRSP transfers into a RIF. The transfer to the RIF has zero tax impact.
TFSA
A TFSA works like any savings account. You set aside whatever money you want (up to a government-set maximum). And, you can remove it whenever you want, without penalty. The money, while in the account, accrues interest – more interest than you would see in a traditional savings account. What sets the TFSA apart is that the interest that is typically subject to taxation in an unsheltered account, is tax-free when invested in a TFSA. And, unlike a registered savings account, funds are withdrawn tax-free.
Real Estate
One of the major benefits of homeownership is that it is a great vehicle for retirement savings. Many of us buy family homes that we no longer need once the kids move out. Why sit on a large property with empty rooms? Downsizing in retirement allows you to free up the equity you have in that home and use it in retirement. And that helps determine how much additional money you need to retire. [7]
Utilize seniors discounts
You may save money by taking advantage of seniors’ discounts.
Low-fee bank accounts for seniors
Many financial institutions offer low-fee bank accounts for seniors. They usually offer these accounts to people 60 years old and older. Speak to somebody at your financial institution to find out if they have accounts for seniors.
Seniors who have a low income can get special no-cost bank accounts. Find out if you’re eligible to get a no-cost bank account.
Use the Account Comparison Tool to help you find the account that best suits your needs.
Discounts on goods and services
Many businesses offer discounts to seniors on a wide range of goods and services including:
- groceries or household supplies
- entertainment and travel
- insurance
- public transportation
- education
Always ask about seniors’ discounts. It could save you money. [5]
What if I can’t save enough for retirement?
After using a retirement savings calculator and working out how much money you need to save to retire in Canada, you may find that the final figure is simply out of reach. This can often happen if you started saving later in life. If that is the case, you do have several options. You could:
- Take a part-time job or rein in your retirement plans – this could mean less travelling or a later retirement
- Start up a business or rent out part of your home – either a room or a basement apartment
- Downsize, but this can be quite costly, plus the realtor fees and land transfer tax can take a considerable chunk out of your equity
Alternatively, you could take out a reverse mortgage and cash in up to 55% of the value of your home without having to make any mortgage payments. If you’re interested in seeing how much tax-free cash you could receive, try our reverse mortgage calculator now!
You get to stay in your home with an improved retirement income and only have to pay the loan if and when you decide to sell. [2]