If you are like most people, you have been looking forward to retirement for the better part of your career. We know that planning for retirement is an important part of any financial plan. But what we don’t necessarily know is how much money we need to retire in Canada, comfortably.
According to a CIBC survey released in February of 2018, most Canadians think they need $750,000 in savings to retire. But surveys aside, it’s important to plan for retirement by determining how much you need to be comfortable.
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What Is The Average Retirement Income In Canada?
Without any additional savings, the average Canadian Pension Plan retirement pension is just $8,303 a year. In 2019, the average monthly payout for CPP was $723.89, which is 37% less than the $1,154.58 maximum amount. That’s because many people don’t earn enough money during their careers to receive the maximum payout.
And that means the average Canadian doesn’t have access to the maximum, which is not a liveable income, to begin with.
Meanwhile, a survey done in 2016 on the average living expenses in Canada for people over the age of 65 is just south of $60,000. That makes for one heck of a shortfall between what they have and what they need to have to afford to retire. That’s why it’s important to determine where you may have gaps in income, and how much you actually need to retire in Canada.
How Much Do I Need To Retire In Canada?
How much you need to retire will vary greatly on how you live now. In addition, where you plan to retire and how you plan to spend your retirement are also important considerations. Use a retirement calculator to shed some light on how your personal income, savings plan and life plans impact your retirement savings needs.
The typical rule of thumb is that you need between 70-100% of the income you were getting before retirement to live comfortably in your post-work life. If you plan to have a mortgage in retirement, you need as much of your annual working income as possible when you retire. However, if you’re one of the lucky few without a mortgage, you need less.
How Much Do You Need To Retire At 55 In Canada?
Not everyone looks at 65 as the earliest they can retire. In fact, many people set their sights on 55 as their retirement goal age.
If that’s your goal, do you want to know what that means for you? Use a calculator like this one to see how your current income and expenses can be organized in such a way that you can retire before 65. It might not be doable. But if it is, a calculator can show you exactly how much money you need to retire in Canada.
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.
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.
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.
Do I Need $1 Million to Retire In Canada?
Kind of like hearing an 800-point credit score is a worthy goal, so too is the idea that Canadians need $1 million in savings for a comfortable retirement. Of course, that is a major over- simplification, given that everyone has different expenses and expectations for how they would like to live in retirement.
Absolutely, if you save $1 million for retirement and you’re not a multi-millionaire living a life of luxury before retirement, you should be comfortable. But is it necessary? Not necessarily.
The amount of money you need to save for retirement depends on when you want to retire. In addition, it depends on what you want to do when you retire (obviously, if you plan to travel the world, you’ll need more money to live than if you can’t wait to move into a cabin in the woods). And, the less predictable rate of inflation. So exactly how much money you need to retire depends on many factors.
How Much Do I Need to Retire: The Best Plan
Long before you retire, you need a plan to get there. Engaging the help of a professional is the best way to make sure your plan is a good one, that will get you where you want to go. They can help you determine how much money you need to retire in Canada.
What Is A Retirement Plan?
When you retire, you stop working, obviously. The other thing that stops is your income. Lots of free time with no income can be an issue. You still need to eat and live when you’re retired. That’s where retirement planning comes in. A well-executed retirement plan creates a strategy to replace that lost income upon retirement so that you can still put a roof over your head and live your life. It’s all about understanding how much money you need for retirement and setting a plan to get there.
What Are The Options For Retirement Planning?
There are far more ways to save for retirement than most people realize. There is (as we will discuss further down) the traditional Registered Retirement Savings Plan (RRSP). And that is certainly a secure way to save for retirement. But, there are other methods to save money for retirement that are open to you but that you may not have considered. In addition, there are some options you probably know about but aren’t exactly exclusively relying upon. It is important to consider all of these when thinking about how much money you need to retire in Canada.
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.
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.
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.
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
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.
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.
How Much Money Do I Need to Retire?
Retirement seems like a distant, pipe dream that we save for. The reality, of course, is that inflation makes living with a solid income increasingly difficult.
There is no better time than the present to plan for how to manage future fixed expenses without the benefit of an income to pay for them. If you’re not sure how much to save for retirement, sit down with a financial planner to go over your goals, your expectations and your current ability to save for the future.
Retirement will be here sooner than you think. Remove any future stress by planning for a bright future. And start by considering how much you need to retire.