Retirement is a hot topic for many Canadians. According to a recent survey by HOOPP, 55% of Canadians said they were concerned about having enough money in retirement, up six points from last year.
Saving for retirement is essential, no matter your age. But how much do you need to retire? What if you don’t have a pension? How do you retire early?
In this post, we will discuss how you can save for retirement in Canada and how much you need to save to retire comfortably.
How to save for retirement in Canada
There are a few ways that you can save for retirement in Canada. According to the Government of Canada, the most common income sources during retirement are:
- The Canada Pension Plan (CPP) or Quebec Pension Plan (QPP).
- The Old Age Security (OAS) pension.
- Employer-sponsored pension plans and personal savings and investments.
These are often referred to as the “three pillars” of Canada’s retirement income system. Knowing how much money you will receive from each source can help you better plan for retirement.
Canada Pension Plan (CPP) or Quebec Pension Plan (QPP)
The Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) provide monthly payments to Canadians who contributed to the plans during their working years. The amount you’ll receive each month depends on your contribution history, how much you earned during your life and when you start receiving benefits.
You can receive your CCP or QPP pension payments between the ages of 60 and 70. The later you start, the higher your monthly payments will be.
The Old Age Security (OAS) pension
The OAS pension is available to Canadians age 65 or older, regardless of whether they are still working or have never worked. The amount you receive depends on how long you’ve lived in Canada since the age of 18.
If you have lived in Canada for the last ten years, you are eligible to receive the OAS pension. You will receive the maximum amount if you’ve lived in Canada for 40 years or more.
Guaranteed Income Supplement (GIS)
If you have a low income, you may be eligible for the Guaranteed Income Supplement (GIS), a monthly non-taxable benefit. To be eligible, you must file an income tax return every year.
If your spouse or common-law partner receives the GIS and you are between the ages of 60 and 64, you may also be eligible for the Allowance benefit.
Employer-sponsored retirement and pension plans
There are several employer-sponsored retirement and pension plans, such as a group Registered Retirement Savings Plan (RRSP) or a Registered Pension Plan (RPP).
These programs offer employees a retirement savings option sponsored by their employer that can provide tax advantages and other benefits.
Personal savings and investments
RRSPs are savings plans that allow you to save for retirement and grow your money tax-free. Your contributions to an RRSP are tax deductible, which means you can reduce the amount of income tax you pay each year. However, you will have to pay taxes on the money when you withdraw it from the plan.
TFSAs are similar to RRSPs, but the money you contribute is not tax deductible. However, the money in a TFSA grows tax-free, and you don’t pay any taxes on it when you withdraw it.
You may also consider investing in real estate, investment accounts and other assets.
How much do you need to retire in Canada?
There is no definitive answer to this question. There are many outdated assumptions that you need 70% of your pre-retirement income to spend every year in retirement, but this doesn’t work for all income levels.
How much money you will need depends on many factors, such as the age of retirement, your expenses, the lifestyle you want to maintain, life expectancy, and whether you have a workplace pension.
Consider how your monthly budget will change after retirement. There will be bills you no longer have to pay, so your cost of living depends on whether you’re still paying for things like rent, mortgage, transport, travel or outstanding debts.
Where do you want to live, and what are the cost implications of living there? Think about how you want to spend your time in retirement and whether you plan to travel. Lastly, think about how your health might impact your spending.
In retirement planning, it is also important to factor in inflation. In Canada, the inflation rate is about 2% per year.
If you are unsure how much money you need to save for retirement, you should speak with a financial planner. They can help you figure out how much money you will need and create a plan for reaching your retirement goals.
You can get a rough idea by using a retirement calculator tool.
Rules for retirement savings
Many people are dreaming up new retirement savings rules, but no one-size-fits-all plan exists. Instead, focus on what you intend to do when you retire and budget accordingly.
The 50/30/20 rule
The 50/30/20 rule divides your money into three categories: needs, wants and savings.
50% of your income goes towards needs like rent, utilities and transportation, while 30% is allocated for wants such as eating out and entertainment. The remaining 20% is saved.
The 25x rule
The 25x rule can help you estimate how much money you’ll need in retirement. You take your desired annual retirement income and multiply it by 25. Your current salary can give you an idea of how much you might need to live comfortably in retirement.
For example, to live off $50,000 per year in retirement, you would need $1.25 million saved by retirement age.
Retirement savings by age rule
Fidelity Investments says you should save ten times your income if you want to retire by 67. They recommend the following:
- Age 30: 1x your income
- Age 40: 3x your income
- Age 50: 6x your income
- Age 60: 8x your income
- Age 67: 10x your income
The premise is that you save 15% of your income yearly, including employer contributions, and invest more than half of your savings in stocks.
How much does the average Canadian have saved for retirement?
So what are the average savings by age in Canada? Below is the latest data (2019) from Statistics Canada for asset and debt levels.
Retirement savings refer to money saved in Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs), Locked-in Retirement Accounts (LIRAs) and Employer-sponsored plans (EPPs).
Other savings include things like Tax-Free Saving Accounts (TFSA), bank accounts, stocks, mutual funds and bonds.
Average savings of economic families
|Age||Retirement Savings||Other Savings||Total Savings|
|35 to 44||$220,500||$51,600||$272,100|
|45 to 54||$437,400||$127,200||$564,600|
|55 to 64||$645,500||$163,600||$809,100|
|65 years +||$514,800||$224,400||$739,200|
Average savings of individuals
|Age||Retirement Savings||Other Savings||Total Savings|
|35 to 44||$89,700||$36,200||$125,900|
|45 to 54||$290,900||$59,600||$350,500|
|55 to 64||$377,300||$69,200||$446,500|
|65 years +||$272,100||$112,000||$384,100|
What is the average Canadian retirement income?
According to Statistics Canada, the median income for senior households, in which the highest income earner is 65 years old or older, is $65,300 before tax.
How much should I save for retirement?
When planning for retirement, one rule of thumb is to set aside at least 15% of your pre-tax income for retirement each year, including any employer match. By saving early on, you can take advantage of compounding interest and grow your nest egg significantly over time.
Additionally, the sooner you start saving, the more time you’ll have to adjust your savings rate if needed to reach your retirement goals.
When to start planning for retirement
Now that you know how much you need to save for retirement, it’s time to start planning and saving as early as possible.
Use the information above to plan for your retirement and create a budget to make the retirement you want possible. Take advantage of tax-sheltered accounts, such as TFSAs and RRSPs, and discuss a strategy with a financial planner or advisor.
With a little effort, you can ensure a comfortable retirement for yourself and your loved ones.