How much do I need to retire in Canada?
We frequently get asked: How much do I need to retire in Canada?
Many Canadians hope to retire at age 60 or 65. It allows you to enjoy your life while you are still in good health. But you can choose to retire earlier if you work systematically toward your goal. That is why it is important to have a solid retirement plan.
Calculating how much money you need in retirement down to the last penny is nearly impossible. There are many variables involved, like your life expectancy and overall health.
The general rules covered in this post can help you make an educated guess. But remember to adjust your plans based on your unique circumstances and desired retirement lifestyle.
Important Canadian Retirement Savings Statistics
Before we discuss what a good retirement plan is in Canada, let us look at some interesting Canadian retirement savings statistics.
- Canadians estimate that they need, on average, $756,000 for a comfortable retirement.
- You will likely need 70-80% of your pre-retirement salary in retirement.
- In 2021, the average retirement age for Canadians was 64.5 years.
- Registered Retirement Savings Plan (RRSP), Tax Free Savings Accounts (TFSA), and Canada Pension Plan (CPP) are the three most popular retirement accounts in Canada.
- 69% of Canadians held an RSP account in 2019.
- Life insurance is an additional retirement planning tool when used correctly.
What is a good retirement income?
A general rule of thumb is to replace 70-80% of your annual pre-retirement income. This means if you currently make $100,000 a year, you should aim for at least $70,000 of annual income in retirement.
After retirement, your expenses are likely to go down, so 70-80% of your pre-retirement salary should suffice. Of course, this is just a general guideline and may not work for everyone. Be sure to adjust according to your long-term plans.
For example, if you plan to pay off your mortgage before retirement, you may comfortably live on 60% of pre-retirement annual income. On the other hand, if you want to pursue more expensive leisure activities post-retirement, like world travel, you may need 90% or even 100% of pre-retirement income.
What is considered a good retirement annual income also depends on the percentage of your current monthly income that goes toward paying everyday living expenses. If you spend more than 60% of your monthly income on living expenses and are barely able to make ends meet, you will likely need more than 70-80% of your pre-retirement salary in retirement. Look for ways to cut expenses — tracking your spending, creating a budget, and consolidating debts can all help — and start saving for your golden years without delay.
The general opinion about how much of current annual income should go toward retirement funding seems to be around 10%. Yet, some financial experts differ, leaning towards 15% as a safe figure. The earlier you start putting money in your retirement fund, the more of it you will have when you hang up your hat.
How much do retirees spend?
According to a survey, Canadians estimate, on average, they need $756,000 to retire comfortably.
Will this amount be enough for you? Well, that depends on your desired retirement lifestyle and other variables, such as the cost of living in your city and your life expectancy.
How much do you need to retire early in Canada?
There is no universal answer to this question as each person has unique circumstances. Below are a few estimates of what you need to retire based on the average Canadian retirement annual income and life expectancy of 85 years.
Retirement at age 60
According to a study, for senior Canadian couples the average retirement income is $65,300 a year. That comes to $32,650 a year for one person. If you are looking at a 25-year time horizon, your retirement savings should be at least $32,650 x 25 = $816,250
Retirement at age 55
If you want to retire at age 55 and believe $32,650 a year will be adequate, you are looking at a retirement nest egg of $979,500.
Retirement at age 50
You should have $1,142,750 ($32,650 x 35) in your retirement fund if you want to hang up your boots at age 50.
How much money should you have to retire?
How much money do you need to invest to retire comfortably in order to enjoy your golden years? $1 million? $1.5 million? More?
Most financial experts believe retirement savings between the range of $700,000 and $1 million is enough for most Canadians. But these are just ballpark figures. In reality, there is no one-size-fits-all answer to this question because financial circumstances and retirement goals vary from one person to another.
Some variables that impact how much money you will need to enjoy a comfortable retirement are:
- The age at which you want to retire
- Desired retirement lifestyle
- Your estimated expenses after retirement
- Whether you will be financially responsible for other family members
- Whether you will carry debt into retirement. If yes, how much?
The higher the estimated expenses, the more money you should have in your account when you retire. To get a clear picture of your estimated expenses after retirement, ask yourself these questions:
- At what age would you like to retire?
- Do you plan to work part-time in retirement?
- Do you plan to relocate to a lower cost of living area post-retirement?
- Will your expenses stay the same in retirement?
- What will be your income sources after retirement?
- How long will your retirement likely last?
For a happy retirement, you need careful retirement planning that takes into account your specific circumstances, needs, and goals. Due to this, customized retirement planning is paramount, as the following example shows:
Sharon and Susan are both 35 years of age, have $100,000 in their retirement accounts, and want to retire at age 55. Sharon is keen on traveling extensively post-retirement, something she is not currently able to do because of family and work commitments. Susan, on the other hand, plans to relocate to Quebec City and have the Quebec pension plan, which has a much lower cost of living than Vancouver, her present location. Since Sharon’s post-retirement expenses are likely to be much higher, she will need to have a bigger retirement nest egg than Susan’s in order to travel after retirement.
Like Sharon and Susan, the amount of money you need to save for retirement depends on your goals.
Where does my income come from after I retire?
In most cases, retirement income comes from:
- Pensions/Retirement Accounts: including Old Age Security (OAS), Canada Pension Plan (CPP), and employer-sponsored pension plans.
- Registered Savings Plans/Retirement Accounts: like Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs).
Other sources of retirement income include:
- Non-retirement savings, including savings accounts, certificate of deposits, and brokerage accounts
- Income from employment sources, like part-time work
- Real estate investments.
Another retirement income tool worth considering is life insurance. Even though many people only think of pensions as a way to provide for their family after death, it can also help supplement retirement income.
Whole life insurance or universal life insurance are options for those interested in using life insurance for retirement. Both are types of permanent life insurance, meaning the coverage lasts your lifetime. They also build cash value, which grows tax-deferred and can be accessed at any time you want.
Since cash value grows tax-deferred, you will pay tax on it only when you withdraw it. If you access it after retirement, you will probably pay less in tax as by then your taxable income would be lower than what it is now.
You can access cash value all at once by surrendering your policy; or in installments. Because cash value growth picks up pace only after 10-15 years, life insurance as a retirement savings tool make sense only for those who are not yet 45 years old.
With whole life insurance, cash value earns interest at a steady rate decided by the insurer. In contrast, cash value growth rate is not fixed in the case of universal life policies.In addition, the cash value growth rate can fluctuate according to the performance of the indexes of sub-accounts linked to it.
Retirement Saving Rules
These five retirement savings rules are a good place to start if you are not sure about how much money you will need in retirement. But keep in mind that these rules are not set in stone, nor are they intended to replace a customized retirement plan.
1. 50/30/20 Rule
The 50/30/20 rule divides your paycheck into three categories:
- 50% for essentials, like food and housing
- 30% for wants
- 20% for savings.
2. Savings by Age (As a Multiplier of Income) Rules
The following saving benchmarks based on age can help you track progress against saving for retirement:
- Age 30: 1x annual salary
- Age 35: 1x to 1.5x annual salary
- Age 40: 3x annual salary
- Age 45: 3.5x to 5x annual salary
- Age 50: 6x annual salary
- Age 55: 6.5x to 7x annual salary
- Age 60: 8x annual salary
- Age 67: 10x annual salary
3. Years Multiplied by Annual Expenses Rule
This rule involves multiplying your annual salary by the number of years you expect to live. The younger you are when you hang up your boots, the more money you will need for retirement.
For example, Joe plans to retire at age 72 instead of the standard retirement age of 65. He estimates he will need $100,000 a year in retirement and wants his savings to last till age 85, or 14 years. 14 times $100,000 is $1.4 million — the figure Joe should aim toward for a stress-free retirement.
4. The 4% Rule
The 4% rule suggests the total amount you should withdraw from your retirement account each year. If you follow this simple rule, chances are your money will last at least 30 years after retirement.
Its two main precepts are:
- Withdraw 4% from your retirement savings account in the first retirement year.
- Adjust this amount by the rate of inflation each subsequent year. (Basically, if inflation goes up, you will withdraw more than the previous year. If it goes down, you will withdraw less.)
Example: If you have a retirement nest egg of $2 million, you can withdraw $80,000 in the first year of retirement. From the second year onward, you must adjust this amount according to the inflation rate.
If the inflation rate is 2% in the second year, you would draw out $81,600 ($80,000 x 1.02). If in the third year, inflation reduces by 2%, you can spend $79,968 ($81,600 x 0.98). Likewise, in the fourth year you will take the amount you withdrew in the third year and then adjust it for inflation.
As easy as it is to follow the 4% rule, it may not work for everybody or in every situation. For example, if you have not saved enough, withdrawing 4% or thereabouts every year may deplete your retirement funds too quickly.
Also, this rule does not account for market fluctuations. The economy is not likely to stay even-keeled and consistent for the rest of your retirement years. When the economy is booming, drawing out more than 4% might be absolutely fine. But when a recession is on the horizon, relying blindly on the 4% rule may not be a good idea.
According to financial experts, keeping an eye on your total savings and spending accordingly at any given time is a much better approach. That means you should spend more when the economy is in good shape and spend less when it is not doing well.
Everyone has different goals, incomes, and expenses. As such, a good financial advisor will inform you that a one-size-fits-all approach does not work when it comes to retirement planning. While the 4% rule (and other guidelines discussed here) can help you figure out how much you need to retire in Canada, you should adapt it for personal use.
Once you know the amount you need, identify the retirement plans that will work best for your situation. RRSP, TFSA, CPP, OAS, employer-sponsored pension plans, and life insurance are some of the most popular retirement savings vehicles in Canada, but life insurance can also come in handy. Whole and universal life insurance plans build cash value, which can nicely supplement your retirement income.
If you are interested in using life insurance as a retirement income source, Dundas Life can help. We work with some of the top providers in Canada and can get the right coverage at an affordable price, a guaranteed income supplement after retirement.