While 65 is the goal retirement age for many people, when you retire is a very personal decision that depends on a variety of factors, such as how much you enjoy working, your health, your family situation and of course, how much money you’ve saved.
Below you’ll find some guidelines and rules of thumb you can use to determine how much money you’ll need in retirement, as well as tips for optimizing your savings so you can reach that milestone in a timely fashion.
» MORE: Can annuities fund your retirement?
How much money do you need to retire?
The amount of income you need during retirement depends on your individual circumstances and overall net worth, but a common rule of thumb is to save about 70% of your annual pre-retirement income.
This guideline assumes that your expenses will decrease slightly when you stop working — no commuting, fewer dependents, potentially lower housing costs — and you’ll no longer be setting aside money for retirement.
So, if you earned an average of $80,000 a year while working, you could reasonably expect to need $56,000 a year in retirement.
Of course, if your lifestyle doesn’t change much or you are still paying down a mortgage in retirement, you might need much more than 70% of your income (in fact, some experts say to aim for 100%).
To figure out the total amount you should aim to save up for retirement, start by taking 70% of your pre-retirement income (in this example, $56,000) and multiply it by 25. Why? Because it’s a good idea to assume you’ll live at least 25 years after you retire. In our example, that would result in a sum of $1.4 million.
Next, subtract any employer pension income you expect to receive during those 25 years or government benefits from programs such as the Canada Pension Plan (CPP), Old Age Security (OAS) and Guaranteed Income Supplement (GIS).
To continue our example, let’s say you have no company pension but expect to receive $15,000 per year in CPP/OAS. That means you’d subtract $375,000 ($15,000 x 25) from the $1.4 million total. So, in this case, you should aim to save approximately $1,025,000 for retirement.
If you want a more exact number that takes into account things like federal assistance and investment savings, the government of Canada has a handy Retirement Income Calculator you can use.
Questions that affect how much you’ll need to retire
The 70% rule is just a starting point, however, and may not be sufficient for all lifestyles. You also need to consider your own personal goals and likely spending costs during retirement. Ask yourself:
- Will you keep working? While most people stop working completely in retirement, many create passive income streams or continue to do creative or part-time work that supplements their savings.
- Will you downsize? If you plan to move to a smaller house or apartment in retirement, your home maintenance costs and utility bills will likely be lower than they are now.
- Where will you live? If you live in a major city, you’ll need to save more; if you live in a smaller town, daily expenses tend to be less than they would be in an urban center.
- Do you have debt? Credit card debt, bank loans and mortgages won’t go away just because you retire. If you have these or other types of debt, it could increase the amount you need to save for retirement.
- What will you do as a retiree? If you plan to be very active during retirement and travel frequently or go down south every summer, you’ll need to have more money saved than if your goal is to take it easy and stay close to home.
- What unexpected costs should you plan for? Do you have supplemental insurance that would pay for medical/dental services or drugs not covered under your provincial health plan during retirement? If not, you may want to increase your personal cash flow and save more.
» MORE: How older homeowners can use a reverse mortgage
Ways to save for retirement
Whether retirement is decades away or closer than you’d like to admit, always be thinking about ways to maximize your savings. There are a variety of ways to save for retirement in Canada. Here are just a few examples:
Tax-free savings accounts (TFSA)
One of the best ways to plan for a financially successful retirement is by putting money aside every month in a tax-free savings account. Any interest or investment income you earn is not taxable, and withdrawals are also tax free. The earlier you begin to save the better, as that allows your money to grow faster thanks to the power of compounding returns.
» See Our Picks: Canada’s Best High-Interest TFSAs
Registered Retirement Savings Plan (RRSP)
You can ease your tax burden by putting money aside in a tax-deferred Registered Retirement Savings Plan, or RRSP. You get an income tax deduction in the year you make your RRSP contributions, but you pay tax on the money you withdraw during retirement.
» MORE: TFSA vs. RRSP
If your employer offers optional membership in a workplace pension plan, be sure to participate. They often provide matching contributions that can go a long way toward boosting your retirement savings.
» MORE: Defined benefit vs defined contribution pension plans
What to Know About Registered Retirement Income Funds (RRIFs)
A RRIF is a registered retirement income fund that keeps RRSP savings tax-sheltered and safe. It converts retirement savings into income.
TFSA Contribution Limit and Withdrawal Rules for 2022
The maximum TFSA contribution for 2022 is $6,000. If you don’t reach your annual limit, the unused contribution room can be carried over to the following year.
Best High-Interest Savings Accounts in Canada for 2023
The best high-interest savings accounts (HISAs) in Canada will grow your money faster than standard accounts. Compare top HISA interest rates.
How Do RRSP Contribution and Deduction Limits Work?
RRSP contribution and deduction limit is 18% of your previous year’s earned income, up to an annual maximum, plus any unused contribution room carried forward from previous years.