retirement in canada

3 out of 4 Canadians do not have a financial plan when it comes to retirement and if that’s you, here is my guide on preparing for retirement in Canada. If you’ve been living in Canada for some time, I think you’ll agree with me that the living standard in Canada is generally pretty good, especially where I live in Vancouver, BC. You can golf and ski on the same day! This high standard of living also comes with a high price tag so it’s no surprise that Canadian is an expensive country. From housing, cell phone bills to taxes, it’s not easy to make our ends meet let alone save up for retirement. Let’s get started so a comfortable retirement can be in your future. 

So how much do I need for retirement in Canada in 2021? 

According to a poll done by CIBC in 2018, Canadians estimated they will need an average of $756,000 for retirement, yet the average amount Canadians actually save for retirement is $184,000. What is even more surprising is the fact that 90% of the respondents didn’t even have a detailed retirement plan describing their retirement lifestyle or income needs. 30% did not have retirement savings at all and 26% had no clue how much they will need for retirement. Honestly, these results are quite worrying. 

When you talk to people around you, it seems like a million dollars is the magic number that most people aim to have for retirement but do you know why many think that this is what they need? Is this number sensible, or does it only sound good because that will make you a “millionaire”? Is one million dollars enough for retirement? Or what is enough for retirement? 

Let’s break it down. 

The answer on how much you need for retirement is: there isn’t one set amount or plan for retirement that works for everyone. Everyone’s needs and situations are different and the amount you need should be reflective of your retirement goals. It’s like asking how much water one needs to drink per day. The simple answer is 4L but that’s not the only answer. Similarly, there isn’t one number that works for everyone. You take into your account what age you want to retire, the lifestyle you want after retirement, if you’ll be making any income at all after retirement, etc. 

How to calculate how much you need for retirement

Having said that, there are many rules that can help us figure out that number we need for retirement more easily. There is the infamous 4% Rule and the 25X Rule. This idea stemmed from the concept of F.I.R.E (financial independent and retire early). These two rules are most commonly used for retirement and are as follows:

  • The 4% Rule states that during your retirement, it is recommended to withdraw 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 
  • The 25X Rule suggests you should assume 25 years of retirement 

Together, these two rules can give you a rough idea of how much you need to save up for retirement. 

For example, if Tom figures that each year he would need $50,000 for his living expenses. His OAS and CPP will contribute around $10,000 of his retirement in today’s money, meaning the other $40,000 would have to be covered by his own savings. If Tom anticipates his retirement life to be 25 years, then one million dollars is indeed his magic retirement number because if he puts that one million dollars into an investment portfolio with a 4% return, then he can estimate that he won’t outlive the money. 

Factors that affect retirement in Canada

Now keep in mind these are common rules to serve as a starting point for you. There are still many factors to think about when it comes to your retirement such as inflation, your investment’s rate of return, the age of your retirement, etc. So remember this: 

Your retirement plan can be perfect, but us as human beings aren’t. 

In fact, the term 4% rule is a little misleading as well, because you are withdrawing 4% of your savings in year 1 of your retirement, but for subsequent years, you are supposed to adjust the annual withdrawals by the rate of inflation, and the withdrawals are also subject to tax. 

Also with the recent F.I.R.E movement that has popularized early retirement, some individuals retire even in their 30s or 40s. For these individuals, the 25x rule obviously doesn’t apply, and the 4% withdrawal also has little use because it doesn’t work well for more than 35 years of retirement. 

We can also use a financial calculator to verify our retirement and to see if one million dollars is enough. 

For instance, Nancy is 30 years old and wants to retire at 60 with the same living standard as she has today. She is currently making $60,000 a year. With the help of the financial calculator estimating 2.5% inflation every year, Nancy needs around $125,000 per year when she retires. 

Since she will stop working, she needs an investment portfolio that can give her $125,000 per year. Let’s multiply this number by 10 giving her $1.25 million. This is because at her retirement, with a 10% return each year, she will get $125,000. If we want to be conservative, we might need to adjust for a lower return and would multiply by 15 or 20 times. 

Nancy would need to save $10,000 a year with an 8% return to get a $1.25 million retirement savings, meaning she needs to start NOW. 

Fun fact: if we divide $10,000 to Nancy’s income of $60,000, we will get 16.7%.

Do you know what the annual RRSP contribution limit is? It’s based on 18% of your previous year income.

Ah. You see, the Canadian government didn’t randomly select a percentage. Their intention is that if you can save that 15 – 18% income with a reasonable rate of return for a long period of time, then you should be set for retirement. You can find the financial calculator here so you can calculate a more accurate number for your own retirement. Or, you can also consult with me for assistance. 

Rethinking your retirement in Canada

Now you might be wondering, so Thomas does that mean as long as I reach that number, then I am safe?

Not quite. 

Here’s why: Retirement is no longer the final stage of our lives, but instead, it’s a transition between life stages. It’s no different than going to school or getting married so you may want to consider a flexible retirement strategy considering the retirement stages below. 

There are three stages in retirement:

  1. The gogo stage – Right after your work life where everyday is basically a weekend. You travel, you play golf, you live at the same house. You’ll spend more than what you used to make back then because it’s the time when you have the most flexibility
  2. The slow go stage – You are still enjoying the same things as the gogo stage but less frequently. As a result, you will spend less than what you used to make. 
  3. The no go stage – You will spend more time at home and have less activities so you will spend roughly 70% of what you used to make. 

In summary, the law of average suggests that $1 million to $1.2 million in your bank account should put you in a comfortable position to enjoy retirement life. Following these simple hacks can help us quickly determine a figure that we should aim towards saving for retirement. 

Planning your retirement

I hope this helped you get some clarity on your retirement journey. As Canadians, we are quite fortunate that there are supplemental retirement incomes for us from the government such as CPP, OAS and GIS. 

If you’re interested in learning more, you can find more videos on my YouTube channel to help you make better decisions when it comes to wealth, retirement and insurance in Canada. I’m always here to help put together a personalized plan for you so feel free to email me.

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Thomas is an advisor with NOVELLA WEALTH

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