Save & Invest
How Much Money do you need to Retire in Canada?October 23, 2023
Retirement is one of those things that is always in the back of our minds. How much do I need to retire? What if I don’t have a pension? Will I be able to retire early? How much of my monthly income should I be putting away for retirement?
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Then you start hearing words like:
- Tax-Free Savings Accounts (TFSA)
- Mutual Funds
- Registered Retirement Savings Plans (RRSP)
- Stocks and bonds
Where do you start? Well, these options mentioned above are all tools you can use to help you save for your retirement. Depending on your situation you just need to figure out what works for you. TFSAs and RRSPs allow you to save your money and earn interest whereas mutual funds and stocks/bonds involve investments and are a bit riskier. The most common option people use to save for retirement is RRSP’s. Even if you do have a workplace pension, having personal savings can make retirement less stressful and allow you to enjoy your freedom that little bit more.
When it comes to saving for retirement though, it doesn’t matter as much how you save your money as long as you have some sort of retirement income. How much you need to retire really depends on a lot of different factors including age, lifestyle, monthly bills and such. However, the general person will need a total of between $700,000 and $1,000,000,000 at retirement, roughly 70-80% of their average pre-retirement income. The average amount saved for most Canadians at retirement age is only $280,000.
The average amount in an RRSP at retirement
An RRSP is a Registered Retirement Savings Plan. RRSPs are tax-deductible and are used to save money for retirement. Each year, the government calculates how much an individual is able to deposit into an RRSP without being taxed. You can then claim any amount you put into your RRSP on your taxes and receive a tax break. If you choose to take out any of these savings before you reach retirement age you will be taxed otherwise interest is earned on this amount. The amount of interest gained depends on the type of RRSP or mutual fund you have decided on.
In Canada, the average amount held in RRSPs by retirement varies depending on the region, but the national average is $144, 613 as of 2022, which is slightly higher than $141,923 in 2021. This has gone up from $112,295 in 2020. Every year more and more Canadians are starting to invest in their future. Now, keep in mind this is just what the average Canadian has invested in RRSPs’. This does not include any workplace pensions, government pensions, investments, assets, or TFSAs’. For most, this would not be a liveable amount over a substantial period of time, but it will add a comfortable cushion in addition to other retirement income.
If you do decide to create an RRSP, don’t forget that the funds need to be transferred into a Registered Retirement Income Fund (RRIF) by the time you turn 71 to avoid being taxed on them. Now, what exactly is a RRIF? A RRIF is a way for the holder of your RRSP, or any other retirement investment, to pay you in monthly installments without charging the tax of an RRSP. This is a registered fund and is considered to be income that will be reported on your taxes.
How much money should you have to retire?
When calculating how much money you need to retire in Canada there are a few factors to consider. First, what do you plan to do during retirement? Do you want to travel? Will you still have any debt to pay? Do you have any family you will still financially support? Do you have a workplace pension? Next, you need to consider what age you would like to retire. This will estimate how many years you would like to be financially supported by retirement income and will affect the total amount you should have saved. Once these factors have been considered, you then need to consider how your monthly spending on a fixed retirement income will look compared to how you currently spend your money. Are there expenses you can cut? What income will you need to live a lifestyle similar to how you currently live?
Taking inflation into consideration
Another important factor to consider when retirement planning is inflation. In Canada, the inflation rate is roughly 2% per year. Based on this and how many years you have until your anticipated retirement date, you can estimate the changes in bills and expenses over time and save a little extra.
Canada Old Age Security (OAS)
In Canada, on top of your pension as well as any RRSPs, TFSAs, and mutual funds, you can also receive Old Age Security (OAS) and Canada Pension Plan (CPP) benefits. These benefits, because they are government-regulated, will increase with inflation, whereas personal savings like RRSPs will not, so it is important to keep that in mind when creating your retirement plan.
The CPP Retirement Pension replaces part of your income when you retire. In order to qualify for this benefit, you must be at least 60 years of age and have made at least one valid contribution to the CPP/QPP benefit. The CPP benefits are not automatic, and you must apply to be able to receive them. These benefits are based on your pre-retirement income.
OAS pension amounts differ for everyone and depend on how long you have lived in Canada. It is based on your yearly net income, and you can be taxed on it depending on if you exceed the allotted net income amount. With OAS, once you turn 75, you can also receive a 10% increase in your pension amount. This amount is also subject to change due to inflation and is reviewed periodically by the Government of Canada. These amounts are meant to offset your retirement savings and can be calculated into your retirement budget.
The maximum amount that you can receive every year from OAS changes, but currently, as of 2023, the maximum OAS amount you can receive is $778.45 per month if you’re 75 and over. If you’re between the ages of 65 and 74, then the maximum amount you could receive is $707.68.
What is a good retirement income?
When calculating your retirement income, it is recommended that you plan for 70% of your current income. It is likely that with no longer commuting for work as often, your pre-retirement costs will decrease, and you will be able to live quite comfortably on this amount. This, of course, may not be enough for everyone.
The first factor is your current expense in relation to your current income. If you are barely making ends meet with your current income it is likely your reduced retirement income won’t be enough. It is recommended to start saving at least 10% of your current income into a retirement fund. The younger you start saving, the more you will have when the time comes to retire.
As we mentioned before, the exact amount you need to retire really depends on your lifestyle. With that said, though, it’s recommended to have around $750,0000 saved for retirement if you don’t have a pension. That $750,000 has to be broken down over the rest of your life so, for most, it will work out to be within the parameters they are able to live the relatively same lifestyle.
Can you retire on $500,000 or $1,000,000?
Many people want exact numbers when it comes to retirement. Am I able to retire off $500,000 or even $1,000,000? The truth is that it is hard to say yes or no to a set amount. Instead of basing their income on 70% some people also take their ideal yearly income and multiply it by 25. This is based on the average lifespan after retiring being 25 years. There is also another way of calculating this and that is the 4% rule. This helps to determine how much from your retirement accounts you can withdraw every year and not risk depleting your funds. Based on this rule, if you had $750, 000 put away for your retirement, you could take out 30,000 a year and live off that for 25 years. This would be the retirement income of the upper middle class who were used to making around $100,000 per year when they were working.
Let’s go over a few common questions regarding how much is needed to retire. Can you retire off $500,000 in Canada? Based on some of these rules let’s calculate what the retirement income would be. The average retirement age in Canada is 65, estimating the $500,000 is to last you 25 years your yearly retirement income would be $20,000. This is lower than the average Canadian income and might be difficult to live off depending on your monthly expenses. However, retiring off $1,000,000 could be substantially more manageable. Given the same principle as before this would leave you with an annual income of $40,000. Even with inflation, if your expenses align this would be a very manageable income. We can extend this even further and look at what it would look like to retire with $2,000,000. This is an extremely manageable number. Even over a span of 25 years, your annual income would be $80,000.
How much do you need to retire early in Canada?
Honestly, it is very difficult to dictate what exact amount would be the ideal amount to retire with. These numbers above are just estimates based on common principles. But what if you want to retire early?
Retiring at age 60
For example, you have $500,000 saved for retirement and you want to retire at 60. Instead of calculating this amount based on 25 years, a good start would be to base it on 30 years. The annual income based on this principle would then be $16,667. Will this cover your yearly expense? It could be very difficult. If this is at least 70% of your pre-retirement income it could be possible though. It would also depend on if this was the only income you would receive after retirement.
Retiring at 55 or 50
What if you want to retire even earlier than 60? What about 55 or even 50? In order to get a good estimate on what you would need it would be ideal to add these years to the 25-year guideline. For example: you have $1,000,000 set aside for retirement and you want to retire early. Based on 35 years, if you retired at 55 your annual income would roughly work out to $28,571.42. If you were to retire at 50, based on 40 years, your annual income would be around $25,000.
Before you make any decisions, it is important to get a second opinion, but these numbers can give you a good idea of what you are capable of retiring with and at what age.
How much money does the average Canadian retire with?
While it is difficult to determine the exact amount needed to retire based on individual circumstances, the average Canadian retirement income is $65,300 per year for senior couples. Roughly half of that amount ($32,000) would be average per person. If you were to estimate what amount you should have saved for retirement based on the Canadian average, a single person should have $800,000 and a couple should have $1.6 million. This is based on the amount lasting you roughly 25 years at $32,000 annually.
Even though these numbers are considered to be the norm according to Statistics Canada that doesn’t mean more or less won’t work for you. It is also important to remember that in Canada you are eligible for full CPP benefits (QPP in Quebec} and OAS between the ages of 60 and 70.
How much do you need to retire with a $100,000 a year income?
If you currently have a $100,000 a year income, the methods we discussed to help calculate the retirement income can be very useful. Based on the idea that you would have less expenses than with your pre-retirement income and using the 70% rule an ideal amount would be somewhere around $70,000 a year or higher. If you are retiring at 65, then the estimated amount you would need saved for retirement would be around $1,750,000. Then if you decided to retire 5 or even 10 years earlier you would add those years to your calculations. These same principles can be used for any pre-retirement income and be a great guideline when you begin your retirement planning.
Another great tool you could use is the Canadian Retirement Income Calculator. This factors in your income, expenses, and as well as government benefits to help you to determine what funds you would need to retire comfortably.
How Much Should You Have Saved by the Time You Turn 40?
How much you should have saved by the time you are 40 is roughly 3 times your yearly income. So, for example, you make $45,000 per year. If this is the case then you should have at least $135,000 put away for retirement savings. If you make $100,000 per year, then you should have around $300,000 saved.
Planning for retirement can be a very daunting process. The prospect of living off of a fixed income can create a lot of stress but by planning for the future you can eliminate some of this stress. The tools listed here are meant to give you a head start when planning for your retirement and to start considering a budget making the type of retirement you desire possible. TFSAs, RRSPs, mutual funds, or any other retirement savings tools are meant to make saving for your future easier. Speaking with your financial advisor can help ease your stress as well. They can advise you which of these tools would best suit your retirement needs and how much savings is required to do so. Remember, the earlier you start saving for the future the more in charge you will be of your future financial health.