Retirement is the light at the end of the tunnel. However, many people don’t know where to start planning, where to save their money, or how much to save. There are seemingly endless questions surrounding retirement.
How much do I need to retire?
What’s the cheapest place to retire in Canada?
How do I begin planning for retirement?
Saving for retirement starts now if you haven’t already begun saving. The earlier to start saving, the more compound interest will grow your money. This will allow you to retire earlier or have more money there when you do retire.
Right now, the average age of retirement in Canada is 65. However, no age is set in stone, nor is the amount of money you need for retirement. Some people choose to continue working much later than 65 whereas others retire as early as 50.
Everyone has a different lifestyle, different retirement plans, and different goals. Only you can correctly determine how much you need to save for retirement. There are tools to help, though, so do not be overwhelmed. Many strategies and methods have been devised to help begin retirement planning which we will discuss here!
Retirement Planning Canada
To effectively plan for your retirement, you should estimate how much money you need each year to live comfortably. You need to consider the following:
- Retirement Age
- Retirement Location
o Do you want to retire in Canada or somewhere with a lower cost of living?
o Are you living in a home that you still owe on?
- Various Spending
o The average annual cost of living
o Hobbies
o Healthcare
o Travel
o Any mortgage or loan payments
o Emergency expenses
o Children or grandchildren support
Once you start to think about all those factors, you can begin to effectively plan out your retirement. As there are a lot of variables in retirement, this number will be different for everyone. Some individuals may plan to retire with $30,000 per year where some are closer to the $50,000 a year mark. Some retirees may also still work part-time to supplement their income.
Whatever number you come up with, it’s better to be a bit conservative and overestimate the income you need rather than underestimate it. Once you’ve come up with an estimated yearly income, you can begin to plan how much you’ll need in total to retire.
Retirement Income Strategies
As there is no set method to determine how much you’ll need to save, we’ll go over a few here. These are suggested methods to follow and come with assumptions that may not fit everyone. Their sole responsibility is to get you on the correct path for determining the total amount you need for retirement.
By this point, you’ll need your annual expenses estimated to continue.
1. 4% rule
With your yearly income in mind, look to the 4% withdrawal rate to figure out your total retirement savings. This 4% rate we’re using is considered an average and safe rate to estimate your total retirement fund.
It was created based on the market’s returns historically. This is assuming you have a portfolio with annual returns of 7%, an average rate for long-term investing. Inflation is then accounted for which is estimated to be about 3%, giving us the final rate of a 4% annual return. Thus, you can take 4% out of your retirement fund each year comfortably.
For example, you expect to need $35,000 per year to live comfortably. This includes estimated expenses for travel and hobbies as well. Some years you may be spending $30,000 whereas some maybe $40,000.
$35,000 / 4% = $875,000
This is a conservative approach, however. You may be very capable of spending more than 4% each year depending on your investments as you may have yields higher than 7%, also not including dividend payments.
If the economy has a bad year, and the market takes a turn downwards, taking out 4% could result in a much bigger percentage loss when you consider the percent fall in your investment.
The 4% rule is not a perfect predictor of what you’ll need. Planning your retirement fund based off your investment is tough to do. However, using the 4% rule is a great starter for those looking to get a general idea for a total retirement fund.
2. 70% Rule
The 70% rule is another method used to estimate how much to save for retirement. This approach estimates you need at least 70% of your pre-retirement income during your retirement years. If you still have loan payments or a mortgage to pay, your need may be closer to 100%. It all depends on your assumed costs when you retire.
The basis under the 70% rule is that your expenses are significantly lower in retirement—30% lower. As a retiree you no longer pay the costs of transportation to work every day. You, hopefully, won’t have kids to support financially. You also will not be taking out money from your income to save for retirement. Rather, you only have to pay for living expenses, hobbies, traveling, maybe healthcare, and other various costs.
Let’s see an example where before retirement you were making $100,000. This doesn’t mean you’re whole life you were making this much, rather it was your highest salary to date.
$80,000 * 70% = $56,000
This assumes you need $56,000 each month in retirement. This may seem high, however, it’s good to overestimate your needs rather than overestimate your needs.
From here, you can choose how many years you want to plan for retirement, as it’s different for everyone.
For example, we’ll say you retire early, at 60, and want to be set until you’re 90. That gives you 30 years
$56,000 * 30 years = $1.68 million
The difference between this method and the above 4% method is stark, to say the least. This is a very liberal approach to your retirement savings and makes judgment off your highest-earning year. This value could be significantly different than what you need in reality. You may only need 50% of your pre-retirement income if you have no major expenses.
However, each person’s situation and needs are different.
3. 25 Year Approach
This is another general approach that comes with the assumption you need your income to last 25 years. With the average age of retirement in Canada being 65, this approach would see you through your 90th year.
For those of you planning on early retirement, you’ll need to adjust this method to fit your goals.
Let’s look at an example. We’ll stick to our first example of needing $35,000 per year.
$35,000 * 25 years = $875,000
As you can see, the number is the same as the 4% rule. It is the same, however, it’s easier for many people to think in terms of years rather than percentages. Modifying the number of years you want to plan for is easier than modifying the percent of your income.
For example, maybe you want to be set for 30 years.
$35,000 * 30 = $1.05 million
That approach is much easier than deciding you want to live on 3.33% of your total retirement savings.
Putting It All Together
Now that you have your monthly income and total retirement funds estimated, we can see how much you should set aside. When doing your retirement planning, you can’t forget about the government benefits you’ll receive.
You’re probably wondering:
How much is OAS (Old Age Security)
How much CPP will I get?
Government Benefits
If you’ve lived and worked in Canada before retirement, you’ll receive some amount of money from the Canada Pension Plan (CPP) and the Old Age Security (OAS) plans. The money you get from OAS depends on how long you’ve been living in Canada. For CPP, the amount you receive depends upon how much you contributed during your working years. It also depends on how long you were working on contributing.
You can receive more information on qualifying for the CPP here and the OAS here.
Using a retirement calculator can be very beneficial in this stage, as it’s tough to predict how much governmental support you’ll receive. The best retirement calculator Canada has is from the government. Look here, and you will find Canada’s retirement income calculator to give you an estimate on your retirement benefits.
According to the government’s website, the maximum amount a retiree aged 65 can receive is $1,175.83 from CPP. However, in January 2020, the average was $735.21. On average, retirees receive $8,822.52 per year from CPP.
From April to June 2020, the maximum monthly payment for OAS is $613.53. This gives retirees $7,362.36 per year from OAS.
Adding it all up, you can expect to get $16,184.88 every year from the government if you’re receiving the average payments.
How Much Do I Need To Retire Canada?
Back to the main question. By this point, you should have an estimate of how much you need to retire. But now we can see how much you need to save after taking government benefits into account.
For example, we’ll say as an individual you need $35,000 each year to live comfortably, and you want to save for 25 years.
($35,000 – $16,184.88) * 25 years = $470,378
For 25 years of a comfortable retirement, you’ll need to have $470k saved up. This allows you to withdraw around $18,815 each year from your retirement savings.
If you’re planning for retirement for a couple, you can assume you’ll need $60,000 and you’ll receive $32,369.76 annually.
($60,000 – $36,369.72) * 25 years = $690,756.
Altering Your Retirement Income
If you believe you’re not on track to reach the amount you calculated from above, you can always adjust. There are always financial emergencies we do not expect, but we still have to pay for them.
Maybe you have a family member, child, or friend in desperate need of financial help. You could have an unexpected health problem, a market crash may occur, or some legal situation where court fees arise. Many things may happen that can alter your plans.
The best thing you can do is adjust your annual budget. Even a slight modification can change your retirement needs significantly.
Instead of planning on spending $35,000, try a budget of $32,000.
Doing the same calculations we did above, your necessary retirement fund comes to $395,378.
If you’re still not comfortable with how much you need to save, you can always consider retiring later than planned or working part-time after retirement. You may not be fully retired, but by reducing your work hours, you receive similar free time while staying busy and supplementing your income. Even working part-time for a year or two could help significantly.
Additionally, you can use the latter part of your career to save aggressively. Reduce your spending as much as you can while living comfortably and save the rest. If you have a home, consider selling and downsizing or moving somewhere with a cheaper cost of living.
There are many ways you can change your necessary retirement income or find ways to increase your retirement fund before fully retiring. Consider your financial position, ability to work, and weigh all your options.
Final Thoughts
When planning for retirement, many people overthink retirement and subsequently over plan. This is not a bad thing, but it may lead to unnecessary stress. To effectively plan for your retirement, try to pinpoint every expense you imagine you’ll have. Once you have all your standard expenses accounted for, add in budgets for yearly travel and hobbies. Most importantly, always keep an emergency fund for events such as health issues, economic downturns, car repairs, or anything you can’t exactly plan for.
Although many people plan for 25 years of retirement, they end up working hard saving up the money only to not spend it. It’s very common for people to save much more than necessary and then underspend.
If you have the chance to start saving young, do it. Compound interest is your friend. Take a look at this calculator here, and play around with it. It’ll show you the advantage of beginning your savings at a younger age.
Saving for Retirement?
How much money you need to retire can be a one line response or a complicated discourse. What makes the difference, and which one applies to you? If you never travel, live on a fixed income, do not have fluctuating expenses from month to month or ever plan to go anywhere, the answer might be simple. These days retirement is not easy for some retirees. Today some retirees decide to take advantage of retirement in foreign countries while still others decide they will continue the independence of living outside of a traditional ‘retirement community’ for as long as possible.
You could say, you need as much as it takes to live how you want to live. Another way to answer the same question could be to say you should read and understand the Trinity Study, and replacement rates. After you do, pattern your finances so you work towards attaining the 4% return annually and enjoy life on your own terms.
Are both answers saying exactly the same thing? Is one contained in the other? Are both suggesting it is in your best interest to learn about them in order to relax and fly fish every month? Are both saying if you have not invested wisely already it’s too late? Let’s take it a step further.
Retirement is reflective phase of life. It is the way you experience your last phase of life. It can be a happy or worrisome phase of life. In either case, how much money you need to retire is an essential question. Financial security is the cornerstone of retirement. Tools such as the Trinity Study, which advocates the 4% rule and others financial instruments are effective tools that will help you map out your retirement years.
Learn about The Canadian Retirement Income Calculator. This government website will provide the essential information about programs such as the Old Age Security pension, Canadian Pension Plan and other valuable information. The website even has a calculator for you. As with any income calculator, the information is only as accurate as the data you provide for analysis.
Replacement rates analyze real income in real time based on previously earned income. The OECD country profile Canada can give you an insight into global comparisons if you love to travel or live out of the country. Basically, what percentage of your pre-retirement income will you need in order to keep your current lifestyle. This is fluid dynamic. Like with other financial assessments, this will vary depending on pre-retirement income, lifestyle and other factors. When you work with a financial advisor you can work out a strategy that helps you live the retirement lifestyle you envisioned. Just as with other financial terms and strategies it depends on what you want.
Income sources will make a difference. Today more senior citizens work longer. Some will work until they are in their 70’s, Some by choice, others due to circumstances. In some cases, they may have already retired from one career but continue to work in a second since they may not have attained the retirement income they want. Retirees with multiple sources of income calculate how much money they need differently from someone who still works part time.
Do you have any hobbies? Do you plan to continue doing them? How will you pay for what you love to do, or do you just give it up? Leisure activities are very important to everyone, especially retirees. Participating in a hobby might be the only time a person feels mentally relaxed. When you can continue doing the things you love to do because you can afford to, is a real treat. When a person can continue with exciting hobbies or begin new hobbies, life can be a new venture. When you do not have to concern yourself with money, life can be a joy. Starting a collection of antique jade broches might take you to Asia and who knows where else. It’s nice to know you can do that now, and not worry about money.
The basic necessities of life such as your car if you have one will also impact how much money you need to retire. If you are fortunate to be one the lucky one who has already made that final car payment, congratulations. If not, you have the payment plus the ancillary cost of gas, maintenance and insurance to consider. For some, taking care of grandchildren becomes a real expense. The dynamics that affect families might include raising grandchildren. This can be an unexpected expense that can change your plans before you retire or during retirement.
Have you set any goals for retirement? Some people have a ‘bucket list’; things they want to do in retirement. Often the list will include travel to Europe or the South Pacific. It’s nice to be on a tropical island in January snorkeling. The costs associated with these plans can be in the thousands of dollars. When you consider how much money you need for retirement, have you added in travel?
You might consider a spending plan that is within a larger budget. More clearly, you might set aside five thousand dollars annually for travel. Three thousand for one trip and two thousand for a second. This becomes your plan within your travel budget. Now that replacement income or 4% goal begins to look different. Before retirement that money may have been set aside for work related expenses but now you can use it to ‘get out of town’. So once again the question of how much money you need to retire take another turn.
Sometimes people downsize from a larger home to a smaller house or condominium. In doing so they decrease the overall cost of living and might not need to be so concerned with financial formulas that economists and financial planners develop. Maybe the question of how much money you will need comes down to what do you want and how do you plan to get it? If you have investments, you might gain income so you can live off that money. There is also growth from those investments which is different.
When you analyze your investments, consult with a financial planner so you understand exactly what to expect. If you invested $100,000 for example, you might expect a 3% return or about three thousand dollars. This is income you can now live off. Maybe this is the money for the spending plan to travel.
If you have a pension, that money might be what you use for your day to day living expenses. Some retirees still have a mortgage or pay rent. The pension might be the resource for those expenses. Other savings, if you have any, could be used for a prudent reserve in the event of an emergency. Things happen.
As you begin to take a closer look, there really isn’t one simple answer to the question. There so many different variables to consider. You can begin to see now that to answer the question how much money you will need to retire depends on many factors.
Keep informed about retirement income. Talk with other retirees and find out what they are doing. Yes, there are men and women that continue to live day to day or month to month on a small income. At the same time there are men and women who have saved their entire life just so they can enjoy their retirement.
For a quick overview, Plan to have enough money to support the lifestyle you have or have planned for your retirement. If you plan a lifestyle that requires income of fifty thousand dollars a year, then set your goals to attain that reality. If that is not realistic find a middle ground and work towards that goal.
Consider what changes you will need to make. If you are in the best of health, you are going to have a totally different experience than the person who is in bad health and in constant need of medical attention.
Where you live and how often you travel will make a difference. If you live in a colder climate how much money do you need to spend on clothing for the different seasons. If you live in a warm climate you are most likely spending a lot less. Do you plan to become a ‘snowbird’. A person who travel sought every winter. Some things such as operating a motor coach requires money.
How much money you need to retire is a very important question that some people do not consider until they are faced with retirement. The more information you have about your own financial, medical, social and community needs the better off you will be. Retirement should be about serenity and relaxation. This is the time to reflect and take it easy. Plan and research before you do retire. If you have already retired adjust your life so you can live well. Plan to get updated information annually and have a good life.
