How Much Money Do You Need to Retire Comfortably in Canada?

Retirement is a major life milestone that requires diligent planning and preparation to ensure you can retire comfortably and maintain your desired lifestyle. With life expectancies rising and healthcare costs increasing, determining how much money you will need for retirement is now more critical than ever.

This guide examines key factors that affect retirement savings goals, provides average retirement savings figures, and delves into specific strategies and accounts to maximize your nest egg.

Read on for advice on calculating your retirement number and optimizing your savings to retire worry-free.

How Much Money Do You Need to Retire in Canada?

Determining how much money you need to retire comfortably is an inexact science. The amount varies based on your intended retirement age, lifestyle, debt levels, and other sources of retirement income. However, there are some general guidelines to provide a starting point:

• The commonly recommended replacement ratio is 70-80% of your pre-retirement income. So, if your final working salary was $100,000, you would aim to have $70,000-$80,000 annually in retirement income. This assumes your expenses like commuting and retirement savings contributions end after retiring.
• The median retirement savings for household individuals aged 55-64 in 2019 was $377,300, while the median for economic families was $645,599. (Source)
• Financial experts caution that with inflation averaging 1.9%, your retirement savings goal should increase by that amount annually. For example, if you plan to save $1.75 million for 25 years after retirement, that could easily become $2.1 million in 10 years due to inflation.

These benchmarks show that retirement savings goals aren’t one-size-fits-all—they depend on things like your age, income, household situation, and when you plan to retire.

Using a Retirement Calculator

Retirement calculators that factor in your specific details provide a more accurate savings target. The Government of Canada offers a free Canadian Retirement Income Calculator that estimates how much retirement income you may receive from government pensions, employers, RRSPs and other sources to determine if it aligns with your desired replacement ratio.

Retirement calculators enable you to input details like your current age, planned retirement age, income, spending, savings, debts, and more to help calculate a target tailored to your unique situation.

The 4% Withdrawal Rule

Another popular retirement planning method is the 4% withdrawal rule. This rule advises limiting annual retirement account withdrawals to 4% of your total nest egg. For example, if you managed to amass $1,000,000 in retirement savings, you would withdraw only $40,000 the first year.

This conservative rule aims to provide steady income that can be increased slightly each year to account for inflation while preserving the principle. If withdrawal amounts exceed 4%, you risk depleting your retirement funds prematurely.

What Questions Should You Ask Yourself When Determining Retirement Goals?

Beyond the general rules of thumb, achieving your optimal retirement savings target requires asking yourself some personal questions:

At What Age Do You Plan to Retire?

Retiring early requires significantly higher savings to support your retirement lifestyle for a longer period. Delaying retirement gives you more time to build your nest egg and shortens the timeframe you need to fund.

The earliest age you can start receiving government pensions like CPP and OAS is 60. However, taking CPP before age 65 results in reduced monthly payments of 36% less than if you wait until 65. Delaying CPP until age 70 increases payments by 42%.

Will You Downsize or Relocate in Retirement?

Downsizing your home or moving to a lower-cost area can significantly reduce living expenses in retirement. If you sell a larger, expensive home and move to a smaller, less-priced residence or community, you may be able to reduce costs for housing, utilities, property taxes, and more.

Relocating to a different province or a rural area with a lower cost of living can also stretch your retirement savings further. Make sure to research different locations’ average costs for housing, transportation, food, entertainment, and healthcare.

What Will Your Regular Living Expenses Be in Retirement?

Analyze your current regular living expenses and determine which will remain fixed and which will decrease in retirement. Budget for ongoing costs like:

• Housing – mortgage/rent, property tax, homeowners insurance
• Utilities – electricity, water, gas, phone, cable, Internet
• Transportation – vehicle payments, insurance, gas, maintenance
• Food – groceries, dining out
• Healthcare – medications, dental, vision care, insurance premiums

Eliminate any costs that will disappear when retired, like commuting, retirement contributions, business clothing, and lunches out.

Will You Still Have Debt in Retirement?

Ideally, you will enter retirement debt-free, but that is not always possible. If you still have outstanding debts like a mortgage, car loan, or credit card, factor the monthly payments into your retirement budget.

You should aim to pay off high-interest credit card debts before retiring. If you still have a mortgage, consider paying it off early or downsizing to eliminate that monthly cost.

Do You Have Any Retirement Benefits Through Work?

Employer pensions can provide a significant supplement to your retirement income. Make sure to find out if you will receive any pension, RRSP matching, or other retirement benefits from your employer.

How Much Will You Receive from CPP and OAS?

CPP and OAS pensions from the government provide a consistent baseline of retirement income. But don’t rely on them to fully fund your retirement. The average CPP payment in 2024 for new retirement is just $808.14 per month.

Factor in only the amount you are eligible to receive based on years contributed to CPP and years residing in Canada for OAS.

What Are Your Retirement Lifestyle Plans?

Your expected retirement activities have a significant impact on your savings needs. If you plan to travel often, pursue expensive hobbies, spend winters abroad, or regularly visit family out of town, you will need higher savings than someone who plans a quiet, local retirement. Be realistic about the costs of your desired lifestyle.

Will You Work Part-Time in Retirement?

Many retirees take on part-time work, freelancing, or consulting to remain active and earn extra income. Even working just 10 hours per week at $20/hour can generate $10,400 annually to help cover retirement costs. Have a reasonable plan for any supplementary retirement income you anticipate.

Do You Have Supplemental Health Insurance?

While Canada has universal healthcare, retirees still have medical costs like prescriptions, vision and dental care. If you do not have supplemental health benefits through an employer, you will need to budget these costs out of pocket. Set aside more savings if you do not have extra health insurance.

Will You Financially Support Other People?

Having dependent family members like elderly parents, grown children, or grandchildren can increase your retirement costs. Make sure to factor in any regular support you plan to provide others when calculating your retirement savings goal. Even small amounts like $300 per month for a family member add up to $3,600 per year.

Asking yourself these personal questions will help you create a realistic picture of both your expected retirement income and expenses and better calculate the savings you need.

How Can You Save for Retirement in Canada?

Canadians have access to a variety of different accounts and strategies to save and invest for retirement. Consider maximizing your contributions to these beneficial options:

Registered Retirement Savings Plans (RRSPs)

RRSPs allow tax-deferred growth of your retirement savings. Contributions are deductible on your income tax return. You pay tax only when withdrawing funds in retirement. The sooner you start contributing, the more your savings can grow.

Tax-Free Savings Accounts (TFSAs)

While not exclusively for retirement, TFSAs are a flexible, tax-free savings vehicle. The current annual TFSA contribution limit is $7,000. TFSA investment gains and withdrawals are not taxed.

Max out your TFSA in addition to your RRSP to give your retirement savings a major boost.

Defined Benefit & Defined Contribution Workplace Pensions

Defined benefit pension plans pay guaranteed income in retirement based on salary and years of service. Defined contribution plans specify retirement contributions, but benefits depend on investment performance. If offered a workplace pension, participate to get matching employer contributions.

Non-Registered Investment Accounts

Once registered plans are maxed out, open a non-registered investment account. Retirement savings in these accounts don’t get special tax treatment, but they provide more flexibility for withdrawals than registered plans. Aim to invest early and contribute regularly.

Health Savings Accounts (HSAs)

HSAs through your employer can supplement healthcare costs in retirement. Contributions are tax-free, and funds can be invested. Withdrawals for medical expenses are also tax-free.

Other Strategies

• Start saving early, max out contributions, and invest for growth.
• Take advantage of tax deductions for RRSP contributions.
• Consolidate retirement accounts to reduce fees.
• Split income with a lower-earning spouse to reduce taxes.

Diversify your retirement savings using these different accounts and tax strategies. Consistently invest over time to take advantage of compounding growth.

What If You Won’t Have Enough Saved for Retirement?

Despite your best efforts, you may project that your retirement savings will come up short. Don’t panic. You have options if it looks like you won’t have enough money to retire comfortably:

• Delay retirement a few additional years: This allows more time to save and earn investment returns while shortening the length of retirement you have to fund. Even delaying retirement by 2-3 years can have a major impact.
• Downsize your home: Selling a large house and moving to a smaller property or less expensive area can significantly reduce living costs. Property taxes, utilities, insurance and maintenance costs all decline.
• Relocate to a lower cost of living area: If you live in an expensive city, relocating to a rural town or different province can really stretch your retirement dollars. Compare prices for housing, food, entertainment, transportation, and healthcare costs.
• Reduce spending and live more frugally: Track your spending to identify areas you can cut back, like dining out, entertainment, clothing, or leisure activities. Move to a lean budget and lifestyle.
• Go back to work part-time: Many retirees work part-time jobs out of both financial necessity and boredom. Even 10-15 hours per week of work can generate a few thousand in supplemental income.
• Consider retirement income products: Annuities through insurance carriers or reverse mortgages on your home can convert assets into guaranteed income streams. These products provide fixed monthly income for life.

With some adjustments like these, you can still achieve a comfortable retirement even if you come up a little short of your savings goals.

Summary

Determining how much money you will need to retire comfortably is an essential part of retirement planning. While there are general rules of thumb, take time to calculate your own unique number based on your specific situation and plans, as no one is the same.

Maximize contributions to TFSAs, RRSPs, workplace pensions, and non-registered accounts early on to take advantage of decades of tax-deferred or tax-free growth. Maintain a diversified, growth-oriented investment portfolio while working to grow your nest egg.

Build in a buffer in case you retire earlier than expected or live longer than average in retirement. Seek guidance from a fee-only financial planner if you need help creating a personalized retirement plan.

With prudent preparation, consistent saving, and disciplined investing, you can amass the savings you need to enjoy your post-work years comfortably doing the activities you love.

FAQs About How Much Money You Need to Retire Comfortably in Canada

Article Sources:

1. Here’s How Much Money You Need To Retire – https://www.nerdwallet.com/
2. How Much Money do you Need to Retire in Canada? – https://www.chip.ca/
3. How Much Do You Need to Retire in Canada? – https://www.fool.ca/