How much should Canadians save for retirement?

Wondering how much money you need to retire in Canada? You’re not alone.

Saving up for retirement takes time, determination, and consistency. However, figuring out precisely how much you should save for retirement as a Canadian isn’t always easy.

Trying to predict the amount of money you’ll need to live out your golden years thirty, forty, or even fifty years down the line can seem like an impossible challenge. But while everyone’s situation is different, there are some overarching guidelines you can follow when planning your retirement savings.

To help you out, we’ll do a deep dive into everything you need to know about how much Canadians need to retire.

How do I save for retirement in Canada: Basic principles

Most financial planners, advisors, and coaches encourage their clients to start saving about 10 to 15% of their pre-tax income for their retirement as soon as possible. This is a general rule though, and it may not work for everyone. The critical part of the question “how much do you need to retire in Canada” is “you” and the money you need to save up before you retire will depend on factors specific to you, such as at what age you plan on retiring, what expenses you will be looking at post-retirement, what your living situation is, etc.

While the amount may not be the same for everyone, the principle of retirement is definitely going to be the same: the sooner you start saving for retirement, the more time your funds have to grow and accumulate compound interest.

Compound interest can be thought of as your money making money for you. When you invest and amount into assets held in a Registered Retirement Savings Plan (RRSP), that money immediately starts accruing interest. Eventually, as you continue to contribute to your account, and invest the funds, the interest you earn on your investments will compound and accrue more money, without any extra effort on your part.

For example, imagine you start with a $1,000 initial investment and then invest an additional $500 a month for 40 years. With a conservative 7% growth rate, you could have around $1.3 million by the time you retire—all because of compound interest. Over that same time period, you would’ve contributed about only $240,000 of your own money.

As a result, the power of compound interest is one of the key concepts behind retirement planning. Since you’ll need to find a way to replace your earned income in retirement, putting your money to work for you as soon as possible can help you retire comfortably in Canada.

Ultimately, the basic principles behind saving for retirement are timeliness and consistency. The earlier and more frequently you put money toward saving for your golden years, the more likely you are to have the amount you need to retire.

How to create a retirement savings plan

Now that you understand the basics behind retirement savings and approximately how much you should save for retirement, let’s take a look at how you can create your own retirement savings plan.

1. Open a retirement account

Opening a retirement account is usually the best way to get started with your planning. In Canada, there are a couple of retirement investment options and government retirement schemes you can take advantage of:

Registered Retirement Savings Plan (RRSP): What’s an RRSP and how does it work?

Canada’s basic individual retirement plan is called a Registered Retirement Savings Plan (RRSP). An RRSP account is available to anyone in Canada under the age of 71 with a Social Insurance Number and the investments you make into your RRSP accounts are tax-deductible. With RRSP plans, you can contribute up to a certain amount each year (called your RRSP deduction limit). Your funds then grow tax-free until retirement.

The only catch with RRSP accounts is if you choose to access those funds before you retire, you will have to pay taxes on them. There’s also another type of RRSP account, called locked-in RRSPs, which generally don’t allow you to withdraw funds before you retire.

The best part about RRSPs is you can choose to hold a variety of investment types, such as stocks, bonds, mutual funds, etc. depending on your goals. This ensures that the money you put aside for your retirement in the form of RRSPs is not depreciating with time, but growing in a tax-free manner thanks to your investments.

The maximum amount you can contribute to your RRSPs annually is fixed, and is known as your RRSP contribution limit. It’s calculated as 18% of your earned income for the previous year or the standard maximum annual contribution limit for the taxation year, which is $29,210 for 2022, whichever is lower.

Canada Old Age Security (OAS): What is OAS and do I qualify for it?

Canada Old Age Security or OAS is a Canadian government-regulated pension plan that depends on how long you’ve lived in Canada for after the age of 18. If you meet the eligibility criteria for OAS, you start receiving a fixed amount of benefits once you turn 65. The payment amount of this benefit depends on your age, marital status and level of income.

Unlike RRSPs, it’s considered taxable income and is subject to recovery tax if your net annual income is greater than the world income threshold for that particular year. Additionally, the OAS program is funded by the Government of Canada and you don’t “pay” directly into it—like you would for RRSPs or other pension plans. The best part about OAS is the government regularly reviews the plan to ensure the benefits you receive are at par with inflation.

Canada Pension Plan (CPP), Group RRSPs, and Registered Pension Plans (RPPs)

The Canada Pension Plan or the CPP is meant to replace a small portion of your income after you retire in Canada. It’s deducted from your income and the benefits you receive upon retirement depend on your pre-retirement income. It’s a government-regulated plan and you must be at least 60 years of age in order to start receiving payments under it. Similar to RRSPs, you need to apply to be eligible to receive CPP benefits.

Some employers offer various retirement plans and pensions, such as Registered Pension Plans (RPPs) and Group Registered Retirement Savings Plans (Group RRSPs). There are a few differences between each of these plans, but the general idea is that you and your employer will make contributions toward your retirement savings.

Regardless of which type of retirement account you choose to open, the important thing is that you have a retirement account in the first place. Having a dedicated, tax-advantaged account for your retirement savings will serve you well in the long term.

2. Calculate your retirement spending needs and income streams

We’ve already discussed the general 10 to 15% savings rule for retirement planning. But the reality is that most people’s financial situations are a bit more nuanced to have a single right answer to the question how much do you need to retire in Canada.

While saving 10 to 15% of your pre-tax income each year will usually get you to a good place financially before you retire, it’s worth taking the time to consider how much you’ll need to have saved up after you stop working. You’ll also want to consider the different sources of income you might have during retirement so that you’re able to more efficiently invest right now.

Many financial experts suggest that people should plan to have at least 70% of their current, pre-retirement annual income saved up before they retire. This means that if you currently make $100,000 a year, you’ll want to have about $70,000 per year saved up in your retirement account.

The reason for this is simple: Many people in retirement end up spending more on things like travel and recreation, but they often have fewer expenses, like a mortgage or recurring investments. Additionally, you can also expect funds from either the Canada Pension Plan (CPP) or the Quebec Pension Plan (QPP) to make up for a part of your lost income.

Trying to save enough money to replace 70% of your income in retirement can feel daunting. So a better place to start might be answering the following questions:

• What’s my current age and when do I plan to retire?

• What’s my current annual income?

• What expenses do I see in my post-retirement life?

• How much money will I need annually to take care of those expenses?

Once you have rough answers for all these questions, you can start to break down your total amount into annual goals, and then into monthly saving goals.  Remember that you may have other sources of income available to you beyond your RRSP and the CPP. You might have a Tax-Free Savings Account (TFSA), rental income, or access to a Canadian Armed Forces Pension plan. You can figure all of these other sources of income into your total retirement savings plan.

3. Understand your time horizon

Retirement planning is all about taking advantage of the power of compound interest. But in order to maximize the benefit of compound interest, you need to start your retirement fund investment strategy as soon as possible.

For recent university graduates and other twenty-somethings, a forty or fifty-year time horizon is plenty of time for even a modest initial investment to grow into a fantastic nest egg. But if you’re well into your professional career and haven’t started saving for retirement yet, you may need to be more aggressive with your savings.

The amount of time you have between now and your ideal retirement age will greatly affect how you invest the funds within your RRSP and other accounts.

Younger people with longer time horizons are more likely to benefit from higher-risk, higher-reward investments, like stocks and even crypto. Meanwhile, older professionals may opt for a higher proportion of lower-risk investments, like bonds, in their portfolios.

Understanding your time horizon is an essential part of retirement planning. If you’re new to investing or you want help selecting the right investment products for your needs, consider working with a qualified financial planner or financial advisor.

4. Maximize your contributions & tax breaks

Retirement planning is a marathon, not a sprint. If you want compound interest to work in your favour, you need to take advantage of your tax-exempt saving plans and your retirement accounts by contributing to them as frequently as you can.

While everyone’s financial situation limits their investment abilities to some degree, it’s worth making a serious effort to contribute a sizable chunk of your income to your retirement account each month. While 10 to 15% of your current pre-tax income might not be feasible for everyone, any amount you can contribute now will pay dividends down the line.

Keep in mind that there are maximum contribution amounts to most tax-advantaged retirement accounts in Canada. RRSP and Group RRSP contributions are usually limited to about 18% of your previous year’s income. The more you can contribute up to this limit, the better, especially if you have a Group RRSP with employer matching contributions.

If you find that you often max out on your RRSP contributions each year, you might also consider opening a TFSA as an additional investment strategy. TFSA maximum contribution limits vary from year to year, but it’s currently at around $6,000 and should increase every two years.

Maximizing your annual contributions isn’t just about saving for retirement, though. Most retirement plans also provide you with tax breaks for every dollar you contribute. That means you can save for retirement and lower your current tax bill, all at the same time.

5. Assess your progress regularly

No good retirement savings strategy is complete without frequent progress check-ins. If you’re an avid investor on top of the changes to the stock market, monitoring your RRSP’s performance and managing your investment portfolio might not be time consuming for you.

But even if you’re not normally in stocks and bonds, it’s worth reviewing your retirement plan’s performance on a quarterly basis.

Regularly checking in on how well your various investments are doing puts you in a better position to make changes if a certain asset is under-performing. Additionally, if your personal situation changes, you may need to reevaluate your savings plan. A change in job, moving to a new city, the birth of a child, or other major life events can affect how much you can realistically save.

If you just set and forget your retirement investment portfolio, your investments might unknowingly veer off-track. The closer you are to retirement age, the more important these check-ins become.

Final thoughts: How to make it easy to plan for your retirement in Canada

While there’s no one good answer to how much Canadians should save for retirement, most people should aim to invest at least 10 to 15% of their pre-tax income in an RRSP or similar tax-advantaged account.

Saving for retirement is all about investing early and often so that you can take advantage of compound interest. Additionally, regularly checking in on your retirement plan’s progress can help ensure that your investments stay on-track for growth in the long-term. This can increase the chances that you have more than enough saved up to live comfortably in retirement.