Read Our Finance Blog
Retirement Planning

How Much Money Do You Need To Retire In Canada?

How much money do you need to retire is a debatable topic and will be the same for yours to come. The answer depends on how much your current income is, how much money you would like to save for retirement, what are the expenses right now versus what would be your expenses in the future, and the inflation rate. 

It is always a good idea to start saving for retirement early and enjoy the benefits of compounding. A lot of people mistake saving early for retirement thinking that they do not need to save money now and they can always save when they have enough financial stability. But even if you save a small amount, today’s $100 can be tomorrow’s $1000. You must avoid such rookie mistakes. Wondering how much money you need to retire in Canada? Let’s find out.

Read: Understanding Guaranteed Income Supplement (GIS) Canada

How Much Money Do You Need to Retire in Canada? 

Do you know that the majority of investment advisors suggest that you need to have at least 70% of the income to live a comfortable retired life? There are also people that believe that you need to have at least 10 times your final income when you retire. One of the most popular concepts about how much to save is the 4% rule.

The 4% Rule 

Different methods suggest how much money you need to retire but it’s always a good idea that you learn about different methods and the one that suits you. In the 4% rule, you divide your expected retirement income by 4%. So for example, if you want to get $100,000 as annual retirement income you divide that by 0.04 which comes at $2,500,000. Under this, your expected return on the investment comes at around 5% but it does not consider any social security.

In order for this rule to work, you have to be invested for the long term. If you keep on withdrawing money every year or every now and then, it will not work.

Read: Understanding the Old Age Security Pension (OAS)

How Much Do You Need to Save by Age for Retirement? 

There are various methods that can be used for this calculation. The first one is the percentage method and the second one is the formula method.

1. The Salary Percentage

You multiply your salary by a certain percentage. As per Fidelity, you need to have your final or your annual salary saved by the time you turn 30. This equals to 50% of the gross salary if you begin that by the age of 25. You also need to save at least half of your savings into equity stocks. With age the income that needs to be saved increases as you can see below.

  • At the age of 30: 1 times the annual income
  • At the age of 40: 3 times the annual income
  • At the age of 50: 6 times the annual income
  • At the age of 60: 8 times the annual income
  • At the age of 70: 10 times the annual income

2. The 25% Formula

This is an aggressive strategy where you save 25% of the total gross income every year from the time you turn 20. This is quite a larger amount. In this way, you will save at least your entire annual salary the time you turn 30. After that, you need to continue saving at this rate.

Read: What is Homeowners Insurance & What Does It Cover?

How Much Money Do You Need For Your Retirement? 

There will be expenses when you retire. The only difference is that you won’t have any active income. That’s why it is necessary that you look after the following before making a decision on how much you need to save. 

  • Your current lifestyle and the lifestyle you want when you get retired. 
  • The number of family members depends on you. 
  • If you are married then your spouse’s current income and his or her retirement plan 
  • The health factor for you and your family. 
  • The debt you have now vs what you will have in the future. For example, mortgage loan payments or student loan payments of the kids, etc. 
  • Your living expenses at the current time versus in the future. 
  • Your other income or pension plans that you will receive in the future.

Also know: 7 Vital Tips For Paying Off Mortgage Faster

Also, Considered the Inflation Rate 

Inflation keeps on increasing every year and as a result, it makes our daily lives expensive. The $100 item that you can buy now will cost you $102 after a year if the inflation percent is 2%. So by the time that you retire, it will be numerous years and things are going to be pretty expensive. 

That’s why you also need to consider the inflation factor when you decide how much you want to save for retirement. If you are planning to save your annual income which is for example $10,000 for 2021 and you are planning to retire in the year 2050, the chances are high that the inflation may increase by 5% to 10%. You will need drastically more monthly annual income in 2050 to sustain a good life. Based on such factors, make a decision.

Read: How To Choose The Right Life Insurance In Canada?

How Can You Accelerate Your Retirement Earnings Apart from Your Current Income? 

It’s a fact that sometimes what we earn as a prime income is not enough to sustain a long and stable financial position. You are going to pay expenses for emergencies or for any other needs. So, you must start early to save money and also take up some passive income strategies to build your wealth for retired life. 

There are various methods in which you can earn as listed below. 

  • Rent your apartment 
  • Take a part-time job 
  • Take side hustle like teaching online writing blogs
  • Start a reselling business in your spare time
  • Rent your apartment or list your home on Airbnb
  • Start social media marketing 
  • Invest in stocks that pay dividends
  • Learn new skills and utilize that to earn income like building an app

Even if you earn $1000 extra every month, you will have $12,000 at the end of the year. And if you count that 30 years, that is $360,000. It is a pretty good amount for a passive income. Combining that with regular savings will help you live a steady and comfortable retired life. This will also be a boon for your family members and you will never feel that you are burning anyone. You can also fulfill your dreams like traveling or buying that yacht that you have always wanted. I hope this article has helped you in answering how much money do you need to retire; plan early, plan well, and enjoy when it’s the time.

Read: 13 Crazy Ways To Make Money From The Internet In Canada

Also Read: ODSP Payment Dates 2021: When Will You Get Your Disability Benefits?


Devanshee Dave

Devanshee is a staff writer at YourFirst.ca. She is a finance enthusiast and has completed her Master’s degree in Mass Communication & Journalism. She is currently pursuing CFA (Chartered Financial Analyst) and has worked as a journalist in a local business newspaper, multiple start-ups as well as finance and economy-related online media houses.

Leave a Reply

Your email address will not be published. Required fields are marked *

About YourFirst.ca

YourFirst.ca is your trusted resource to find simple Canadian financial advice for Your First everything! Buying your first home, applying for your first mortgage, or making your first investment should not be that difficult. Learn more about us:

Learn More About Us
Blog Categories
Read Our Blog
Cart Overview