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How Much Money Do You Need to Save for Retirement in Canada?

Retirement is considered as a second life but if you don’t have enough savings for that, it’s more like running life on a tightrope. It is important to save for retirement from an early age so that you can live a comfortable lifestyle afterwards. The question is how much to save for retirement? It is a tricky question because there is nothing like a specific number assigned to it. 

It depends on how you want to live your lifestyle, what are your expenses, what are your goals after you retire, do you want to pay off all your debt, do you have any other investments, etc. 

Retirement – The Second Inning of Life 

The question is how would you like to live your life with your spouse or your family after you have retired. For example, you want to live a simple and peaceful life at your house or want to explore the world. While you are not working, the sky is the limit for you to experience the rest of your life. You can even get to choose if you want to move to a new city or a country. One of the main questions remains that at what age you would like to retire or you would like to work for a little longer! All these would impact the amount you will need to save for retirement. 

Read: How to Pay off Credit Card Debt When You Have No Idea Where to Start!

The Future Cost of Living

There are certain elements that come to mind while thinking about the cost of living in the future. It includes 

  1. Inflation 
  2. Your financial position
  3. Your family
  4. Your savings

1. Inflation: It means that the current income that you have right now would not be enough in the future even if you are earning the same because inflation applies and that reduces the time value of money and increases the cost of living.

2. Your Financial Position: Your financial position refers to various things like if you are currently paying any mortgage payments, would you be owning the house when you are retired or you would still have to make a few more cash payments, etc. If you are renting a house that also counts in your expenses after retirement. 

3. Your Family Life: It means how much responsibility you will have after you retire. For example, are your children done with college or you will have to pay for the college fees. There are also medical expenses for old age, etc. That would decide how your financial situation would turn in the future. 

4. Your Savings: This includes when you are retired, do you have any form of saving apart from saving for a retirement fund! Saving can be invested in various forms like stocks, bonds, mutual funds, etc. Also, calculate how much you would get if you sell them after you have retired.

Read: How To Buy A Home & Get A Mortgage With Bad Credit?

How Much You Need to Save for Retirement?

Let us understand this with an example. 

Suppose you are a 35-year-old man living with his wife in Ontario. Your household income is $80,000. You and your wife do not have any pension from the companies you work for. You have bought a house and you pay $2000 every month for mortgage payment as well as $500 every month for your child’s daycare. You and your wife save 12 percent of your household income every year to live a comfortable lifestyle after retirement. 

Now consider that you would be able to pay back the mortgage by the time you retire and as you don’t have any other kind of debt as of now, and your child would be on his own by the time you retire. You will need the following income when you retire.

Current annual income: $80,000

(Deduct)

Annual mortgage payments: $24,000

Annual day care charges: $6,000

Annual retirement savings: $9,600

Estimated net annual income to live the current cost of living after retirement: $40,400

Government Retirement Plans

In Canada, the government provides citizens with retirement plans like Canada Pension Plan (CPP), Old Age Security Pension (OAS), guaranteed income supplement, etc. You can apply for them and can take benefits of the same after retirement.

Canada Pension Plan (CPP): For this plan, you have to be at least 60 years old. For January, the average monthly CPP was $ 619.75. Now, this amount would differ when you retire in the future. 

Old Age Security Pension (OAS): Here it depends on when you start taking a pension or if you defer receiving a pension – the amount may vary. For the period of April to June 2021 the maximum amount every month you could receive as a pension was $618.45. However, you can choose to delay receiving payments from 1 year to 5 years and that will increase the monthly amount you can get.  

The tax rate of around 20.05 percent applies in Ontario on the retirement benefit you get. The amount that you receive in your city would have to be reduced keeping in mind the appropriate tax rate. So it is wise to consider this as well for saving for retirement.

For calculation purposes, think that you and your wife each get the following amount in CPP and OAS. 

CPP amount= $620

OAS amount = $650

Total amount you would get each month = $2540 ($1270 X 2)

Total annual amount you would get  = $30,480

Tax deduction at 20.05 percent = $6111.24

Net annual CPP and OAS amount = $24,368.76

Read: How to Open A CRA Account? (Updated 2021)

Know If Your Saving Would Sustain

Let us calculate the entire income required when you retire at the age of 65. Now consider that you are already saving 12 percent for retirement. This amount comes at $9600 yearly. So, for 30 years, you would save $288,000. If you invest the same in TFSAs and RRSP accounts, along with some investments in equity and mutual funds with an average return of 7.5 percent calculated annually. 

The value of this amount after 30 years, when you turn 65 would be $992,634.26. 

Calculated as future time value of money = Future Retirement Value

Whereas PMT= annual payment = $9,600

i = interest rate= 7.5 percent

n = number of years for compounding  = 30 years

On this amount as well, the tax would be applied which would come at = 20.05 percent. You can choose to receive this amount annually (based on investment instrument nature) or in lump sum as per your preference. 

Note: Because the investment is a mixture of Government instruments and equity, the return is higher. You can choose the instruments as per your preference and based on that, the return rate would differ. 

Read: 55 Investment Quotes To Help You Multiply Your Money

Total Amount You Would Have

The total income you needed to live the same comfortable lifestyle was = $40,400

Your CPP and OAS annual payment estimation net amount is =  $24,368.76

The amount you need is = $16,031.24

This rest of the amount you can get from your retirement savings of  = $992,634.26

Even if you choose to receive an annual payment of this sum for 20 years from the age of 65, it would come at = $49,631.71 (excluding tax).

But as said, this higher return is due to mixed investment. Based on this you can get an idea of how much you want to save for retirement in Canada. You can also check the inflation calculator and RRSP or TFSAs calculator to find the return amount if you choose to invest in the same.

You can also start early and that would reduce the annual amount you need to save annually. Personal finance is a choice that you make to relax your pockets when you get wrinkles and frown lines; so make your decision wisely! 


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.

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