In Canada, retirees have an important foundation through the Canada Pension Plan (CPP) and Old Age Security (OAS) on which to start their retirement savings programs.
Still, CPP and OAS won’t pay for everything and it would be a mistake to assume that Canada’s national pension plan will cover all your costs.
How much you really need to retire depends on a lot of things: the extent to which you plan to travel, whether you’re planning upgrades to make your house more comfortable, costs for prescription medications, non-covered medical expenses, and so much more.
Financial planners and pension experts frequently use the term ‘Magic Number’, based on a percentage of your current income, to come up with an idea of how much you should expect to spend each year after you retire.
Many experts cite a need for retirees to have 70 percent of their working income in order to retire comfortably. So, if you made $50,000 a year (The average wage in Canada in 2018) when you were working, the math says you’ll need $35,000 a year once you retire.
These so-called Magic Numbers also come with several assumptions on the planner’s part: you have paid off the mortgage on your principal residence; your children are through university, have moved out and you are no longer supporting them financially; you aren’t making support payments to a former spouse or common-law partner; you are either single, or if you are married are not planning to get divorced; you are in generally good health and are taking sufficient care of yourself to ensure you’ll stay that way for 15 to 20 years and you aren’t anticipating any major expenses, like having to buy a new vehicle or a cottage.
Choose your multiplier
Once you determine how much you’ll actually need each year, multiply that number by the number of years you expect to live in retirement.
So, if you expect to be retired for 20 years (which brings you to age 85 if you retire at 65--85 is five years longer than the average life expectancy for men and one year longer than the average life expectancy for women in Canada in 2018), then using our simple example, multiply $35,000 x 20 and the math will tell you that you need $700,000 saved for retirement.
Sounds hard, and it is. But here’s some good news: if you contribute enough to CPP to collect $10,000 annually, then you only have to save enough to have an extra $25,000 for each year in retirement.
Suddenly, the math looks like this: $25,000 x 20 = $500,000 in needed savings. And that’s before you factor in OAS, which for most Canadians comes in around $7,040 a year. So once you factor in OAS the amount is you need to save for an extra $17,960 a year. The math now looks like this.
$17,630 X 20 = $359,200 is what you need to save for your retirement. To achieve that goal, if you invest and earn the average rate of return of 5.89% a year then from you need to invest
At age 25 $ 185.69 a month
At age 35 $ 365.40 a month
At age 40 $ 527.70 a month
At age 45 $ 788.65 a month
As you get older you have to invest more to make the amount of money needed, so start investing earlier or start now and many Canadians are now opting to work a little longer – to 67 and 70, which can shave a few years off your savings needs so you will need less money.
And, keep in mind, these estimates assume that all the cash is in place on the day you retire. If you leave a portion of your savings invested and they earn an average 5 to 7 percent annual return, your nest egg will continue to grow during retirement.
For anyone who hasn’t started saving, those numbers should be sound motivation to start exploring the various options to line up your finances for a comfortable retirement.
A qualified financial advisor can provide specific insights about how much you need to save, and how to get that process started.
Still, CPP and OAS won’t pay for everything and it would be a mistake to assume that Canada’s national pension plan will cover all your costs.
How much you really need to retire depends on a lot of things: the extent to which you plan to travel, whether you’re planning upgrades to make your house more comfortable, costs for prescription medications, non-covered medical expenses, and so much more.
Financial planners and pension experts frequently use the term ‘Magic Number’, based on a percentage of your current income, to come up with an idea of how much you should expect to spend each year after you retire.
Many experts cite a need for retirees to have 70 percent of their working income in order to retire comfortably. So, if you made $50,000 a year (The average wage in Canada in 2018) when you were working, the math says you’ll need $35,000 a year once you retire.
These so-called Magic Numbers also come with several assumptions on the planner’s part: you have paid off the mortgage on your principal residence; your children are through university, have moved out and you are no longer supporting them financially; you aren’t making support payments to a former spouse or common-law partner; you are either single, or if you are married are not planning to get divorced; you are in generally good health and are taking sufficient care of yourself to ensure you’ll stay that way for 15 to 20 years and you aren’t anticipating any major expenses, like having to buy a new vehicle or a cottage.
Choose your multiplier
Once you determine how much you’ll actually need each year, multiply that number by the number of years you expect to live in retirement.
So, if you expect to be retired for 20 years (which brings you to age 85 if you retire at 65--85 is five years longer than the average life expectancy for men and one year longer than the average life expectancy for women in Canada in 2018), then using our simple example, multiply $35,000 x 20 and the math will tell you that you need $700,000 saved for retirement.
Sounds hard, and it is. But here’s some good news: if you contribute enough to CPP to collect $10,000 annually, then you only have to save enough to have an extra $25,000 for each year in retirement.
Suddenly, the math looks like this: $25,000 x 20 = $500,000 in needed savings. And that’s before you factor in OAS, which for most Canadians comes in around $7,040 a year. So once you factor in OAS the amount is you need to save for an extra $17,960 a year. The math now looks like this.
$17,630 X 20 = $359,200 is what you need to save for your retirement. To achieve that goal, if you invest and earn the average rate of return of 5.89% a year then from you need to invest
At age 25 $ 185.69 a month
At age 35 $ 365.40 a month
At age 40 $ 527.70 a month
At age 45 $ 788.65 a month
As you get older you have to invest more to make the amount of money needed, so start investing earlier or start now and many Canadians are now opting to work a little longer – to 67 and 70, which can shave a few years off your savings needs so you will need less money.
And, keep in mind, these estimates assume that all the cash is in place on the day you retire. If you leave a portion of your savings invested and they earn an average 5 to 7 percent annual return, your nest egg will continue to grow during retirement.
For anyone who hasn’t started saving, those numbers should be sound motivation to start exploring the various options to line up your finances for a comfortable retirement.
A qualified financial advisor can provide specific insights about how much you need to save, and how to get that process started.
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