Question. I have been diligent in investing my TFSA and RRSP accounts over the years. I would like to retire in the next 10 years or so, but I’m not sure if I will have enough saved by then. Can you tell me, how much savings I should have in order to retire?
Answer. That’s a great question, but nearly impossible to answer. The question of “how much” is almost entirely a function of lifestyle – For some people, an income of $50,000 per year would make for a comfortable retirement. For others, $50,000 per month would not be enough.
In other words, the amount you need for retirement depends on your own unique personal circumstances, including items such as spending requirements, plans, goals and dreams, self-discipline, life expectancy, and health, just to name a few.
So, while there is no universal amount that should be saved for retirement, what we can do is give you some information about the most common sources of income in retirement, and the amounts you might typically expect to receive from those sources.
Employer Pension Plan
Unless you work for the government, a crown corporation, or another large and well-established organization, chances are you do not have a pension plan. From their peak in 1977, employer pension plans have been declining steadily for decades. Today, only about 1 in every 4 Canadians has access to an employer pension plan.
The two main types of pension plans are Defined Contribution (DC) and Defined Benefit (DB).
DC pension plans function similar to a group RRSP. That is, you contribute a certain percentage of your salary to the plan, and your employer matches your contributions, up to a specified amount. In this type of plan, you are typically provided with a menu of investment options, and you are the one responsible for deciding which of those options you use. As such, there is no guarantee on how much your pension will be worth, or how much money you will receive from your pension in retirement. The amount you receive is dependent on the amount contributed, and the performance of investments selected.
DB plans are the more traditional type plan, and are what most people think of when they think of an employer pension. With a DB plan, you and your employer still contribute to the plan, but you are not responsible in any way for the investment decisions within the plan. Rather, the amount you will receive in retirement is determined by a formula based on your salary, and the number of years you’ve been a contributing member of the plan. DB plans in particular are almost non-existent outside of government, with experts indicating less than 3% of private sector employees will have access to a DB pension plan by the year 2026.
Government Pension Plans
In Canada, we have several government-sponsored retirement income programs. While there are additional programs, such as the Guaranteed Income Supplement (GIS) available for low-income seniors, the two core programs for most Canadians are the Canada Pension Plan (CPP) and Old Age Security (OAS). Both CPP and OAS are fully taxable as regular income. Let’s review the basics of each:
The Canada Pension Plan is a contributory program, meaning both you and your employer contribute to the plan, and the amount you receive in retirement is entirely a function of how much you’ve contributed throughout your working years. As such, the amount you receive from the CPP is different for everybody, and varies considerably from one person to the next.
How much should you expect to receive from CPP? As of January 2019, the average monthly CPP benefit at age 65 is $723.89. Note, however, that you don’t have to wait until age 65 to begin receiving CPP benefits. You can start receiving CPP at any time from age 60 up to age 70. If you start earlier than age 65, your benefits are reduced, and if you start later, your benefits are increased. Note that residents of Quebec participate in the Quebec Pension Plan (QPP) rather than the Canada Pension Plan (CPP).
Old Age Security, unlike CPP, is not a contributory program. It is funded entirely by general tax revenues, and the amount you receive in retirement is based on the number of years you have been a resident of Canada. Also unlike CPP, when your income exceeds a certain threshold (currently $75,910), you will start to lose OAS benefits.
How much should you expect to receive from OAS? For the period April – June 2019, the maximum monthly OAS benefit at age 65 is $601.45. OAS cannot be taken before age 65, however, benefits can be postponed as late as age 70. As with CPP, your benefits are increased if you wait until after age 65 to start receiving your OAS payments.
CPP and OAS combined are, on average, less than $16,000 per year. Since most people no longer have access to an employer pension plan, where will the additional money come from? Basically, from your pocket.
If you have a strong employer pension, and you’ve been a member of the plan for decades, you can probably retire with minimal personal savings and investments.
For the rest of us who have no pension, and who can’t live on $16,000 per year, the only way to get there is with personal savings. Yet, a recent poll shows that 1 in 3 Canadians nearing retirement has saved absolutely nothing. Other studies show similarly alarming trends – Half of all Canadians of retirement age (55 – 64) have less than 1 year of savings, with the median savings weighing in at a paltry $3,000.
As a point of reference, let’s assume you want to retire at age 60, and plan for 30 years of retirement. Additionally, let’s assume you want a retirement income of $50,000, and that $16,000 of that comes from CPP and OAS. Therefore, you have to make up the difference of $34,000 per year, in today’s dollars, for 30 years. What size of a retirement nest egg would you need to generate that income? Assuming a 6% average annual rate of return, and allowing for 2% inflation, you’d need to have about $600,000 saved by age 60.
A generation ago, you gave your employer the best years of your life, in return for a promise you’d be taken care of when your working days were done. But the days of the old social contract are long gone, and the responsibility of building an acceptable retirement income stream now rests squarely on your shoulders. Take charge of your future!
Interested in learning more? Contact us today to find out about the exciting retirement planning solutions we have to offer.