Canadians now believe they need a whopping $1.7 million to retire, according to BMO’s annual retirement survey. But is this really a reality? The number seems a bit high.
Canadians now believe they need a whopping $1.7 million to retire, according to a recent survey by BMO.
How much do I need to retire? is one of the most common questions that we get asked by clients and the answer I always give is… well, it depends on your unique situation, so let’s take a look.
In this video, I’ll go over 4 common strategies that you can use to figure out your target retirement number. Be sure to watch until the end where I’ll talk about what I see are the real amounts people retire with, based on our actual client experiences.
But first, I want to show you what a failed retirement” looks like and why it’s so crucial to properly figure out how much you should retire with.
Avoiding Risk of Ruin in Retirement
Example of a “Failed” Retirement
Meet Vincent, who retires at age 60 with $400,000 in savings. He plans to withdraw $40,000 annually, believing his investments will grow and his savings will last for 15 years and he can rely on government pensions after that. Here’s a brief breakdown of what actually happens though:
Year 1:
- Savings: $400,000
- Withdrawals: $40,000
- Remaining Balance: $360,000
Year 5:
- Savings: $200,000 (after consistent withdrawals and minor market losses)
- Unexpected Home Repair Expense: $50,000
- Remaining Balance: $150,000
Year 10:
- Savings: $0
- Annual Expenses: $40,000
- Income Sources: CPP/OAS covering only $25,000
- Shortfall: $15,000 annually
Vincent runs out of his savings in just 10 years and faces a significant annual shortfall. Running out of money in retirement can lead to serious challenges. Without sufficient funds, you may struggle to cover essential expenses like housing, healthcare, and daily living costs. You could lose your financial independence and have to rely on family or government assistance.
My number one goal for retirement is to avoid the “risk of ruin.” That basically means running out of money before the end of your life, leaving you unable to cover expenses and maintain your desired standard of living, like Vincent here.
It limits your ability to enjoy life, travel, or handle emergencies. Also, nobody wants to become a burden to family members and loved ones.
Now, let’s go over some common strategies that I see Canadians take, we’ll start from the most simple ones to the most detailed and complicated.
The “Do Nothing” Retirement Strategy
Ok, before you get the pitchforks out, I’m not saying I recommend this as a strategy. But the sad reality is, this is what a lot of Canadians do. A shocking number of Canadians don’t plan or prepare at all for retirement.
Over half of Canadians, 52% feel they are behind on retirement savings. And shockingly, 20% of those nearing the retirement ages of 55-64 don’t have any money set aside any for retirement, meaning they will likely retire with close to $0 in retirement savings.
I like to call this the “ostrich head in the sand” method. Essentially, ignoring the problem and hoping it will go away.
But please, don’t be an ostrich. Ignoring retirement planning can lead to serious consequences. Imagine reaching retirement age and realizing you don’t have enough saved up. This can result in having to work well beyond the age you planned to retire, or relying on minimal government assistance.
Instead, try one of these next strategies to ensure you can retire comfortably and enjoy your golden years.
Using Rules of Thumb for Retirement Planning
Alright, now let’s talk about using rules of thumb for retirement planning. These methods are a good starting point for anyone to try.
Age-Based Savings Targets
By age 30, aim to have one year’s salary saved. By age 40, three times your salary. By age 50, six times your salary. By retirement, aim for eight to ten times your final salary. For example, if you earn $60,000 a year, you should have $60,000 saved by age 30, $180,000 by age 40, and $480,000 by age 50.
The 4% Rule
Next up is the 4% rule. This rule suggests that you can withdraw 4% of your retirement savings each year without running out of money. For example, if you have $1 million saved, you can withdraw $40,000 annually. In one example we discussed earlier, Vince had a 10% withdrawal rate, much higher than the 4%, which is why he ran out of money so quickly after his investments didn’t perform so well.
Percentage of Pre-Retirement Income
Another common rule of thumb is to aim for 70-80% of your pre-retirement income. At Blueprint, we prefer to use 80-90% as a starting point because surprise expenses will always come up. So if you earned $100,000 a year before retirement, you should plan for an annual retirement income of $80,000 to $90,000 to cover your expenses.
Household Expenditure Stats
Let’s add in some real numbers. In 2021, the average expenditure for Canadian households aged 65 and over was around $61,855 per year.
In 2021, the average household expenditure for those aged 40 to 54 was $120,646, according to Stats Canada. For individuals aged 55 to 64, it dropped to $99,623, and for Canadians aged 65 and older, it further decreased to $61,855. So, if you’re in your 40s or 50s and worried about retirement, on average, your expenses should drop by a lot in retirement.
At Blueprint, we typically see retirees spending around $3,000 to $7,000 per month for singles and $5,000 to $9,000 per month for couples, depending on their desired lifestyle.
Pros and Cons of the rules of thumb
Pros:
- Simplicity: These rules are straightforward and easy to remember.
- Quick Estimates: They provide quick estimates of how much you need to save.
- Guidelines: They give you a rough guideline to start planning your retirement.
Cons:
- Oversimplification: They don’t take into account personal circumstances, inflation, or unexpected expenses.
- Risk of Running Out of Money: Relying solely on these rules can lead to running out of money if your expenses exceed expectations, or investments don’t perform as well as expected.
- Lack of Flexibility: They don’t adapt to changes in your lifestyle or financial situation.
Use a Canadian Retirement Calculator
There are a lot of online calculators to help you determine how much you need to retire in Canada. These tools can provide a quick and easy way to get a sense of your retirement readiness. Here are a few popular options:
Canada.ca Retirement Calculator
The retirement calculator from Canada.ca is provided by the government. It’s thorough and considers various factors, but it’s not very user-friendly. It will take you about 30 minutes to fill out, requiring detailed information about your financial situation.
Wealthsimple Retirement Calculator
Wealthsimple offers a retirement calculator that’s really easy to use. It has a clean interface and is quick to fill out. However, it might be lacking in a bit of detail compared to more comprehensive tools. It’s great for a quick overview but might not cover all the nuances of your retirement planning.
Sun Life Retirement Calculator
I’ve played around with the Sun Life calculator in the past and it seemed decent as well. It balances ease of use with a fair amount of detail, making it a good middle-ground option.
These online calculators all work pretty much the same. You enter in things like your age, how much you make, your savings, when you plan to retire, and how much you expect to send, and then it spits out whether or not they think that you’re ready for it.
Pros and Cons
Pros:
- Accessibility: These calculators are easy to find and use online.
- Quick Estimates: They provide a quick snapshot of your retirement readiness.
- Guidance: They offer basic guidance on what you need to do to achieve your retirement goals.
Cons:
- Lack of Detail: Some calculators may lack the detailed analysis required for a comprehensive retirement plan.
- User Experience: Tools like the one from Canada.ca can be cumbersome and time-consuming to use.
- Assumptions: They often rely on assumptions that may not suit your personal situation perfectly.
- Limited Scope: They might not consider all factors, such as tax implications, healthcare costs, and changes in lifestyle.
Comprehensive financial planning
If you want the most thorough way to determine how much money you need to retire in Canada, consider hiring a fee-for-service financial planner to use planning software to simulate different scenarios.
At its core, planning for retirement is like solving a complicated math problem with many variables and assumptions to consider. Here at Blueprint Financial, we specialize in creating custom financial plans for Canadians. Today, I’ll walk you through our 6-step process.
Step 1: Initial Consultation
First, we start with an initial one-on-one video consultation to understand your financial goals and main concerns. This includes your current financial situation, retirement aspirations, risk tolerance, and any specific needs or priorities you may have. This step is crucial for tailoring a plan that fits your unique circumstances and we’ll spend a lot of time here. We’ll even record the initial meeting and transcribe it so we can refer to it throughout the whole process.
Step 2: Detailed Data Collection
Next, we gather detailed data about your finances, focusing on Canadian-specific details. This includes:
- Income and Expenses: Detailed review of your monthly and annual cash flow.
- Savings and Investments: Including your Tax-Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP), and any other investment accounts.
- Debts and Liabilities: Mortgage, credit card debt, loans, etc.
- Government Benefits: Canada Pension Plan (CPP) and Old Age Security (OAS) entitlements.
- Employer Pensions: Any company pension plans or Registered Pension Plans (RPP).
- Expected Retirement Age: When you plan to retire and your desired retirement lifestyle.
We use this information to build a comprehensive picture of your financial health.
Step 3: Personalized Strategy Development
Once we have all the necessary data, we develop a comprehensive financial strategy tailored to Canadians. This includes:
- Tax Optimization: Optimizing your TFSAs and RRSPs to minimize taxes and maximize your retirement income. We also consider income-splitting strategies and the potential benefits of pension income credits.
- Investment Management: Helping you create a diversified portfolio with a mix of Canadian and international assets.
- Retirement Expense Planning: Estimating your retirement expenses, including increased travel and hobby expenses. We consider different phases of retirement spending: Higher Spending Phase: Early retirement years with higher spending on travel and activities. Moderate Spending Phase: Middle retirement years with moderate spending. Low Spending Phase: Later years with minimal spending, except for potential increased healthcare costs.
- Government Benefits Integration: Strategically plan when to take CPP and OAS to maximize benefits. We consider factors like early retirement reductions and deferral increases.
- Estate Planning: Help ensure your assets are distributed according to your wishes, including setting up a will and considering the tax implications of RRSP/RRIF withdrawals upon death.
We then create a detailed retirement plan that outlines how you will achieve your financial goals. Check out our website at blueprintfinancial.ca, and you can download some sample plans that we provide.
Step 4: Stress Testing
We model different scenarios to account for various possibilities and challenges. For example:
- Market Volatility: How will your plan hold up during market downturns?
- Longevity: What if you live longer than expected?
- Inflation: How will rising costs impact your savings?
- Unexpected Major Expenses: How will your plan handle large, unforeseen costs like home repairs or financial support for family members?
Step 5: Implementation
With your personalized plan in place, we assist you in implementing the strategies. This might involve setting up investment accounts, adjusting your savings plan, or working with other professionals like tax advisors or estate planners.
Step 6: Ongoing Monitoring and Adjustment
Retirement planning isn’t a one-time event. We provide ongoing monitoring and adjustment of your plan to ensure it stays on track. We conduct regular reviews and make necessary adjustments based on changes in your life or financial situation.
Our goal is to return at least a 10 times return on Investment (ROI) for all of our clients based on the fee we charge. Here’s an example of a recent client where we greatly exceeded that return. We went from having an estimated combined Estate after tax of $8.5 million in the Base Case, to over $9.3 million after implementing out strategies, for a gain of over $800,000 that will go to their children.
Pros and Cons of detailed financial planning
Pros:
- Customization: Tailored to your specific needs and goals.
- Comprehensive: Covers all aspects of your financial life.
- Adaptable: Adjusts to changes in your circumstances.
Cons:
- Complexity: Detailed planning can be complex and time-consuming.
- Cost: Professional planning services may come with higher fees.
Is this method perfect? No it isn’t. It’s still based on assumptions, and things can change as you approach or enter your retirement. But the detailed approach is in my mind the best way to figure out how much you need to retire, because it provides many different scenarios and stress testing as well.
While no plan can predict the future perfectly, the detailed approach we use at Blueprint Financial helps to reduce uncertainty and provides peace of mind.
The magic dollar amount
Is $1.7 million needed for retirement in Canada? In most cases, no. It depends on your lifestyle and desired retirement quality. In my experience, I’ve seen some retirees manage with $500,000 in low-cost areas, while others usually need at least $800,000 in higher-cost areas.
But, I’ve seen lavish spenders that need several million to retire, and will still come close to using up all their savings in retirement. That’s why I can’t stress enough that understanding your needs and planning accordingly is crucial, and to factor in some wiggle room in case things don’t go your way.
For a detailed, personalized retirement plan, consider working with us at Blueprint Financial.
Check out the planning services we offer, and book a free consultation when ready!
