Luisa Rollenhagen is a journalist and investor who writes about financial planning for Wealthsimple. She is a past winner of the David James Burrell Prize for journalistic achievement and her work has been published in GQ Magazine and BuzzFeed. Luisa earned her M.A. in Journalism at New York University and is now based in Berlin, Germany.
Retirement: Theoretically, those words should be like sweet music to all of our ears. Visions of vacations, luxurious evenings spent sipping wine in your backyard, and the time to finally work on that novel that’s been locked away in your desk are, ideally, the first things on our minds when we picture that magical period. But the reality is shaky savings, an unstable job market, soaring real estate prices, and the still-present memories of a global financial crisis may make the idea of retirement more stressful and blissful. A Canadian Imperial Bank of Commerce poll from 2018 actually found that the average amount that Canadians save for retirement is only $184,000, while 30% of respondents said they have no retirement savings and 19% have saved less than $50,000. But here’s the good news: It’s never too late to start saving. And if you’re equipped with the right strategies and information, planning doesn’t have to be as scary as it might initially seem.Wealthsimple Invest is an automated way to grow your money like the worlds most sophisticated investors. Get started and we'll build you a personalized investment portfolio in a matter of minutes.
How to estimate how much you need to retire
One of the first things to keep in mind when planning for retirement is to envision what you actually want your retirement to look like. That answer will be a bit different for everyone, but ultimately the following tends to hold true: While the idea of luxury vacations may be fun to think about, the reality is that most of us just want to live comfortably within our means without worrying about running out of money. In order to do that, you’ll need to take stock of where you’re at financially, which will help you estimate what you need on a monthly basis in order to be comfortable. That’s all part of what’s ultimately going to be your retirement plan: After all, you need to figure out what you’re working with and what you’ll need before you can figure out how to get there.
Here’s how you take stock of where you’ll be at:
Estimate the guaranteed income you’ll be receiving. Most Canadians have access to the following retirement schemes: Old Age Security Pension (OASP) is a stipend that most Canadians aged 65 or older are eligible for, and is not at all dependent on employment status or history. Got a pulse and a Canadian citizenship? You’re probably going to receive OAS; at last check benefits were just over $600 a month. But if you earn over a certain amount, then you might need to pay back a “recovery tax.”
Then there’s the Canada Pension Plan (CPP), which is a government-administered pension designed to benefit not only retirees, but also those who are disabled, as well as relatives of those who die after having paid into the CPP system. CPP benefits will be entirely dependent on how much you’ve contributed to the system over the years through payroll taxes.
Rounding off the available schemes is the Guaranteed Income Supplement (GIS), which is provided only to retirees earning very low incomes. How low? The numbers frequently change, so best to consult the government’s eligibility tables.
Estimate your monthly expenses. This will largely depend on where you live and what your tax bracket will be. For most of us, retirement means we’ll be slipping down into a lower tax bracket. And then there’s the question of owning or renting property: If you own a house, are you still paying off a mortgage? What are those monthly payments? What are your rent payments looking like? What about other expenses like utilities, groceries, and phone bills? All of these monthly expenses will help give you an idea of how much you’ll likely be spending a month.
Go over your savings. How much are you contributing each month to your savings? Do you have an RRSP or a TFSA account, or perhaps even both? Are you taking advantage of employer matching programs such as a Group Registered Retirement Savings Plan? The more regularly you contribute to these accounts now, the greater your savings will be in the long run.
How much should you save
Once you have a better idea of where you stand on these three points, you can focus on how much savings you should be aiming for. The most obvious answer is, of course: “Save as much as you can.” But having a concrete idea of how much you might need will help you plan better. And while there’s no hard rule for how much you should have saved—since every situation will be a bit different—financial advisors have suggested that a pretty safe bet is saving up about ten times your final income, or about 80% of it per year. If by the time you retire, you’ve been making $100,000 a year, you’d need about $80,000 a year or at least $1 million saved in total. In order to get there, a long-term savings strategy could look like this:
At 30: One year of salary saved.
At 40: Three times your salary saved.
At 50: Six times your salary saved.
At 60: Eight times your salary saved.
At 67: Ten times your salary saved.
However, every situation will be different. If you can fall back on government benefits and part-time employment, then this number will change for you. Your health and current lifestyle will also affect the amount you’ll need. If you plan to spend winters in Aruba on the beach once you retire, then it’s safe to say that you’ll probably need a little bit more.
Maybe you’re not where you feel you’re supposed to be, or you don’t know how you’ll get there. That’s okay! Remember, it’s never too late to start. A good way to get into a savings habit is to take on a “pay yourself first” mentality. That means that whenever you get paid, the first thing you should do—after paying off crippling high-interest debt like credit card debt—is to put a portion of your income into a retirement account (ideally an investment account, but we’ll get to that shortly).
How much should you be putting away? It depends on your spending, income, and expenses, but 10-15% of your income each month is a pretty reliable place to start. If you really want to be diligent, then consider paying 20% towards “future you.” A great way to start doing that, if you’re not already, is to set up a budget and automate your savings contributions each month so that you don’t even have to think about it.
Another scary thought when it comes to retirement is the prospect of running out of savings. In order to address this, financial experts often like to cite the 4% Rule when it comes to using your savings during retirement. What’s that? Well, simply put, you should aim to withdraw about 4% of your savings each year and use that for your living expenses. According to the rule, you can enjoy a steady income through retirement for up to thirty years. However, the term “rule” is a little misleading since this should be considered more of a guideline (with you making concessions for inflation or for changes in investment returns).
Take advantage of a retirement calculator
Does this still all sound terrifyingly abstract? A free retirement calculator might help you visualize this process a bit better. You’ll get an estimate of how much you need to retire and how much you have saved already. The calculator takes into account your registered and non-registered savings, annual returns, investment fees, income tax, and inflation to compute how much you should be aiming to save.
How to invest retirement savings
Now that you’ve broadly figured out how much you need to retire, it’s time to get you there. And while we often talk about saving when we talk about retirement, the truth is that you shouldn’t just be squirreling away your retirement fund in a savings account that’s giving you less than 1% annual interest. Even if you choose to go with savings options that give you up to 2.4% interest, you should still put a significant part of your money in investments. That’s where RRSPs and TFSAs come in, since they let you invest your money in a wide variety of assets while also enjoying tax benefits.
If you have the option, you should consider putting a significant part of your retirement savings in a work GRRSP that offers matching funds. You’re free to put up to 18% of your previous year’s income into one of these plans, up to a certain maximum dollar amount, which changes annually. The current max can be found here.
If that’s not available to you, then consider looking into an RRSP or a TFSA, or both if possible. While both are considered retirement accounts with tax benefits and both can hold a variety of investment assets such as cash, government and corporate bonds, stocks, mutual funds, and ETFs, there are certain situations where one account might be more beneficial for you than the other. If you want to withdraw from your retirement account earlier and not pay taxes on the amount withdrawn, then a TFSA might be for you.
If you want to invest heavily in foreign stocks, particularly U.S. stocks, on the other hand, then consider doing so through your RRSP. Why? That’s because the Internal Revenue Service in the United States doesn’t recognize the TFSA as a retirement account. So you’ll have to pay non-resident withholding taxes on any income that flows from U.S. sources. With an RRSP, that’s not the case. You can find a more detailed guide on the differences between TFSAs and RRSPs here.
The benefits of a diversified portfolio
Whatever you choose to do, you’ll probably want your retirement account to consist of a well-diversified portfolio, especially as you near retirement. Why? Because by diversifying your portfolio, you ensure that your portfolio isn’t overwhelmingly reliant on one particular industry or—even worse—one company in particular.
Another aspect of investing you’ll have to consider is choosing an investment provider. High management fees associated with financial planners and managed funds can eat away at a significant chunk of your savings, so keep that in mind. One alternative is to go with a robo-advisor, which creates diversified portfolios out of low-cost ETFs, and boasts low annual fees. Some even offer access to financial advisors, free of charge.
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