Retiring in Canada - Part One: The Numbers Game

Retirement is probably 20, 30, or 40 years away for many of my readers, but it's never too soon to plan it. More than 3/4 of Canadians plan retirement too late, which leads to insufficient income during the Golden Years. The moment you step out of college, you should have a plan for retirement, even something as simple as a savings account to get you into the habit of saving.

There are two general rules of thumb that apply to retiring which will be discussed in part one of this series: save 15 per cent of your income and the rule of 25.

Save 15 per cent
This is a rule that is quite easy to explain. Save 15 per cent of your net income. According to Stats Canada, the average individual Canadian net income was just under $30,000. This would equate to roughly $4,500 saved each year. There are many options where this money can go. For many, they will park this money into an RSP or TFSA and purchase bonds, equities, and mutual funds to defer taxes to retirement. Just make sure you don't save too much or earn too much in the RSP (I will discuss in part 2 as to why) because it could backfire later on. For those who earn more than six-figures, the remainder will have to go into a non-registered account.

The Rule of 25
Unlike the previous rule, "The Rule of 25" estimates the total income required to sustain your life expenses. For example, if you subscribe to a magazine which charges you $40 a year, you would need $1,000 invested to pay off the cost, without putting a dent into the original capital. This rule assumes a 4 per cent rate of return, but if you are conservative and assume 3 per cent, use the rule of 33. Those who can earn 5 per cent should use a multiplier of 20.

Apply this logic to your entire expenses. At retirement, you should have no mortgage or car loans, so if you can, calculate the cost of everything you do. Assuming the average income, most expenses will run near $20,000. Therefore you will need $500,000 at retirement to pay for these things, and this does not factor inflation. That works out to $5,261.74 per year you need to save at 4 per cent. (Here's a great article which expands on "The Rule of 25" [link]).


Start Today
Inflation-adjusted calculations normally run up well over $1 million at age 65, a seemingly impossible task for a 25-year old who may already struggle just to save for the next iPhone or video game, but don't be discouraged. Income generally increases over time, so you can play catch up if you must, but don't use that as an excuse to delay saving.

For every year you don't start, you must save an additional $300 per year just to make it back (assuming 4 per cent growth). It may not sound like a lot, but consider this, you were unable to save the year before, what makes you so sure you can save an additional $300 on top of the scary $5,000 you already need?

Retirement is about enjoying the world you built and love, like your family. You should not be burdened at a time when income does not exist. Employment pensions may not be a reliable source of income, especially since many are defined-contribution plans. The amount you earn at retirement relies solely on the performance of your employer's fund. And CPP was created only to cover up to one-quarter of your average income.

I do not want anybody to have a bad retirement. We've all worked too hard for four decades to end up in a bad situation. By creating a good retirement plan, it also allows you to determine how much you have left over to enjoy today as well. There's no harm in spending a little here and there on luxuries if we can afford it too. Life and retirement was meant for fun, so enjoy it.

Next week, I will be discussing an efficient way to run an RSP. There are many common errors that many self-guided individuals often commit.