Every RRSP contribution season, we are inundated with countless articles and opinions telling us how many millions we should have saved for a comfortable retirement. For many, it is a balancing act just to try to cover the basic necessities let alone saving for retirement. The prospect of having to accumulate millions for a comfortable retirement can be a demotivator for many. If you dream of an early retirement travelling the world, maintaining a big house and newer vehicles, you will require a higher level of savings compared to the typical Canadian retiree.
However, if you have more modest retirement expectations, a little bit of long-term planning today will get you on your way to a more comfortable retirement.
For many in Canada who do not have a public or private pension plan, Canada Pension Plan (CPP) and Old Age Security (OAS) are the only sources of retirement income. As of 2021, for those who qualify, OAS pays a maximum monthly benefit of $615.37 upon turning 65. CPP benefits payable are based on what you contributed during your working years. As of 2021, the maximum CPP benefit for a person starting CPP at age 65 is $1203.75 per month. According to Service Canada, the average monthly CPP benefit for October 2020 was only $614.21 per month. You will not qualify for the maximum CPP benefit if you start CPP before age 65 and/or you did not contribute the maximum to CPP during your working years. For reference, in 2021, to maximize your CPP contribution, you would need a gross annual salary of $61,600 or more, before deductions. As a note, if you delay taking CPP after turning 65, your potential monthly pension benefit will increase the longer you delay. To find out how much you might be entitled to receive upon retirement based on your earnings history, you can visit Service Canada’s website for more information.
For illustration, let’s say you were retiring today at age 65 and draw OAS of $615 per month and a CPP benefit of $900 per month because there were a number of years where you did not earn enough to contribute the maximum to CPP. That gives you a retirement income of $1515 per month, which doesn’t go very far. Compare your projected retirement income ($1515 per month) with your current income (net after all deductions, per month) and calculate the difference between the two. That difference is the amount of income you need to replace if you wish you maintain the same level of income throughout retirement. If you retire with no debt, perhaps you can maintain the same standard of living with a retirement income lower than your work income. In either case, if you have no other source of retirement income besides CPP and OAS, anything extra you can commit now until you retire will help; it’s never too late to get started.
If you have not started preparing for retirement, the first step is to create a realistic household budget that allows for a buffer to cover unexpected, periodic and emergency expenses. It is important to track actual expenses and compare them to your budget every month to ensure your budget is realistic, and if necessary, adjust accordingly until you get something that works. After the budget has been created and all necessity expenses, as well as a reserve for unexpected emergency expenses, have been accounted for, identify how much money your household can safely commit towards debt repayment and savings. You should have a goal to reach retirement mortgage-free and no unsecured debt such as credit cards or lines of credit. Once you have created your budget, create another as if you were retiring today. Although today you might have a mortgage, car loan, student loans, credit card or line of credit debt, if you can reach your desired retirement age free of these debts, surely you will not need as much income in retirement to maintain your standard of living.
Once you have identified how much you can commit for debt repayment and savings, start automatic contributions each pay period to a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA). Your bank should be able to help you identify which one of these accounts is best for your financial situation. Your priority should be debt repayment, but do not put off saving until the debt is paid. No matter how small, the sooner you start saving automatically, the better – make compound interest work for you instead of against you! To illustrate, a 25-year-old, contributing only $100 per month to age 65 earning an average return of 7%, is projected to reach age 65 with accumulated savings of $331,135.00. If that same person waited until age 45 to start saving, they would need to contribute approximately $500 per month to reach age 65 with approximately the same amount saved. The sooner you start, the less you need to contribute monthly to achieve your goals.
If you are struggling with debt or determine you will not be able to pay your debt within a reasonable time frame, let alone retirement, please do not hesitate to contact our office for a free consultation complete with a plan for dealing with your debt.