Every average Canadian will eventually retire; leave the workforce and live off the income that they have saved. For most people, retirement will happen around the age of 65, and it usually comes with a significant drop in income. According to a Statistics Canada report that looked at incomes in 2012, 12% of all seniors are considered to be low income. For seniors who live alone, the percentage in the low income category climbs to 29%. Almost 1 in 3 seniors living by themselves are considered to be in the low income category in Canada.
This highlights the importance of thinking about retirement early in your working life. If a Canadian reaches the age of 65, their average life expectancy is 84 if they are male, and 87 if they are female. This means that an average person will have to support themselves for another 21 years after they reach retirement age. A few people will live even longer than this and will have to support themselves for that additional time.
A simple way to start planning is to aim for a particular income level at retirement, and then calculate the level of investments needed to reach that. To do this, we must consider the rate of return on your investment, and the inflation rate. The median income for a married senior couple is around $50,000 per year. If we use $50,000 for our income target, assume an investment return of 3%, and assume 21 years of retirement, then we will need $780,000 worth of investments when we stop working. However, we must also consider inflation while we are retired. If inflation is 2%, then the purchasing power of that $50,000 per year is only $33,000 after 21 years. If we want to maintain our purchasing power at $50,000 per year, then we must have even more investments, almost one million.
How do we get up to that one million? We start taking a portion of our income now and put it into an investment account that earns some sort of return. Suppose we use the same 3% annual return with an inflation rate of 2%. If we are 30 years old now, and have 35 years to save up, then we will need to put aside almost $2000 per month. For most of us, this level of savings is no easy feat. Keep in mind that these numbers are strongly dependent on the inflation rate and the annual return on your investments.
Fortunately, Canadians can receive help from the government both while saving for, and also after, their retirement. For example, while you are still working, a portion of your paycheque is likely being automatically contributed to the Canada Pension Plan (CPP). When you retire, the government calculates a payout based on the amount of the contributions and how long you have been making them. This payout is indexed to inflation, and was an average of $665 per month as of January 2016. Canadians will also be familiar with the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA). Both programs are designed around reducing taxes paid on income being saved for retirement.
The examples in the previous paragraphs are very rough numbers using averages. Each person will have different financial goals at retirement, and will have different resources available to them. Some people will have a house that they can live in, or sell as part of their retirement, while others will be renting when they retire.
If you are interested in a more personalized retirement calculation, please contact us and we can help plan your retirement together.