How Much Do I Need To Retire In Canada?

Dividend Earner

Dividend Earner

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Retirement is usually the last thing on your mind when you are young, but that’s usually when you want to start planning to have the easiest path to retirement.

It’s like planting a seed now to see the fully grown tree 20 or 30 years later. The sooner you plant the seed of retirement, the faster you get your retirement tree.

As you can imagine, there isn’t one number as every city has a different cost of living. If you are willing to relocate, you can find the cheapest place to live, but you will certainly need to give up something else in the process.

The key is to figure out your magic number for retiring in Canada. Mine is $1,777,777. Your magic retirement number is just the beginning of your retirement investing journey.

Do I need $1 million to retire in Canada?

In some cities, you do if you want to maintain a certain lifestyle. It’s plain and simple that retiring in Toronto or Vancouver will be easier if you have a $1 million portfolio or equivalent in a pension plan.

Given that everyone has different expenses and expectations for life in retirement, to get an accurate picture, you will need to budget your annual spending. Personally, I think it’s harder to budget the annual spending than to put a plan in place to reach $1 million.

The plan for a $1 million portfolio can be as simple as seeing the numbers grow through simple math. Here is how you can do it with your TFSA account. Imagine how fast you can make it when you have two TFSA accounts.

The amount of money you need in retirement depends on when you want to retire and what you want to do once you are retired (travelling the world is more expensive than reading, for example).

It is not simple to answer the question of whether or not you need $1 million to retire in Canada, but until you are getting close to retirement, you should work towards the $1 million. In your 20s and 30s, aim high for $1 million or more, but as you enter your 40s and 50s, your life should be more stable so that you can more easily budget what you need.

What is the average Canadian retirement income?

Without statistical research on savings and pension plans, we need to go by the Canadian Pension Plan (CPP) data. As such, the average Canadian Pension Plan retirement pension hovers around $8,500 per year.

In 2021, the average monthly payout for CPP is $736.58, whereas the maximum amount that could be earned monthly is $1,203.75. To achieve the maximum, you need to meet the CPP criteria.

In the end, the average CPP is useful but not enough. Plan without it and use it as a buffer to your plan in case it doesn’t go according to plan.

How much do I need to retire in Canada?

How much you need to retire depends on where and how you live now and on the adjustments you plan to make. It might sound simple, but the reality is that life isn’t that predictable.

The mistake most people make is to plan for retirement as they see it coming, and that usually doesn’t leave many options, as time plays a major factor in reaching your goals.

Use a retirement calculator to understand how your personal income, savings plan, and life plans impact your retirement savings needs.

Typically, there are three categories of spending you need to consider and plan for:

  • Lodging – Do you own your place?
  • Day-to-day – Food, commuting, and fitness
  • Entertainment – Travel, golf, season tickets, and anything else you fancy

The idea is that lodging goes down since your mortgage should be paid, but entertainment tends to go up since you have more time. So it’s essentially a wash of how much you need between when you were working and when you were not, depending on your diligence.

In short, plan for the average net income from the last 3 or 5 years minus investing since you would stop investing.

How much to retire in your 50s?

Early retirement is possible but not a last-minute decision. It has to be planned in order to be achieved, and in many cases, sacrifices have to be made.

So how do you achieve Freedom 55? If you go back to the TFSA table above, there are 3 factors helping you reach the $1 million mark.

  1. Your contributions. That’s how much you can save. In the case of the TFSA, it’s capped for everyone making it an even playing field.
  2. Your rate of return. That’s how well your investments do for your portfolio.
  3. Time. The one and only variable you have no control over.

In the case of a TFSA, assuming you contribute the maximum, you only have control over the rate of return in way. For other accounts, you also control the contributions but in general, you will need time to reach your goals.

When working towards Freedom 55, you need to realize you have fewer working years to save (i.e. your contributions) and more years to live from your portfolio. It means you need to save more in your 30’s and 40’s than someone willing to retire at 65.

There are a few simple rules that can help give you an idea instead of trying to assess your life expectency and future cost of living.

X25 Rule – Years in retirement

A rule of thumb is to assume you will have 25 years in retirement (65 + 25 = 90). As life expectancy goes, it’s above average, but only you know your family’s history.

If you want Freedom 55, you should do X35.

4% Rule – Annual withdrawal rate

This rule is one that can be challenging in the low-interest rate environment as it assumes a certain growth.

Without going into details, the 4% rule states that you should be able to withdraw 4% of your portfolio every year and retire safely without running out of money. Another way to look at it is to not withdraw more than 4% to feel safe.

It’s a tough rule though because in your 60’s you want to enjoy life a lot more than in your late 80’s when you could struggle to walk. So do you really want to keep 4% of your portfolio when you are bound to a chair in a home for elderly?

70% Rule – Your adjusted income in retirement

As pointed out above, this math rule implies your mortgage is recently paid off.

If you have been without a mortgage for a while, you need to up the number but it’s a good approximation to the income you will need.

Retirement Calculator – How much money I need to retire

With the few rules of thumb outlined, you can easily create a formula.

  • TGA = Target Retirement Age
  • GI = Gross Income
  • PI = Pension Income

Portfolio Value = (90 – TGA) * ((GI * 70%) – PI)

See some examples in the table. Those with a pension plan don’t really see the total value of their pension but rather the income they would receive and, as such, remove the income from the total.

In the examples, no pension income is considered.

Retirement Age Gross Salary Target Salary Portfolio Value
65 $100,000 $70,000 $1,750,000
65 $70,000 $49,000 $1,225,000
60 $100,000 $70,000 $2,100,000
60 $70,000 $49,000 $1,470,000
55 $100,000 $70,000 $2,450,000
55 $70,000 $49,000 $1,715,000
50 $100,000 $70,000 $2,800,000
50 $70,000 $49,000 $1,960,000

Another note here is that inflation is not taken into account. My theory is that your portfolio strategy should grow to keep up with inflation, which means your withdrawals will also keep up. That means that today’s $70,000 needs to increase by, say, 2% on average every year.

If you want a more formal calculator with extra bells and whistles, Sun Life has a good one as well.

Building a Retirement Portfolio

Building a retirement portfolio can be simple but complicated since there is much to learn. You can start with the beginner portfolio model and keep that forever, too.

In my perspective, a retirement plan is focused on how you will live, and a portfolio strategy is how you build a nest egg to support your retirement plan. At some point, you will have to consider taxes in retirement. For example, if you get setup properly, you can access your money tax-free, or for a very low tax rate.

My approach has been to build an income portfolio, starting with a dividend growth investing strategy. Build the largest nest egg, and then setup the taxable account for income.

As mentioned, you can try to reduce your portfolio target by considering your Canada Pension Plan (or CPP), but I find it’s a nice buffer for any unknown. Once you are a few years away from retirement, you can include it, as you should know all the tax considerations of your portfolio.