Many Canadians are struggling with how much they need to save for a secure and enjoyable retirement, but the questions don’t stop there.
Frequently Asked Retirement Savings Questions
- What proportion of my income will I need to replace in order to maintain my lifestyle?
- Should I use Tax Free Savings Accounts (TFSA) and / or Registered Retirement Savings Plans (RRSP)?
- When should I start taking Canada Pension Plan income?
- Which assets should I spend first?
The answers to these questions will depend on many factors. A Financial Advisor can analyze your personal goals and situation to help determine the best options for you.
If you are just starting out in your career, the best advise I can give is: don’t delay saving for retirement. It may seem like it’s forever away, but time flies and you’ll need your savings before you know it. I often suggest to young professionals – that don’t have a pension plan – to work toward saving 10-15% of their pre-tax income. Retirement savings should be factored into their monthly budget before they start buying cars and houses. It should be considered a “bill” just like any other fixed expense. The longer one delays saving for retirement, the higher the percentage of income they will need to tuck away.
In 2009, the Canadian Government introduced the Tax Free Savings Account, which has become an important savings vehicle for many.
A TFSA is Ideal for Canadians that:
- want flexibility in their short and long term savings
- earn less than $40,000 per year to save for retirement
- want savings that will compliment their pension income
- never want to pay tax on their investment earnings
For higher income earning Canadians, the Registered Retirement Savings Account (RRSP) is still a great choice. It allows individuals to grow their savings in a tax-deferred account. When they retire, ideally they will be able to draw out income from their RRSP in a lower tax bracket.
If we knew exactly when we were going to expire, it would make it much easier to calculate how much we need to save for retirement. An important step in retirement planning is to calculate your “income replacement rate”: the proportion of your income you will have to replace to maintain your lifestyle. Unfortunately there isn’t one rate that fits all.
In retirement, you may reduce your personal spending on clothes, transportation, lunches out, and taxes for example. You will also not need to contribute to Canada Pension Plan or Employment Insurance, so your overall spending should be less than while you’re working … unless of course, you have expensive hobbies or plan to travel extensively.
The bottom line is that you will need to assess your own personal situation in order to come up with a retirement savings goal that is right for you.
The more you know, the better prepared you will be to ensure that your retirement income matches your goals.