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How Much Should You Save for Your Retirement?

16 September 2018 by National Bank
how much to save for retirement

Are you wondering how much to save for your retirement? Many factors can influence the outcome: your lifestyle, your future projects, your investments, etc. Because preparation is the first step to the retirement of your dreams, here is some advice to help you make the right calculations.

Set your financial goals

In order to know how much to save for retirement, two “rules of thumb” are often used. The first recommends saving 10% of your gross salary every year. The second suggests that you save enough upon retirement to receive 70% of your income annually. The latter is based on amounts offered by defined benefit pension plans and assumes that you have fewer needs during retirement, although this is not always the case.

These rules can help you set your goals, especially if you are young and your retirement plans are not yet clear. Once your professional situation stabilizes and your plans become clearer, you will need to fine-tune your calculations. These estimates are too imprecise to successfully plan your retirement.

So, how much should you save for your retirement?

Step 1: Determine your needs

Determining your needs takes a little bit of work. Here are some guidelines to follow:

Create a budget.

Take note of all your fixed expenses (mortgage, property taxes, internet, television, phone, etc.) and your variable expenses (groceries, clothing, gas, recreation, etc.). Your current lifestyle can help you determine the amount you will need at retirement.

Think about the lifestyle you want.

What do you want to do when you retire? What are your passions? Do you want to escape to the countryside? Are you planning to sell your house and move to a condo? Will your mortgage be reimbursed? The answers to all these questions have financial consequences. Be as precise as possible to estimate the cost of retired life. For example, if you’re dreaming about traveling, would you prefer to go to the south, go on a cruise or visit Asia?

Then, you will be able to evaluate the income you need for your old age. These considerations are essential to figuring out how much to save for retirement.

Step 2: Assess what you already have

Have you not yet begun saving for retirement? That doesn’t necessarily mean that you have nothing. Do you own a house, investment property, a cottage or a business? You could eventually sell them for your retirement, or keep them and earn an income.

Step 3: Consider amounts that you can plan for

Consider government programs and verify the amounts you could receive from the following:

Old Age Security:

This federal government program gives retirement benefits to Canadians, whether they have worked or not. The amount you receive is not based on your income. It is established based on the number of years you have lived in Canada after 18 years. In 2018, the maximum amount is $589 and is indexed to the cost of living. People with an income over $123,019 are not eligible.

Guaranteed Income Supplement:

If your income is low at retirement, you can also receive this supplement from the federal government for those receiving Old Age Security. For example, a single person with an income of $17,880 could receive up to $880 a month.

Québec Pension Plan:

This program, from the government of Québec, allows workers to receive funds once they’ve retired. Because these contributions are based on your income, the amount of benefits varies from one person to the next. To learn how much you are eligible to receive when you turn 65, check the Retraite Québec website.

If you have a pension fund at work, you should also verify the benefits you could receive. If you have a group Registered Retirement Savings Plan (RRSP) or a Voluntary Retirement Savings Plan (VRSP), consider doing this as well.

Step 4: Imagine different scenarios to achieve your goals

In order to know how much to save for retirement, you must also consider inflation and investment returns. These calculations can be a little more complicated. Thankfully, you can use these calculators for clarification. They will help you determine how much you need to save each month to achieve your retirement goals. A financial advisor can also provide even more precise projections depending on your situation.

For example, if you earn $50,000 a year and at age 65, you want to withdraw 70% of that amount. According to the results from the calculator based on your age, here are the amounts you need to save before retirement to reach your goal:

At 25 years: $1,285 per month

At 35 years: $2,240 per month

At 45 years: $4,294 per month

Are you not currently saving enough? Go back to your budget. You can either revise your goals or increase your savings—or do a bit of both. The more years you have ahead of you, the easier making corrections will be. Put the odds in your favour and opt for systematic savings. It’s the best way to discipline yourself.

Step 5: Opt for the right investments

In the long term, choosing the right investment tools can make a big difference in your retirement savings. Here are the two most common tools:

RRSP:

Funds deposited are tax deductible. The higher your salary, the more advantageous. You can reinvest your tax refunds and grow your savings faster. At retirement, withdrawals are taxable.

Tax-Free Savings Account (TFSA):

Funds grow tax-free. This means that returns are tax exempt. Contributions are not deductible, but withdrawals are not taxable either.

These tools can include different types of investments: mutual funds, exchange-traded funds, guaranteed investment certificates, stocks, bonds, etc. Your portfolio should be diversified well and should correspond to your investor profile.

It could be risky to invest by yourself without the right knowledge of this field. Your financial advisor can develop some scenarios that will allow you to maximize your income for a more comfortable retirement.

If you are a business owner, other strategies may be better suited to plan your retirement savings. For example, you could open an individual pension plan.

Step 6: Update your calculations

Finally, it’s in your best interest to review your calculations and strategy at each important stage in life. It’s a good idea after the purchase of a home, a new baby or a promotion, for example. Have you discovered a new passion that may be expensive in retirement? Go back to your calculations.

A budget, a retirement plan and a saving strategy are essential to determine how much you should save for retirement. They’re also the best way to achieve your goals. And remember, the sooner you start, the easier you’ll get there!

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