5 Steps to Retire in Canada

Published on: Jul 4, 2021
Author: Thomas Chan

Retirement will arrive sooner than you think and planning is key in preparing for the time. In this post, I will be sharing 5 simple steps to follow when planning for your retirement, not only to help you save but strategies that will supplement your retirement income. Why start now? Well, you don’t plan a fire escape route when the fire is outside your door and likewise for retirement, you don’t want to wait until you reach your retirement age to start thinking about it.

Retirement Goals

Here are some questions you should think about when coming up with your plan:

  • What is your end goal?
  • What age do you want to retire? When you know how much time you have to save, you can start working on how much you need to save each month to achieve this goal including how aggressive you may need to be.
  • What is your definition of retirement? If you want to stop working completely upon retirement, then you need to save towards this goal.

As I always say, a goal without a plan is just a wish. However, know that as your situation changes, your retirement plan will change too so this isn’t set in stone.

How much do I need to save for retirement?

The million dollar question but there’s no easy answer. There are lots of formulas and online calculators to help you figure out a figure which provides helpful guidelines, but ultimately only you know how much is enough. One thing that is commonly missed is to calculate inflation and the future value of money. Once you can figure out the amount required for your retirement, you can see clearly the monthly savings target you would need to reach your retirement goal.

As an example, Sam is 25 years old and wants to retire at 65, giving him 40 years to save. He makes $2000 per month and with inflation of 2.5% per year, in 2060, he would need to make $5400 per month by the time he retires. If he wants to solely depend on his savings to retire, he would need to save around $1.2 million. With a 5% return per year, the $1.2 million will give Sam $60,000 a year and that is $5000 per month.

However, keep in mind the uncertainties such as:

  • Extra medical costs
  • Longer life expectancy
  • Fluctuating inflation rate and cost of living
  • Your amount of expenses, unless you expect to change your lifestyle 100% at your retirement, chances are your expenses would be more or less the same as your current lifestyle

Long story short, it is always advisable to save more than what you think you need. It’s never too late to start saving for your retirement. In fact, we should start saving the moment we start working. Why? Two words: compounding returns.

The power of compounding effect

Here is an example: Mary starts saving for her retirement at 25. She saves $3000 per year, around $250 a month. If she invests this amount with a 7% annual return since 25,

she would have over $600,000 by the time she retires at age 65. Now Gary didn’t start doing the same until he’s 35. He invests the same amount each month as Mary,

to retire at 65. But with the same 7% annual return, he would have just over $300,000 by the time he retires. The end result here is that Mary contributed only $30,000 more than Gary, but she has double the amount that Gary has at age 65. This is the power of the compounding effect.

How to save for your retirement in Canada

There are two main vehicles that Canadians can use to save for their retirement:

  1. Registered Retirement Savings Plan (RRSP)
  2. Tax Free Saving Account (TFSA)

Contributing to RRSP can lower your taxable income for that year and if done properly it would allow your retirement savings to grow to a substantial amount tax-sheltered. But be careful, RRSP is like a double edge sword, it might hurt you if you blindly follow what other people do.

With the Tax Free Savings Account (TFSA), Canadians can open up this account as soon as they turn 18. Unlike the RRSP, the contribution limit is not determined by income but by age, so this account is a perfect place to keep your money to avoid retirement benefit claw backs. Whether you decide to use either the RRSP or the TFSA, or both, don’t treat them like a savings account and forget about it. At the minimum, you need to be investing in something that would give you interest, so that your money’s future value can beat the inflation.

Other retirement strategies

There are also other ways to build your retirement portfolio like a company pension plan, if available, and real estate. Real estate is a huge vehicle that Canadians like to use to accumulate wealth. In a survey done back in 2018, it is estimated that 77% of baby boomers across Canada are homeowners, and the average net worth of homeowners

was $824,000, 7 times more than that of renters in 2012. As attractive as it seems, that’s probably not the best idea to put everything into real estate. The saying “never put all your eggs in one basket” is always true. A tip for homeowners out there, you have one extra option beside renters, and that is to do a reverse mortgage. A reverse mortgage is a loan that allows you to get money from your home equity without the need to sell your home, and you can borrow up to 55% of your home’s current value. In most of cases, the bank allows you not to make any payments until you sell your house or you pass away.

A good retirement plan is one where you can stay flexible and creative. You may want to work past the age of 65 with part-time hours which might surprise you with what a difference that can make with a few years’ worth of contributions to your retirement fund.

While all of the strategies I discussed are focused on making more money, let’s not forget about cutting down on expenses too. When you have extra money sitting around, is it smarter to pay down the debts first or to contribute into your retirement savings? The interest you save by paying down your debt could mean a lot for your retirement. As you age and get closer to your retirement though, you might want to revisit your investment portfolio and rebalance it according to your risk appetite. The risk tolerance for a 25-year-old versus a 50-year-old person can be drastically different.

Now that we have powered through the essence of retirement planning, do you feel more confident about your retirement? I understand that for most people, managing money is a stressful thing to do, but just think about it, if you can put up with this little bit of stress right now, you could very well live a stressful free retirement life! Seems worth it doesn’t it? No matter how small your progress is, believe me, any contribution is better than doing nothing. So, start today, come up with a plan, get help from a professional and stick to your plan. Follow me on YouTube to keep learning more on how you can continue building your wealth today and tomorrow.

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