In the retirement series, I wrote about the Canada Pension Plan, RRSPs, Old Age Security, and other employment pension plans.
Taking it a step further, I want to address a question I’ve often asked myself (and have been asked by others):
“How much money do I need to have saved up before I retire?”
“How can I retire at age 50, 55, 60, or 65 years old?”
“Do I need $1 million to retire?”
“How much income will I need in retirement?” …
or more specifically: “How much money do I need to retire in Canada?”
These, of course, are important questions!
As you grow older, you start to wonder if you’re putting aside enough money for retirement and if your retirement nest egg will hold up when you finally do retire.
While I do not have all the answers, I’ll take a stab at providing an answer that hopefully gets you started on the road to arriving at the “magic number” or “multiple” that works for you.
How To Calculate Retirement Income in Canada – Rules of Thumb
When it comes to income required in retirement in Canada, there are several rules of thumb or schools of thought out there. If you are looking for a definite answer to put your mind at rest, you may be disappointed.
The one thing everyone readily agrees on is that when it comes to retirement income, it is not “black and white,” and there is no 100% consensus.
Popular rules of thumb include:
Rule 1: 4% Withdrawal Rate
The 4% withdrawal rule infers that you build up a retirement portfolio that provides a certain amount of income per annum at a 4% or so withdrawal rate. A 4% withdrawal rate is often referred to as a “safe” withdrawal rate.
For example, say you have figured out that you need $40,000 per year in retirement. Using a withdrawal rate of 4%, you should have a minimum of $1 million in retirement savings before you retire.
⇒ $40,000 ⁄ 4% = $1,000,000
This rule of thumb works whether you plan to retire early at 35 or go the conventional route and retire at 65 years or later. It’s the strategy often utilized by many “early retirement” enthusiasts or the movement popularly referred to as “FIRE” – Financial Independence/Retire Early.
Note: For earlier retirement plans, consider that you will not be receiving a government pension or retirement benefits until later in life and adjust your income needs accordingly.
The general idea behind the funds lasting you for life is based on historical market returns. If we assume your investment portfolio generates approximately 7% annually in long-term returns, then real returns of approximately 4% are expected after accounting for inflation (assuming an inflation rate of 3%).
Essentially, a 4% withdrawal rate assumes your investment portfolio is not highly conservative (i.e. you are invested in a good proportion of stocks/equities).
Rule 2: Desired Annual Retirement Income x 25
This rule follows the 4% withdrawal rate rule. They are pretty much the same, but this is easier to calculate for those who would rather not dabble in fractional math. It infers that to meet your income needs in retirement, you want to have at least 25 x your desired annual retirement income.
For example, say you estimate that your expenses per year in retirement are $40,000. You would be expected to save up a minimum of $1 million in retirement savings.
⇒ $40,000 x 25 = $1,000,000
Related: The Complete Guide to Retirement Income in Canada
Rule 3: 70% of Working Income (or more)
This rule estimates that you will need between 70% and 100% of your pre-retirement income in retirement: 70% if you are typical and do not have a mortgage and up to 100% if you are still paying a hefty mortgage plus other atypical expenses while retired.
The idea behind this rule is that your expenses are generally expected to be lower in retirement: no mortgage payments, no longer need to save for retirement, kids are financially dependent, etc. After computing this amount, you can then proceed to calculate how much you need (lump sum) by going back to Rule 1 or 2.
For example, assume you earn $100,000 per year before retiring. Using the 70% rule, you will need approximately $70,000 ($100,000 x 70%) in annual income to maintain your lifestyle in retirement. Going back to Rule 2, it implies you need:
⇒ $70,000 x 25 ⇒ $1.75 million in retirement.
I think the 70% rule is a reasonably liberal estimate of retirement income needs (barring exceptional circ*mstances). A survey conducted by Sunlife and released in 2016 shows that Canadian retirees were, on average, living on 62% of their pre-retirement income.
Rule 4: Pre-Retirement Income x Multiples of 10 to 14
This rule suggests that you can calculate how much you need to save for retirement by multiplying your income just before retirement by a number between 10 and 14.
For example, say your income before retirement was $100,000/year. Following this rule, you should accumulate at least (depending on which multiple you’re working with):
Rules 3 and 4 implicitly assume that you are using the income earned during your highest income-earning years as the basis of your calculation. This means that if you are a younger person in an entry-level position (i.e. low starting salary) looking at retiring early, calculations using these approaches will not work for you in the longer term.
Related: CPP vs. OAS: How Do They Compare?
How To Estimate Your Retirement Income Needs in Canada
The income available to you during your retirement years (distribution phase) will depend largely on how much you were able to set aside during your working years (accumulation phase), plus other available government and employment benefits.
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Steps to estimating or calculating your retirement income needs include:
A. How much income do you expect to live on per year?
You can compute this amount using different strategies – for example, by using the 70% pre-retirement income rule or by simplylooking at the lifestyle you envisage living in retirement and estimating what your expenses will add up to (including taxes).
Note: In your calculations, if looking at your current lifestyle and expenses, remember to eliminate expenses that may no longer be relevant in retirement such as mortgage payments, cost of commuting to work, childcare expenses; RRSP, CPP, and EI payments, etc. And remember to add new expenses that may crop up, such as travel expenses, hobbies, health issues, etc.
B. How much government benefit do you expect to receive?
If you have lived and worked in Canada before retirement, you can expect to receive Old Age Security (OAS) and Canada Pension Plan (CPP) benefits.
The amount you receive will generally depend on how long you have lived in Canada (for OAS), how much you have contributed to the plan, and for how long (for CPP).
Using OAS and CPP numbers for 2024. Let’s assume the maximum monthly OAS payable is $713.34for a total of $8,560.08 per year (ages 65 to 74), while the maximum CPP is $1,364.60for a total of $16,375.20 per year.
Most people will get less than the maximum amount. For example, the average monthly CPP benefit paid in 2024 is $831.92 (40% less than the maximum amount payable).
For individuals who immigrated to Canada in their adult years (like me), the total government pension they will be eligible for will be significantly reduced.
Using the 2024 maximum government pension amounts as an example, total payouts from this source to a single senior are:
$8,560.08 (OAS) + $16,375.20 (CPP) = $24,935.28 per year
Here’s how many years you need to work to get the maximum CPP.
C. How much do you need to save up?
To calculate this amount on an annual basis, you will need to subtract expected government pensions from the annual expenses you calculated in Step A, and then multiply the remainder by 25 (or divide by 4%).
For example, a couple who estimates their annual retirement income needs to be $70,000 will need to save:
As shown in the table above, government pensions offset some of the savings required by the couple pre-retirement. The more government pension they qualify for, the less money is required in their investment portfolio.
Additionally, if one or both partners have a defined benefit pension, it will further lower the amount of savings required to meet their desired retirement income.
Overall, to fund their preferred retirement lifestyle, the couple in the scenario above will need about $900,000 in their retirement nest egg.
Related: CPP and OAS Benefits for Surviving Spouse and Children
How Much Do You Need To Retire?
How much you need to retire will depend on your needs. Using the couple described above, who needs $70,000 annually, almost half of this is provided through their government pensions.
So, instead of requiring $1.75 million based on the 4% withdrawal rule ($70,000 x 25), they may need less than $1 million in their personal retirement accounts and be able to retire comfortably.
Some Canadians will need even less, with paid-off homes and decreased income requirements when retired. As such, it’s no surprise that the average retirement savings as per Statistics Canada, are much lower.
You can check out various income scenarios using this Canadian Retirement Income Calculator.
What Can Change Your Retirement Income Needs?
Calculating your income needs in retirement is not an exact science. Life happens, and it may leave your retirement plan in tatters. Some possibilities include the following:
If, for one reason or the other, you are unable to save enough money for retirement at age 60, 65, or earlier, depending on what your plans were initially, the following strategies may be useful in managing your “savings/income gap”:
1. Work for longer and delay government pension till later: Working for a few more years and/or delaying when you start receiving OAS/CPP can significantly increase your eligible payouts down the road.
2. Semi-retire and work part-time: Every year you delay dipping into your retirement nest egg means more money to spend in the future.
3. Start saving aggressively: The earlier you start saving, the better for you. Time is the game-changer regarding the returns you can earn on your investment portfolio. If you are running out of time, you will need to put aside more funds more often.
4. Consider adjusting your retirement lifestyle expectations and spending less: If you have run out of time to build an adequate retirement portfolio to pay for the lifestyle you desire, you may have no choice but to take out less money from your savings and live accordingly.
5. Downsize and sell your home: You can consider beefing up your retirement savings by downsizing and selling your home to utilize the equity you have built up over the years. Alternatively, you may consider taking out a home equity line of credit (HELOC) or a reverse mortgage.
6. Other Government safety nets: If your income in retirement puts you in the low-income bracket (as specified by the government on an annual basis), you may qualify for additional government benefits, including the Guaranteed Income Supplement (GIS) or the Allowance.
The original version of this article was written by Enoch Omololu on Savvy New Canadians, under the title "How Much Money Do You Need To Retire in Canada?"
