Retirement is usually the last thing you think about when you are young, but then you usually want to plan the easiest way to retire.
It’s like planting a seed now to see the mature tree 20 or 30 years later. The sooner you plant the seeds for retirement, the sooner you will get your retirement tree.
Wealth passed down through the generations has grown old trees that can live to be over 100 years old. So you see, “time” is an important part of wealth generation and how much it takes to figure out whether you need a 20 year old or a 30 year old tree.
As you can imagine, there isn’t a number as every city has a different cost of living. If you are ready to move, you can find the cheapest apartment, but you will certainly have to go without something else.
The key is to find out your magic number for retirement in Canada. Mine is $ 1,777,777.
Do I need $ 1 million to retire in Canada?
In some cities you do this when you want to maintain a certain lifestyle. Quite simply, retiring in Toronto and Vancouver is easier when you have a $ 1 million portfolio or an equivalent retirement plan.
Since everyone has different expenses and expectations for life in retirement, you need to plan your annual expenses to get an accurate picture. Personally, I think budgeting for annual expenses is more difficult than devising a plan to reach a million dollars.
The plan for a $ 1 million portfolio can be as simple as watching the numbers grow through simple math. Here’s how you can do it with your TFSA account. Imagine having two TFSA accounts how fast you can get it done.
|1||2009||5,000||5,000||5,250||5,500||Not pursued||Not started|
|2||2010||5,000||10,000||10,762||11,550||Not pursued||Not started|
|3||2011||5,000||15,000||16,550||18.205||Not pursued||Not started|
|4th||2012||5,000||20,000||22,628||25,525||Not pursued||Not started|
|5||2013||5,500||25,500||29,534||34,128||$ 41,742||Not started|
|6th||2014||5,500||31,000||36,786||43,590||$ 52,820||Not started|
|7th||2015||10,000||41,000||49.125||58.949||$ 56,307||Not started|
|8th||2016||5,500||46,500||57,356||70,984||$ 70,200||Not started|
|9||2017||5,500||52,000||65,999||84.034||$ 78,900||$ 13,308|
|10||2018||5,500||57,500||75,074||98,487||$ 96,937||$ 58,818|
How much money you need in retirement depends on when you want to retire. In addition, it depends on what you want to do in retirement (for example, traveling the world is more expensive than reading).
Answering the question of whether or not you need $ 1 million to retire in Canada is not an easy one, but by the time you are close to retirement, you should be working towards that $ 1 million. Aim high to $ 1 million or more in your twenties and thirties, but by the time you hit your 40s and 50s your life should be more stable so you can more easily budget for what you need.
What is the average Canadian retirement income?
Without statistical research on savings and retirement plans, we need to look to the Canadian Retirement Plan (CPP) data. Therefore, the average retirement pension from the Canadian retirement plan is around $ 8,500 per year.
In 2021, the average monthly payout for CPP is $ 736.58 while the maximum account that can be earned monthly is $ 1,203.75. To get the maximum you need to meet the CPP criteria listed here.
In the end, the average CPP is useful, but not enough. Without planning and use it as a buffer for your plan in case it doesn’t go according to plan.
How much do I need to retire in Canada?
How much you have to retire depends on where and how you live now and what adjustments you want to make. It may sound simple, but the reality is that life is not that predictable.
The mistake most people make is planning retirement the way they see it coming and that usually doesn’t leave many options as time is an important factor in achieving your goals.
Use a retirement calculator to find out how your personal income, savings plan, and life plans affect your retirement needs.
There are usually three categories of expenses to consider and plan:
- Accommodation – Do you own your apartment?
- Everyday life – eating, commuting and fitness
- Entertainment – travel, golf, season passes, and anything else you like
The idea is that the housing decreases as your mortgage should be paid, but the entertainment tends to increase as you have more time. So it’s essentially a wash of how much you need between your work and the time you haven’t been on your due diligence.
In short, plan for the average net income for the past 3 or 5 years minus investments since you would stop investing.
How much do you need to retire at 50?
Early retirement is possible, but not a last-minute decision. It has to be planned to be achieved and, in many cases, sacrifices have to be made.
So how do you achieve Freedom 55? Returning to the TFSA table above, there are 3 factors that will help you hit the $ 1 million mark.
- Your contributions. This is how much you can save. In the case of the TFSA, it’s limited for everyone, which makes it a level playing field.
- Your return. So your investments are doing your portfolio well.
- Time. The only variable that you have no control over.
In the case of a TFSA, provided you make the maximum contribution, you only have control over the rate of return. With other accounts, you control the contributions as well, but generally it will take time to achieve your goals.
As you work towards Freedom 55 you need to be aware that you have fewer years of work to save (i.e. your contributions) and more years to live on your portfolio. That means you will have to save more in your 30s and 40s than someone who is ready to retire at 65.
There are a few simple rules that can help you get an idea instead of trying to estimate your life expectancy and future cost of living.
X25 rule – years of retirement
The rule of thumb is that you have been retired for 25 years (65 + 25 = 90). Life expectancy is higher than average, but only you know your family’s history.
If you want Freedom 55, you should do X35.
4% rule – annual payout rate
This rule is being challenged by the low interest rate environment we are in as it implies some 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 point of view is not to withdraw more than 4% to feel safe.
It’s a tough rule, however, because in your 60s you want to enjoy life a lot more than in your late 80s when you have difficulty walking. So do you really want to keep 4% of your portfolio when you’re tied to a chair in a retirement home?
70% rule – Your adjusted income in retirement
As mentioned above, this math rule means that your mortgage has recently been paid off.
If you’ve been without a mortgage for a while you need to increase the number, but it’s a good approximation of the income you need.
Calculate how much money I will need to retire
With a few rules of thumb, 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 who have a retirement plan do not actually see the total value of their pension, but rather the income they would receive, and therefore subtract the income from the total.
Pension income is not taken into account in the examples.
|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 payouts will too. That means today’s $ 70,000 must increase by an average of 2% each year
Building a retirement plan
Building a bond portfolio can be simple, but it can also be complicated because there is a lot to learn. You can start with the entry-level portfolio model and keep it forever.
From my perspective, a retirement plan focuses on how you will live and a portfolio strategy is how you build a nest egg to support your retirement plan.
My approach has been to build my own income portfolio starting with an investment strategy with dividend growth.
As mentioned earlier, you can try reducing your portfolio goal by considering your Canadian retirement plan (or CPP), but I find it is a good buffer for any stranger. Once you are a few years away from retirement, you can include it as you should know all the tax aspects of your portfolio.