How Much Should You Save for Your Retirement?

07 January 2021 by National Bank
Drawing of two red chairs in front of a lake and sunset

Wondering how much to save for your retirement? There are many elements that factor into the calculation: your lifestyle, your future projects, your age, your investments, etc. Preparation is the first step towards a retirement that’s right for you, so here’s some advice to help you come up with the right formula. 

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Set your financial goals

To figure out how much to save for retirement, many people rely on two infamous “rules of thumb.” The first recommends that you save 10% of your gross salary every year. The second stipulates that you should save enough to enjoy 70% of your salary every year upon retirement. This rule takes after the money you earn from defined benefit pension plans, and assumes that your needs won’t be as significant when you retire, even though this isn’t always the case. 

These rules can help you set objectives, especially if you’re young and your retirement projects aren’t very clear yet. Once your professional situation is stable and you have a better idea of what your goals are, we recommend refining your calculations. These estimates are too vague to adequately plan for your retirement and don’t take into account your retirement projects. 

So, how much should you save for your retirement? 

Step 1: Determine your needs

Determining your needs requires a bit of work. Here’s what you do. 

Make a budget

Write down all your fixed expenses (mortgage, property taxes, Internet, TV, phone, etc.) and your variable expenses (groceries, clothing, gas, entertainment, etc.). Your current lifestyle will help you determine how much you’ll need when you retire. 

Think about your lifestyle

What do you feel like doing when you retire? What are your passions? Do you want to move to the countryside? Do you intend to sell your home and live in a condo? Will your mortgage be paid off? The answers to all these questions have financial consequences. Be as specific as possible so you can estimate your cost of living upon retirement. 

Then, you’ll be able to determine the income you’ll need in your old age. This step is crucial if you want to figure out how much you should save for your retirement.  

Step 2: Take stock of your possessions

Haven’t started saving for your retirement yet? That doesn’t necessarily mean you’re starting from zero. Do you own a home, rental property, a cottage, or a business? You could eventually sell these off for your retirement, or keep them and make money off them. 

Step 3: Consider the money you will receive

Take into account government programs. Find out how much you could receive from the following:

Old Age Security

This federal government program provides benefits to Canadians upon retirement, whether they worked or not. The amount received isn’t tied to your income. It’s based on how long you lived in Canada after the age of 18. In 2020, the monthly limit is $614.14. However, people whose gross income exceeds $128,149 are not eligible. 

Guaranteed Income Supplement

If your income is low when you retire, you could claim this supplement offered by the federal government, which is aimed at beneficiaries of the Old Age Security pension. A single person with an income below $18,624, for example, could receive up to $917.29 per month. 

Quebec Pension Plan

This Quebec government program allows workers to receive a pension upon retirement. Since the benefits are tied to your income, the amount that is received varies from one person to another. To find out how much you could receive when you reach age 65, go to the Retraite Québec website. 

If you also have a retirement fund at work, take a look at the benefits you could receive. If you have a collective registered retirement savings plan (RRSP) or a voluntary retirement savings plan (VRSP), look into that as well. 

Step 4: Imagine the different scenarios for reaching your goals

To find out how much you need to save for your retirement, you should also consider inflation and your investment earnings. A financial advisor can also help you make more precise projections specific to your situation. 

If you’re not saving enough right now, go back to your budget. You could either set smaller goals or save more. Or do a bit of both. The farther away your retirement is, the more time you have to readjust along the way. Put the odds in your favour and opt for systematic savings. It’s the best way to stay disciplined.

Step 5: Choose the right investments

Over the long term, choosing the right investments tools can make a big difference in how your retirement savings progress. Here are the two most popular vehicles:

Registered Retirement Savings Plan (RRS)

The money you invest is tax deductible. The higher your salary, the more you benefit from this. You could reinvest your tax refunds and make your savings grow faster. When you retire, the money you withdraw becomes taxable.  

Tax-free savings account (TFSA)

The money grows tax-free. This means that the investments are tax-exempt. The contributions aren’t deductible, but the money you withdraw won’t be taxed. 

These tools may consist of various kinds of investments: mutual funds, exchange-traded funds, guaranteed investments certificates, shares, bonds, etc. Your portfolio should be diversified and match your investor profile. 

Investing on your own can be risky if you’re not familiar with the industry. Your financial advisor could draw up different scenarios that will allow you to maximize your income for a more comfortable retirement. 

If you’re an entrepreneur, other strategies may better suit your retirement plan and savings. In particular, you could open an individual pension plan. 

Step 6: Update your calculations

Finally, it’s in your best interest to review your calculations and your strategy after every major life event, like when you buy a home, have a child, or get a promotion. Have you discovered a passion that may be expensive once you retire? Time to revise your calculations. 

A budget, a retirement plan and a savings strategy are all crucial for determining how much to save for your retirement. It’s also the best way to achieve your goals. And remember: the earlier you start, the easier it is to reach your objective! 

Need help navigating the world of savings? We’re here to answer your questions. 

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