Retirement planning is about managing your money so you can make the most of your retirement years. Your retirement plan should balance your needs, wants and the reality of your finances.
On this page you’ll find
Why have a retirement plan?
There are many good reasons to have a retirement plan. Preparing to retire is about more than setting money aside for the future. You should know how much money you will need and how investing will help you reach that goal. Knowing how much you need to save depends on what you expect your lifestyle to look like in your retirement years.
A retirement plan can help you:
- Set goals – A plan helps you set goals for retirement, including the age when you want to stop working.
- Know how much to save – It can help you figure out how much money you need to live comfortably.
- Choose investments – A plan can guide your investment choices based on your goals, time horizon and your risk tolerance.
A retirement plan may sound complex, but it starts with answering a few basic questions:
- How much money do you need to save for retirement?
- What age do you want to retire?
- When can you start saving for retirement?
- What sources of income will you have in retirement?
How much do you need to save for retirement?
Knowing how much you need to save for retirement might be the most important step in your retirement plan. It’s possible this amount might change over time. Making your best estimate of how much you need to save for retirement depends on:
1. Your age – The younger you are when you start investing, the longer your time horizon. Thanks to the power of compound interest, the sooner you start investing, the less you have to put away. Try our compound interest calculator to see how your savings can add up.
Your time horizon is the amount of time you have before you want to use the money in your investments. Learn more about time horizon and investments that may be a good fit for you.
2. Your lifestyle – This helps you estimate your monthly spending needs in retirement. Also consider whether you plan to stay home, travel, take up new hobbies, and so forth. The amount you’ll need to save will depend on the life you plan to lead when you retire.
Try our budget worksheet to see the difference in your income and costs before and after you retire.
3. Your eligibility for federal government benefits – When you retire, you’ll likely be entitled to at least some federal government retirement benefits. This may reduce the amount of personal savings you need to build for retirement. The federal government offers three retirement benefits based on your income and/or the amount you contribute during your working years:
Canada Pension Plan/Quebec Pension Plan (CPP) – You can receive monthly payments starting as early as your 60th birthday. But your monthly payment is smaller if you start receiving it before age 65. What you get depends on what you paid into the plan while you were working. Learn more about CPP.
Old Age Security (OAS) – You must be 65 or older to receive payments. You don’t have to live in Canada, but you have to be a Canadian citizen and have lived in Canada for a certain number of years after age 18. What you get depends on your other income and how long you’ve lived in Canada. Learn more about OAS.
Guaranteed Income Supplement (GIS) – For lower-income Canadians 65 and older. What you get depends on your income (and your spouse’s if you have one). It pays out a maximum of $15,000 (couples might get more). Learn more about the GIS.
You don’t get these benefits automatically – you must apply for them.
4. Your pension income – In addition to CPP, you may also have income from a pension plan at your place of employment. This may be in the form of a defined benefit plan, a defined contribution plan, or another type of pension or savings plan. The amount of income you receive from the plan will depend on how long you were part of the plan, and how the funds were invested. Learn more about pension and savings plans.
Use this calculator from Service Canada to estimate your income in retirement. You can also work with a financial advisor or financial planner to figure out this estimate.
Where can you save money for retirement?
You can save money in many different places, preferably not your mattress. Three savings plans are commonly used in Canada for retirement funds:
1. Registered Retirement Savings Plan (RRSP) – This registered account is typically used for investing but it can also hold savings deposits. An RRSP lets you reduce your taxable income in your earning years. You receive a tax deduction based on the amount you put into your RRSP. Your savings grow tax-free in an RRSP as long as you keep your money in the plan. Your annual contribution limit is determined by your annual income level. It can be found on your annual Notice of Assessment.
RRSP withdrawals are considered taxable income when you retire. For this reason, RRSPs are better suited for Canadians with moderate to high income since their income (and tax rate) will usually be lower in their retirement years.
Learn more about RRSPs.
2. Tax Free Savings Account (TFSA) – This account lets you save tax free for any goal. TFSAs can hold savings or most kinds of investments. All Canadians have the same annual TFSA contribution limit, regardless of income level.
Canadians with lower incomes may find TFSAs more suitable for retirement savings than RRSPs. That’s because withdrawals are not considered taxable income in retirement years.
Learn more about TFSAs.
You can use both a TFSA and an RRSP for your long-term saving and investing goals.
3. Workplace pension and savings plans – Your employer may offer pension plan contributions as part of your compensation package. Pension plans, group RRSPs and other savings plans can be a convenient way to save because your contributions come off your pay cheque. And if your employer matches your contributions, your savings power is doubled. Learn more about pension plans.
Once you know where you want to put your retirement saving and investing efforts, you can start making monthly or weekly contributions to your account(s).
In your retirement years you will need to transfer your RRSP into a Registered Retirement Income Fund (RRIF). This account then gives you income in your retirement. Learn more about RRIFs.
How else can you prepare financially for retirement beyond saving?
It’s wise to plan for other financial steps in addition to saving as you get closer to retirement. Transitioning from working to retiring involves many decisions. There are a few things you can do ahead of time, including:
1. Pay off your debts
Pay off your debts as soon as you can, ideally before you retire. Any interest you’re accumulating on your debts will cut into the income you will rely on in your retirement. Learn more about managing debt.
2. Calculate your monthly income in retirement
Use this calculator to estimate how much monthly income you’ll receive from your savings, government benefits and any pensions. An inflation rate of just over 2% is often used as a rule of thumb for longer term planning. But times of higher inflation rates may mean you should review how much you plan to withdraw from your retirement accounts each month.
Your best strategy will depend on how much guaranteed income you have each month, how much flexibility you have, and how long you need to depend on your retirement savings.
3. Review your insurance needs
Your insurance needs will likely change as you get older. If you have fewer debts and dependents, you may not need as much life insurance coverage. However, you’ll likely still want coverage for emergencies like damage to your home or car. If you were covered previously through a workplace insurance plan, it’s a good idea to investigate the cost of coverage on your own.
You may want to consider critical illness insurance or long-term care insurance in the event of health issues. And if you’re planning to spend winters in another country or to travel more, make sure you’re covered in case something happens to you. Learn more about travel health insurance.
4. Review your budget
Figure out how much you’ll need to spend to make ends meet in retirement – then see if it matches your monthly income. If it doesn’t, you’ll need to find ways to save more, cut spending or boost your income in retirement.
5. Apply for government benefits
Don’t wait until the last minute to apply for government benefits — it may mean a delay in getting your payments. You need to apply for CPP nine months before you retire in order to receive your payments in time. Also make sure you are up to date on your tax filing.
6. Prepare to convert your savings to income
Research your income options and set up a plan so you have an income from the first day you retire. Options include RRIFs, annuities and unsheltered savings. You may want to speak with a financial advisor to help you set a plan to meet your income needs in retirement. It may also be a good time to review your investment goals and make any adjustments to your investments.
7. Name a Trusted Contact Person
Your financial advisor is required to ask you about adding a Trusted Contact Person to your account. This person essentially serves as your emergency contact. They are someone your advisor can talk to if they are unable to contact you or have concerns about your financial safety. Learn more about naming a Trusted Contact Person.
8. Review your will and powers of attorney
If you’re about to retire, your will might need to be updated. A valid, up-to-date will helps ensure your estate is distributed as you intend it. And a will can ease the legal and administrative burden to your family of settling your affairs. If you die without a valid will, a court will appoint someone to administer your estate and distribute the assets according to a formula set out in provincial estate and family laws.
You should also make sure you have a power of attorney. That’s a legal document that names someone to make financial and other decisions for you when you can’t make them yourself. Choose someone you trust, who knows you and will carry out your wishes.
Learn more about wills, estate planning, and powers of attorney.
Are you concerned about the financial well-being of a senior close to you? Are you worried a senior is suffering from financial abuse? Learn the signs of elder financial abuse.
Retirement is a big step in your life. Get yourself ready and consider:
- Creating a retirement plan starts with knowing your time horizon.
- How much you need to save for retirement depends on your age when you start saving, your lifestyle needs, and your sources of income in retirement.
- Your personal retirement savings can accumulate within a TFSA, RRSP or a workplace pension — or all three.
- It’s wise to pay off debts before retirement.
- Before you retire, review your insurance needs, your budget, and your expected income.