Retirement Savings Calculator: How Much Money Do I Need?
One of the most common questions people ask is a complicated one: How much money do I need to save for retirement? We’re glad people ask, because it’s important to plan ahead — catching up on retirement savings is much harder than consistently contributing small amounts over a long period of time.
Unfortunately, it’s not a one-size-fits-all answer.
What one person may need is different from what another may need because there are many factors to consider: cost of living in your area, expected medical needs, whether you own a home or rent, if you plan to travel, and the amount you can expect from the Canada Pension Plan (CPP).
An important tool that can help you figure all this out is a retirement and savings tool. It asks questions about various facets of your life, including current levels of savings, any investments you already have, sources of income, and the most important factor: you.
To get the most out of the Retirement and Savings Tool, consider how you might answer the following questions first as this will affect your plans and financial commitments for retirement.
At What Age Do You Plan to Retire?
While the most common age for retirement is 65, there are plenty of people who stop working before, as well as after. Often, this decision hinges on a person’s ability to keep up with the physical and mental demands of their job. Some people may feel the need to work to save more money or delay having to rely on their savings for income. More and more people continue to work in some capacity to feel fulfilled, preserve a sense of purpose and identity and to keep active mentally and even physically. Work is becoming an integral part of the first phase of what we still call retirement.
It’s not necessarily possible to make an accurate prediction of when you’ll retire — life circumstances can change in an instant — but it’s a good idea to have a goal in mind. If you’re unsure, stick with 65. If you reach age 65, are still able to work, and want to, then you’ll be even better off. Planning conservatively is always a good option when it comes to personal finances and retirement.
How long do you need the income to last?
The earlier you retire, the longer your income may need to last. A good portion of your income will need to last as long as you and your spouse or partner expects to live. Some people will set a goal to have their income last until life expectancy. That age is about 80 for men; women on average live about 4-5 years longer.1
What people don’t realize is that life expectancy measures the point in time when half the people pass away. The other half will live longer. That’s not a good gamble to make. Planning conservatively means assuming you will live past average life expectancy. Family health history, your own state of health and health habits can impact how long you may live and how healthy you will be through retirement.
Some expenses won’t last a lifetime. Many people spend more money in the early active years of retirement. Think about that bucket list of travel destinations, a home renovation or some once in a lifetime experiences. Set aside a certain amount of money which you will spend on these things. After that, you will probably settle into a lower, more steady level of spending which may be indexed for inflation.
How Much Can You Expect from CPP?
In calculating your Canadian retirement income, you should first figure out what you can expect to receive from government programs, such as CPP and Old Age Security. While every person’s circumstances are different, Services Canada releases the average CPP payment, maximum payment, and adjustment for inflation and cost of living annually to help Canadians better plan for retirement.
For the year 2021, the average CPP payment for new beneficiaries was $714.21 at age 65. The maximum payment is $1,203.75. The cost of living adjustment will increase payments by 2.7% in January 2022.
The Canada Pension Plan (CPP) uses a Statement of Contributions to keep a record of your pensionable earnings and your contributions to the CPP. You can use My Service Canada Account or contact Canada Pension Plan to get a copy of your Statement of Contributions. Your statement shows your total CPP contributions for each year and the earnings on which your contributions are based. It also provides an estimate of what your pension or benefit would be if you and/or your family were eligible to receive it now. The Statement of Contributions can assist you in your retirement planning.
In part, the reason one of the first questions in our Retirement and Savings Tool is the age at which you hope to retire lies in the CPP payment calculation. Because the target age of retirement is 65, there are penalties for receiving payments early, and rewards for delaying them.
You can apply for CPP payments as early as your 60th birthday. For every month you collect benefits prior to your 65th birthday, you’ll take a 0.6% reduction in your payments. This amounts to 7.2% per year, and could add up to as much as 36% if you begin collecting payments at age 60.
If you’re able to delay payments, you can actually collect more. For each month you wait after your 65th birthday, you will get an extra 0.7%, working out to 8.4% per year. If you work until age 70, this amounts to 42% over the course of the five years. There is no financial incentive to waiting until after age 70 to collect payments, as this is the definite end of the contributory period.
What if you delayed payments by one month, i.e. from December 2021 to January 2022?
The large increases described earlier in the CPP/QPP earnings cap will benefit retirees. Individuals who start claiming their pension in 2022 or later will receive a higher payment for life. That’s because the government uses the YMPE of the year in which an individual starts to receive their pension to calculate their benefit.
For example, someone who turned 65 in November 2021 and is eligible for the maximum benefit would receive a first payment of $1,203.75 in December 2021. That amount would increase to $1,236.25 starting in January 2022 due to the annual inflation adjustment to CPP payments.
Now consider if that person waited one month to claim their CPP. They would receive approximately $16.00 more per month for a total of $1,252.46. This increase is due to the higher earnings cap for 2022 and a small increase for the one-month deferral.
That one month delay does involve a tradeoff. It would take approximately six years for the individual who deferred CPP payments by just one month, from December, 2021 to January 2022, to end up in the same position overall and recoup the value of the December 2021 payment. An unhealthy person may not live that long. If they need the money now, start payments earlier.
The final factor in the amount of your CPP payments is the new enhancement period. Previously, the average payment covered about one-quarter of the contributor’s average income up to the CPP threshold while they were working. With the new CPP enhancement, the payments will gradually increase to cover one-third of a person’s average working income. However, this will not apply to earnings collected prior to December 31, 2018 because the enhancement began on January 1, 2019. The full CPP enhancement will be paid to workers who make enhanced contributions for 40 years. The enhancement is really geared to benefit younger workers.
How Much Can You Expect from Old Age Security?
Old Age Security (OAS) is intended to help support people age 65 and older. OAS amounts are not tied to employment — instead, it’s tied to the amount of time you lived in Canada following your 18th birthday. Eligibility is generally determined by Canadian citizenship or legal residency status in Canada and the length of time in which you resided in the country (10 years if you still live in Canada, and 20 years if you no longer live in Canada). If you receive Old Age Security (OAS), the OAS repayment threshold is set at $81,761 for 2022, meaning your OAS will be reduced in 2022 if your taxable income is more than this amount. It is fully eliminated once you have taxable income over $133,141.
Because the amounts change quarterly, you should always check with the official website for the current OAS pension payments.
Do You Have a Pension?
If your employer offers a pension plan, it may affect the amount you need to save for retirement. There are two different types of pension plans employers can offer: defined contribution and defined benefit.
Defined contribution pension plans involve setting an amount the employer and the employee agree to contribute each year, based on the employee’s annual earnings. This helps reduce the amount you need to contribute to your retirement savings because your employer is footing a portion of the bill. Upon retirement, the employee can transfer these funds into a registered retirement income fund (RRIF), or purchase an annuity (this must be done by the end of the year in which you turn 71).
Defined benefit pension plans are structured differently, in that the employer agrees to pay the employee an annual amount after they retire. This amount depends on how long the employee worked, how much they were paid annually during that time and which earnings count towards the calculation.
Employers can set up a plan that stipulates how many years will be averaged into this pension amount — some plans average the top three years of earnings, whereas others may average the last three years, regardless of whether those years were the highest earnings. The pension is then calculated based on the number of years worked and a percentage of that average.
The Government of Canada gives the following example: Winnie’s employer chooses a plan that averages the highest three years of earnings, which comes to $65,000 and then takes 1.2% of the average, multiplied by the number of years she worked (40).
Therefore, we’d use the following equation: $65,000 x 1.2 x 40 = $31,200.
Winnie can expect $31,200 per year from her employer’s pension plan after retirement.
Do You Expect to Have Other Forms of Income in Retirement?
You may have non-registered investments that can provide you with an income stream.
If you own properties that you rent or lease to others, or expect to receive payments from business investments, these could be additional forms of income that could potentially reduce the amount you’d need to save for retirement.
Additionally, if you opened a registered retirement savings plan (RRSP), you can convert it into an RRIF, purchase an annuity, or cash it in (and pay taxes on the entire amount all at once). These plans would help provide you with additional income.
Our Retirement and Savings Tool can help you determine how much income you’ll have in retirement based on your current savings and income estimations, and how much more you need to contribute to reach your goal.
You may use a Tax Free Savings Account (TFSA) to save money for retirement and withdraw money from this savings plan on a tax free basis. Income coming out of a Tax Free Savings Account is not counted as income for government income tested benefits and tax credits. For example, this means that this money does not impact the amount of income you may be eligible for under Old Age Security (OAS).
Do You Expect High Medical Costs?
If your medical history (or your family’s) gives you reason to believe you may need a fair amount of health care in your older years, you’ll want to plan accordingly. While the provincial and territorial health plans should cover your basic needs, you may find that a supplemental insurance policy will help you reduce your out-of-pocket costs.
If that’s the case, you’ll want to make sure you have enough monthly income to cover your monthly premiums, in addition to your annual deductible and any other expenses, such as prescription fees or copayments.
What Do You Expect to Do in Retirement?
For many people, retirement is a time to do the things that they really have wanted to do throughout their lives. Some people want to relax after decades of hard work, so they choose to stick close to home. They may want to garden, visit with family, help take care of grandchildren, and join a book club. Others want to use their newly discovered free time to travel the world and see new things.
These are perfectly wonderful things to do in retirement, but there can be quite an expense disparity between them particularly when you consider how you want to do these things (first class or on the cheap). Sticking close to home (especially if your home is paid off) is far cheaper than traveling, so if you know you want to travel in retirement and in what style you want to travel, you will need to take this into consideration for your retirement income needs. And don’t forget, you’ll also need to purchase travel medical insurance if you’re planning to leave the country. Travel insurance is particularly important for older travellers as they may be more likely to need medical attention than younger travelers.
Getting Retirement Planning Help
If retirement planning seems overwhelming for you, you don’t have to do it alone.
Check out the Empire Life Retirement and Savings Tool. It’s simple, it’s fast, and it’s easy. Share the results with your advisor and get the conversation started. If you don’t have an advisor, we can connect you with an advisor.
1 Source: Life expectancy in North America; statista.com/statistics 2018