With today’s long life expectancies, your retirement could end up lasting 20 to 30 years — roughly the same length of time you spend in the workforce. Make those years truly golden with a solid retirement plan.
What is retirement planning?
Retirement planning is the process of identifying your retirement goals and then deciding which actions to identify and prioritize. There are two ways to get there: accumulation and cash flow.
Accumulation
Accumulation happens when you actively save and grow your money through RRSPs, mutual funds, savings accounts and more. This phase of retirement planning happens while you’re still working and earning a paycheque.
Cash flow
Depending on your investments, you could generate cash flow in retirement through real estate, bonds or GICs.
How to start planning for retirement
There are 4 simple steps you can take to start planning for retirement:
1. Set your retirement goal
Think about what your dream retirement looks like. Will you travel the world? Start a passion project? Spend more time with family?
Having a clear picture of your life during retirement will help you figure out how much money you’ll need to fund it.
Start by calculating how much money you’ll need for retirement. Then decide if you can realistically save that much given your age and potential retirement date.
If it’s out of reach, consider adjusting your expected lifestyle until you find a happy medium. This could include pushing back your retirement date so you have more time to save, downsizing your home, or relocating to an area with a lower cost of living.
How much money will I need in retirement?
Follow these 2 steps to calculate how much money you need for retirement:
Decide what you want your annual retirement income to be
Divide that number by 4%
This number tells you how much you need in savings to comfortably withdraw 4% a year.
Use the chart below to quickly spot how much you need to save based on various incomes:
If you want your annual income to be this much in retirement…
… then you need to save this much*…
$40,000
$1 million
$50,000
$1.25 million
$60,000
$1.5 million
$70,000
$1.75 million
$80,000
$2 million
*Based on a 4% withdrawal rate
2. Choose your retirement assets
There are many types of assets you can use to fund your retirement. But you’ll maximize your cash flow if you use a mix:
Canada Pension Plan (CPP). Start collecting CPP as early as 1 month after you turn 60, but your monthly payout increases the longer you wait until age 70.
Retirement accounts. Save for retirement using tax-deferred plans like RRSPs, RRIFs, RSPs or RDSPs. Or open a tax-exempt account, such as a TFSA.
Investment accounts.Invest in stocks, bonds, mutual funds and more through a taxable investment account and use the money to fund your retirement.
HSAs. In Canada, business owners can cover medical expenses for themselves, their employees and their employees’ families by paying through a Health Spending Account (HSA). HSA plans must adhere to the CRA’s rules for private health services plans (PHSP). Not all employers offer this, but if you’re eligible for coverage under a family members’ HSA, you may be able to have some of your non-provincially insured medical expenses covered.
Annuities. These are a type of insurance that turns a lump sum of money into a consistent stream of income for a set period.
Pensions. The CPP offers guaranteed income, but many people pair this with additional savings in the form of an RRSP or other employer-sponsored plans.
Home equities. Take out a home equity line of credit and borrow the funds all at once or over time.
Reverse mortgages. Retirees at, or over, 55 years old can pull equity out of their current homes and use it for cash flow.
3. Protect your retirement assets
There are many unexpected risks that threaten your retirement savings. Put a plan in place to protect your assets from any curveballs life may throw your way:
Inflation. With a retirement that could last 20 to 30 years, inflation remains a major threat to your nest egg. Make sure your investment strategy balances protection and growth.
Unexpected medical bills. Consider buying long-term care insurance to help cover the rising costs of assisted living facilities, home health aides, nursing homes and more.
Creditors. Protect your savings from creditors by maximizing out RRSP contributions, which are often protected from general creditors.
Lawsuits. If you lose a lawsuit, a creditor can’t go after funds held in a RRSP or RRIF according to the federal Bankruptcy and Insolvency Act (or pension legislation for locked-in RRSPs and locked in RRIFs).
Taxes. You’ll minimize your tax burden by creating a tax-efficient withdrawal strategy that balances a mix of tax-deferred and tax-exempt accounts each year.
4. Plan your retirement distributions
A tax-efficient withdrawal strategy will keep more money in your pocket as you move through retirement. Ideally, you want to use a mix of CPP, tax-deferred and tax-exempt accounts each year. This keeps your taxable income low, which will save you money when you file taxes.
For some retirement assets, like TFSAs, you can delay withdrawing funds as long as you’d like. But RRSPs require you to take minimum distributions once you hit 71, at which point RRSPs must be converted to RRIFs, annuities or lump sum payments. Funds from an RDSP must be withdrawn once the beneficiary becomes 60 years old.
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Retirement planning for each stage of life
Your retirement planning needs to shift as you get older. This should be your main focus at 3 different stages of life:
Young adulthood
When you’re starting out in your career, money is tight and retirement seems ages away. But time is on your side. Every little bit you save has decades to compound and earn interest. That’s why saving should be your number one priority — even if you can’t save much.
Take advantage of any employer-sponsored retirement plans, including RRSPs. Many employers match contributions to these accounts, which puts even more money in your pocket.
You should invest at least enough to get 100% of your employer’s match each year. The maximum tax-deferred RRSP contribution rate in 2021 is 18% of your income up to $27,830. The maximum tax-exempt TFSA contribution amount in 2021 is $6,000—note that unused contributions can carry over to future years.
How long does it take to double your money with compound interest?
The Rule of 72 is a little trick you can use to quickly calculate how long it’ll take you to double your money. Simply divide your interest rate by 72 and you’ll roughly have the number of years it’ll take you to double your money.
To put this in perspective, let’s look at an example.
If you invest $10,000 in an account earning 7% interest and never added a single penny more, you’d have this much money at age 65:
If you invest $10,000 at this age…
…you’ll have this much money at age 65…
25
$149,744.58
35
$76,122.55
45
$38,696.84
55
$19,671.51
Middle adulthood
Middle adulthood presents its own unique challenges. You’re making more money, but you also have more financial responsibilities. You may have kids, a mortgage, student loan debt and more.
Your main focus should be on:
Maxing out your retirement accounts each year
Making sure you have adequate home, life and disability insurance coverage
Taking advantage of an HSA if your employer offers one
Late adulthood
Once you hit late adulthood, you want to laser in on your retirement goals and identify any holes in your plan. If you’re off track, now is the time to figure out what actions you need to take to catch up.
Keep in mind that your investment accounts should be more conservative than they were early on. Here are a few tips to help supercharge your retirement account:
Fully fund your retirement accounts each year. Contribute the maximum amount as soon as possible.
Take advantage of carry forward amounts and contribution matching. If unused room in your retirement account carries forward to future years, make sure you increase your contributions. If your employer or the government matches contributions to your account, save as much as you can as early as possible to give your savings the maximum amount of time to grow.
Aggressively pay down debt. Eliminate debts with high interest rates so you can focus on building your nest egg.
Slim down your monthly budget. Look for ways to find extra money to put towards retirement, including canceling subscriptions or memberships you don’t use, refinancing your mortgage or lowering your insurance premiums.
This is also the best time to look into long-term care insurance and calculate how much your Social Security payout will be.
Do I need a financial adviser?
There are many moving pieces to the retirement planning puzzle. During your working years, there’s a focus on calculating how much money you’ll need in retirement and how to save it. Once you enter into retirement, it shifts as you begin to focus on tax-efficient withdrawal strategies to ensure you don’t run out of money.
In complex situations like these, it may be best to hire a financial adviser who can provide professional retirement planning advice. People who work with an adviser could see a 1% to 3% increase in their portfolio’s value as opposed to those who don’t.
The cost of a financial adviser varies. Some charge flat fees ranging from $1,000 to $5,000 a year. Others charge a 1.25% to 1.75% fee based on your total assets under management.
Robo-advisors are a cheaper alternative to human advisers. Some don’t charge any fees at all while others charge 0.30% and beyond.
Before you decide to hire someone, weigh the complexities of doing it yourself against the fees and expertise of an adviser or robo-advisor.
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Bottom line
Proper planning is key to a happy retirement. Whether you’ve recently started your career or are a seasoned pro, it’s never too late to put a plan in place.
If you’re looking for expert guidance on how to prepare for your ideal retirement lifestyle, consider hiring a reputable financial adviser.
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Cassidy Horton is a freelance personal finance copywriter and past contributing writer for Finder. Her writing and banking expertise have been featured in Forbes Advisor, Money, The Balance, Money Under 30, Insure.com, and other top digital publishers. She holds a BS in public relations and an MBA from Georgia Southern University.
CMC Markets provides online trading services to Canadian customers who can enjoy low commissions and the features of an award-winning trading platform.
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