Snapshots / Published on .

How much do you need to save for retirement?

This is an essential financial planning question. Even so, this simple but vital consideration comes with secondary questions that you must answer. When or at what age do you expect to retire? How much will your public pensions provide? Should you prioritize an RRSP or a TFSA? And, most important, what do you want to do in retirement? What are your plans and dreams?

snapshots
How much retirement income will I need?

The most important part of retirement planning is to evaluate your plans and expenses. This analysis will allow you to calculate the amount of savings needed for retirement.

Generally, two methods are used: an income-based evaluation or a detailed budget-based evaluation.

Budget-based evaluation

Drawing up a budget is definitely the better method since it takes into account all your expenses and projects. It may include the trip of a lifetime, the purchase of an RV or a cottage, major home renovations or simply the end of your mortgage payments. The closer you are to your retirement date, the more relevant and advisable this exercise is.

Income-based evaluation

iIf you don’t have a specific budget, you can do an income-based evaluation. You should aim for income equivalent to 60% to 80% of your average gross annual income in the five years preceding your retirement. This approach should allow you to maintain your current standard of living.

couple

The higher your income, the closer the replacement percentage should be to 60% owing to higher taxation of gross income. If you’re more than 10 years away from retirement, this method has the advantage of simplicity. From this estimate, you can build a plan that will give you a frame of reference for the amounts you’ll need in retirement.

Importance of your savings vehicles

Your savings and investments will play a key role in the development of your retirement plan. To reach the required amount, you must choose investments on the basis of your financial reality and investor profile.

Basically, you can use three types of accounts. Your savings and withdrawal strategies will be influenced by their tax advantages, among other factors. Discover the different accounts:


RRSP

Ideal way to obtain
a tax deduction


Find out more


TFSA

A flexible vehicle to finance
your projects


Find out more


Non-registered account

Once you have maximized your
RRSPs and TFSAs


Find out more

Government retirement pensions

To do a proper calculation of the amount of savings needed for retirement, you’ll need to take into account recurring income from the provincial and federal public pension plans that you’ll be entitled to. Both plans will provide significant regular income until your death.

Régie des rentes du Québec (RRQ)

The amounts paid in retirement are determined by the contributions you make during your working life and your age at retirement. For a 65-year-old, the maximum annual payment in 2022 is $15,043.

Old Age Security (OAS)

The OAS program is universal and requires no contributions. The amount you receive is based on your years of residence in Canada. To be entitled to the full amount of $7,7071,  you must reside in Canada for 40 years between the ages of 18 and 65.

Case scenario

John is a 45-year-old engineer who wants to retire at 65. How much will he need to save to reach his goal?

  • Age: 45 
  • Years to retirement: 20 
  • Annual salary: $85,000
  • Debts : None
  • Mortgage: 100% paid
  • RRSP/TFSA: $300,000
Graph

To replace 70% of his annual income, John will need $59,500 in retirement income. Considering his current salary, he will be entitled to OAS and probably the full amount of the QPP2.  Thus, John will have to draw down $36,750 a year from his savings.

Assuming a 2% rate of inflation, a 30-year retirement and a 4% average annualized return on investments, he will need to save $18,270 a year to reach his goal of $1,2 million in investments to retire at age 653.

Make a plan and revisit it

As you can see, you need to consider quite a few factors when you calculate the savings required for retirement.

The key to success is to start early and to stay disciplined through the process. Your best ally is a personalized plan that takes into account your goals as well as your financial and tax situation.

Seeking guidance from an advisor is a wise way to prepare for your retirement.

Engineering professionals and their families can count on the Advisory Services team at FÉRIQUE Investment Services. The team members are just a phone call away and no appointment is needed. They’ll provide objective advice and investment solutions for every stage of your life.

You can also get started by using our online tool to create your savings goal!

questions? CONTACT FÉRIQUE INVESTMENT SERVICES

service-conseilAdvisory Services Team
Monday to Thursday 8 am to 8 pm, Friday 8 am to 5 pm
T 514-788-6485 Toll-free 1-800-291-0337
[email protected]


1 https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security.html
2 https://www.rrq.gouv.qc.ca/en/retraite/rrq/calcul_rente/Pages/calcul_rente.aspx
3 Based on gross taxable income. The calculation can be affected by withdrawals from a TFSA or other investments that will not be fully taxable.

FÉRIQUE is a registered trademark of Gestion FÉRIQUE and is used under license by its subsidiary, Services d'investissement FÉRIQUE. Gestion FÉRIQUE is an Investment Fund Manager and assumes management duties in relation to the FÉRIQUE Funds. Services d'investissement FÉRIQUE is a Mutual Fund Dealer and a Financial Planning Firm, as well as the Principal distributor of the FÉRIQUE Funds. Please note that for commercial purposes, Services d'investissement FÉRIQUE is also known in English as FÉRIQUE Investment Services.

There may be brokerage fees, trailing commissions, management fees and expenses associated with investment in the Funds. Management expense ratios vary from one year to another. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

The information contained in this article does not constitute an offer or a solicitation of any nature in any jurisdiction in which such an offer or solicitation would not be authorized or to any person to whom it would be illegal to make such an offer or solicitation. The information contained in this article does not constitute specific advice of a financial, legal, accounting or fiscal nature concerning investments. You should not act or rely on the information without seeking the advice of a professional.