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Planning and saving for retirement. Determining how much you need for retirement, when and how to start saving and how inflation may affect your retirement. Sources of retirement income. Public pensions, OAS, CPP, employer pensions, RRSPs and other sources of personal savings.
Aug 9, 2023 · We've got it covered with our retirement planning tips, which includes how much to save for retirement, when to start saving, and how to save money.
- Jordann Brown
Your Canada Pension Plan (CPP) payments are based on how much and for how long you have contributed to the Plan, and on the age when you decide to start collecting your CPP retirement pension. To know how much you have contributed, you can access your “CPP Statement of Contributions” through My Service Canada Account or request it by mail.
- Overview
- How Much Do You Need to Save for Retirement?
- Factors to Consider
- Understand Your Time Horizon
- Determine Retirement Spending Needs
- Calculate After-Tax Rate of Investment Returns
- Assess Risk Tolerance v Investment Goals
- Stay on Top of Estate Planning
- What Is Risk Tolerance?
- How Much Should I Save for Retirement?
multistep process that evolves over time
To have a comfortable, secure—and fun—retirement, you need to build the financial cushion that will fund it all. The fun part is why it makes sense to pay attention to the serious—and perhaps boring—part: planning how you’ll get there.
Retirement planning starts with thinking about your retirement goals and
how long you have to meet them
Then you need to look at the types of retirement accounts that can help you raise the money to fund your future. As you save that money, you have to invest it to enable it to grow.
The last part of planning is taxes: If you’ve received
Before anyone starts crunching the numbers on their retirement goals, they will need a good idea of how much
money they need to save
Naturally, this will depend on many situational factors, such as their annual income and the age when they plan to retire.
While there is no fixed rule about how much money to save, many retirement experts offer rules of thumb such as saving about $1 million, or 12 years of one's pre-retirement annual income. Others recommend
, which suggests that retirees should spend no more than 4% of their retirement savings each year in order to ensure a comfortable retirement.
Since everyone's circumstances are different, it is worth sitting down to calculate the ideal retirement savings for your own situation.
As you begin to think about retirement, it is worthwhile to consider some of the factors that will affect your retirement goals. For example: what are your family plans? For many people, starting a family is a central life goal, but having children can also put a large dent in your savings. For that reason, the type of family you hope to have will play a factor in your retirement planning.
Likewise, it is also worth thinking about
, including any changes to your home or residence. Many people dream of
, and while it can be an exciting adventure, extensive travel will eat away at your retirement savings faster than staying at home. On the other hand, moving to a country with an extremely low cost of living may allow you to stretch out your savings while enjoying a high living standard.
Your current age and expected retirement age create the initial groundwork for an
The longer the time from today to retirement, the higher the level of risk that your portfolio can withstand. If you’re young and have 30-plus years until retirement, you can have the majority of your assets in riskier investments, such as stocks. There will be volatility, but
stocks have historically outperformed other securities
, such as bonds, over long time periods. The main word here is “long,” meaning at least more than 10 years.
Additionally, you need returns that outpace inflation so you can maintain your
during retirement. “Inflation is like an acorn. It starts out small, but given enough time, can turn into a mighty oak tree,” says Chris Hammond, a Savannah, Tenn., financial advisor and founder of
will help you define the required size of a retirement portfolio. Most people believe that after retirement, their annual spending will amount to only 70% to 80% of what they spent previously.
Such an assumption is often proven unrealistic, especially if the mortgage has not been paid off or if unforeseen medical expenses occur. Retired adults also sometimes spend their first years splurging on travel or other bucket-list goals.
“For retired adults to have
, I believe that the ratio should be closer to 100%,” says David G. Niggel, CFP, ChFC, AIF, founder, president, and CEO of Key Wealth Partners LLC in Litilz, Pa. “The cost of living is increasing every year—especially healthcare expenses. People are living longer and want to thrive in retirement. Retired adults need more income for a longer time, so they will need to save and invest accordingly.”
Once the expected time horizons and spending requirements are determined, the
after-tax real rate of return
must be calculated to assess the feasibility of the portfolio producing the needed income. A required rate of return in excess of 10% (before taxes) is normally
, even for long-term investing. As you age, this return threshold goes down, as low-risk retirement portfolios are largely composed of low-yielding fixed-income securities.
If, for example, an individual has a retirement portfolio worth $400,000 and income needs of $50,000, assuming no taxes and the preservation of the portfolio balance, they are relying on an excessive 12.5% return to get by. A primary advantage of planning for retirement at an early age is that the portfolio can be grown to safeguard a realistic rate of return. Using a gross retirement investment account of $1 million, the expected return would be a much more reasonable 5%.
Depending on the type of retirement account that you hold, investment returns are typically taxed. Therefore, the actual rate of return must be calculated on an after-tax basis. However, determining your tax status when you begin to withdraw funds is a crucial component of the retirement planning process.
Whether it’s you or a professional money manager who is in charge of the investment decisions, a proper portfolio allocation that balances the concerns of
and returns objectives is arguably the most important step in retirement planning. How much risk are you willing to take to meet your objectives? Should some income be set aside in risk-free
You need to make sure that you are comfortable with the risks being taken in your portfolio and know what is necessary and what is a luxury. “Don’t be a ‘micromanager’ who reacts to daily market noise,” advises Craig L. Israelsen, Ph.D., designer of 7Twelve Portfolio in Springville, Utah.
“'Helicopter’ investors tend to overmanage their portfolios," Israelsen adds. "When the various mutual funds in your portfolio have a bad year, add more money to them. The mutual fund you are unhappy with this year may be next year’s best performer—so don’t bail out on it.”
is another key step in a well-rounded retirement plan, and each aspect requires the expertise of different professionals, such as lawyers and accountants, in that specific field. Life insurance is also
an important part of an estate plan
and the retirement planning process. Having both a proper estate plan and life insurance coverage ensures that your assets are distributed in a manner of your choosing and that your loved ones will not experience financial hardship following your death. A carefully outlined plan also aids in avoiding an expensive and often lengthy probate process.
Tax planning is another crucial part of the estate planning process. If an individual wishes to leave assets to family members or a charity, the
of either gifting or passing them through the estate process must be compared.
A common retirement plan investment approach is based on producing returns that meet yearly inflation-adjusted living expenses while preserving the value of the portfolio. The portfolio is then transferred to the beneficiaries of the deceased. You should consult a tax advisor to determine the correct plan for the individual.
Risk tolerance is how much of a loss you’re willing to endure within your portfolio. Risk tolerance depends on a number of factors, including your financial goals, income, and age. Many retirees prefer to
move into more conservative types of investments
One rule of thumb is to save 15% of your gross annual earnings every year. In a perfect world,
savings would begin in your 20s
- Julia Kagan
- Update your budget as a retiree. Your spending habits and expenses may be different than they were before you retired. It’s important to regularly review your budget as your needs and lifestyle change.
- Decide when to apply for public pension benefits. Most Canadian seniors and retirees are eligible to receive income from Old Age Security (OAS) and the Canada Pension Plan (CPP) or the Quebec Pension Plan (QPP).
- Consider the tax deductions and credits you may be eligible for. You may be eligible for tax deductions and credits even if you’re receiving a public pension.
- Review and update your insurance coverage. Check your insurance coverage in retirement to make sure that it suits your current needs and lifestyle. Learn more about the different types of insurance.
Jan 17, 2024 · Applying these best practices of retirement planning to each phase of your life can help put you on track for the retirement of your dreams.
Sep 4, 2024 · There are a few steps to making a financial plan for retirement, starting with how much money you'll need and your own priorities, then moving on to what kind of account you want, where to open...
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