Retirement planning in Canada can look different for each of us, but making a plan is the first step towards reaching your goals. There are several steps to take during different phases of your life and getting started as early as you can is your best bet for meeting all the requirements of your plan.
Because retirement planning can get overwhelming, following a guide and setting goals on a step-by-step basis is a good idea. Once you figure out what you want your golden years to look like, follow these steps and follow the path to retirement. For some, this will mean playing the stock market, while others will choose to live frugally and save every penny, and still others will gradually, methodically, and pointedly add to their nest egg.
The point is to get started. And this guide can help.
When to start planning for retirement
It’s a fairly well-known fact that you should begin your retirement planning as early in life as possible, and this is still true. However, the concept of retirement has changed significantly in recent years, so what you envision in your younger years as you begin making plans may be quite different than what you end up with.
As of 2019, the average Canadian lives to reach 82 years of age, and the number of people reaching the age of 100 is continually growing. And, naturally, if we live longer than planned, we’ll need more money than planned.
An article from the Financial Post in 2019 mentioned that it’s likely that many Canadians will outlive their retirement savings – by 10 whole years (you can read the entire article here: Canadians are living longer and it’s changing the financial equation for retirement).
Age isn’t the only factor here, though. Parents are helping support their children even in adulthood now, whether it be with small loans, cash gifts, housing, or other methods of support. Plus, people are continuing to work past the typical retirement age – one study on Working After Age 65 found that 24% of people between the ages of 65 and 70 are still working.
All of this considered, you should still begin planning retirement as soon as you’re able, but you may want to reassess your goals occasionally as your life progresses.
Why is retirement planning important?
First and foremost, retirement planning is important because it will (hopefully) ensure that you don’t run out of money and/or become desperate in your later years, especially since many Canadians face declining health in later years, making it harder to work full time.
Planning and saving early means taking advantage of compound interest – the more money you have in savings, the more you can earn in interest. And the more you earn in interest, the more savings you have. This means that even if you’re only able to set aside $50 each month when you’re 25 years old, by the time you reach retirement age, this amount will have grown substantially. And it will have experienced more growth than if you only started that $50 savings plan at the age of 45.
But there’s another, even simpler reason for retirement planning: nobody but you can really know what you want your golden years to be like. You want to make sure that your retirement lifestyle is comfortable, manageable, and fun! And to make this happen the way you want it to, you’ll have to do at least a bit of planning.
Steps for planning for your retirement
The first step in planning for your retirement is to decide when you’d ideally like to retire, then you can start considering how to make that happen. There’s no universally perfect time to retire, and there are many factors unique to your situation in life that will determine when and how you retire, but having a goal in mind is important.
But this isn’t the only step, of course. Here’s how we would order the steps of retirement planning, but the first couple can be rearranged as you prefer:
- Decide on the age at which you’d like to retire.
- Make a plan for what retirement looks like for you, including where you’ll live, whether you’ll keep working, any travel you’d like to do, etc.
- Calculate how much money you’ll need in order to maintain your desired retirement lifestyle.
- Decide how much you’ll need to set aside each month in order to reach your retirement savings goal.
- Choose the right savings plans, investments, and accounts to work with your goals.
- Begin and continue to save.
Keep in mind that life has a way of throwing curveballs, so checking in on your goals is wise. This way, you’ll be able to readjust your goals and plans accordingly.
Stages of retirement planning
Now that you know the steps for retirement planning, let’s consider which steps should be tackled during certain stages of your life. These are just suggestions, of course, but they should fit most Canadians’ lifestyles and timeframes.
In early adulthood
This is when you should sit down and plan out what you’d like your golden years to look like. And, as we mentioned, beginning your planning and savings early can make a big difference, so you’ll want to get started in your youth.
Of course, it’s during your early working years that you’ll have significant financial strains, like student loans and mortgage payments, so you may not be able to put much aside for retirement for a while. At this point in life, beginning the habit of saving can be more important than the amount you actually save.
The Scotiabank MomentumPLUS Savings Account offers a unique way for clients to save by rewarding you for not making any withdrawals within a certain period of time – 90, 180, 270, or 360 days. And you can move funds around to your other Scotiabank accounts as much as you want, with no fees, so you won’t be without access in an emergency.
On top of a standard savings account, take the time to look at various retirement plans (which we’ll discuss more in a later section), study the details, and choose the one(s) that you feel are best suited to help you reach your goals.
The midlife years
Between the ages of 30 and 50 are when people spend a lot of time building their lives. Homes are purchased, careers are solidified, children are born, and memories are made. But for those who started early, continuing to add to any retirement accounts should be relatively easy – it’ll be like a habit.
You’ll hopefully be settled in a good job within your chosen field at this point, earning a comfortable living. This means you should also be working hard to invest and save for the future. Because you’re making a better salary now means that you should have a bit more to add to your retirement plans.
Also, be sure to take advantage of any group pension plans provided.
Many midlifers turn to online brokerages to help manage their investments. Wealthsimple managed investing is one of the top online brokerages for Canadians thanks to several factors, like the top security measures it has in place, its easy-to-understand fee system, and the ease of its automatic, set-it-and-forget-it style of investing.
Approaching your retirement
Once you’re at the age where retirement is within arms reach, many of your biggest expenses (mortgage, student loans, etc.) will likely be paid off, leaving you a bit more money that can be put into retirement savings.
At this point, you’ll have a better idea of what your government benefits will look like, so taking the time to figure out what kind of CPP, OAS, and/or other seniors benefits you’ll get is a good idea.
You’ll also have a better idea of precisely how you’d like to spend your retirement, so it’s a good time to revisit your original goals. You can make relatively final decisions about whether or not you want to keep working, either full or part-time, where you want to live, if you want to travel at all, etc, and can adjust your plan accordingly.
During this time you should also consider your health insurance options for retirement.
How much money do you need
Many financial authorities have plans and formulas for figuring out how much money you’ll need to retire, with one of the most popular being the “70% Rule.” This rule says that you’ll need approximately 70% of the income that you had during your working years. The 30% difference can be chalked up to decreased commuting costs, not needing to support a young family anymore, and lower rent or mortgage payments as you’ll likely be in a smaller home.
For example, if you have an annual salary of $65,000, you’ll need to have $45,500 saved for retirement – that is, 70%. Or if you make $130,000 per year, your 70% savings goal should be $91,000.
But whether you use the 70% Rule or not, you’ll need to take some time and plan a budget for your retirement – budgeting software can come in very handy for this. Besides the usual expenses related to daily living, be sure to include the following categories in your calculations:
- travel,
- vacations,
- entertainment,
- hobbies,
- fitness,
- social and leisure memberships (country club, ski membership, sports fees, etc.)
- gifts and charitable donations, and
- healthcare costs.
Many people have these included in their budgets in their pre-retirement lives, but they become more significant once you have more time and financial freedom to pursue recreational activities. Of course, healthcare costs aren’t exactly a recreational expense, but it’s very important to consider this in retirement since you’ll no longer have group insurance through your employer.
Aside from budgeting categories, though, you’ll also need to consider details like the value of your investment portfolio, interest rates, and more so you’ll know what your actual financial situation will look like in your golden years. Our retirement savings calculator can help make this task a bit easier.
Types of retirement plans
There are several types of retirement plans – often referred to as pension plans – available to Canadians, including group plans, personal plans, and government benefit plans. Knowing how these plans work and understanding the sources of retirement income available to you will help you properly plan and budget for your retirement.
This table gives an overview of the most common types of retirement plans in Canada.
| Type | Details | Pros | Cons | Learn more |
|---|---|---|---|---|
| Defined benefit pension plans (DBPP) | * Group plan, provided by an employer * One of the most common types of pension plans * Uses information like the number of years you’re with the company, your average salary, an agreed upon percentage multiplier to calculate contributions * Professionally managed |
* Guaranteed, fixed income * Your employer is responsible for making investments, not you * Sometimes protected against inflation * Can employ income splitting (before age 65) * Professionally managed funds means maximum returns |
* Can make it more difficult to leave your employer * No control over your own investments * Can be expensive to maintain * Is not transferable * Not commonly available anymore |
Employer-sponsored pension plans |
| Defined contribution pension plan (DCPP) | * Group plan, provided by an employer * You, the employee, assume the investment risk * Employers may match contributions, but aren’t required to do so * You’ll know what you’re contributing but not what you’ll ultimately receive in retirement * Contributions are limited by the RRSP limit (18% of employment income up to the max) |
* You decide (if the plan allows) how and when to invest * You get to choose the investment types * Vested immediately, so you aren’t tied to the program or your employer * Contributions aren’t considered income for tax purposes (because they’re made by the employer) |
* You, the employee, assume all risk * Limited investment funds to choose from * Requires significant self discipline * Little flexibility since funds are usually locked in * No inflation protection |
Employer-sponsored pension plans |
| Pooled registered pension plan (PRPP) | * Group plan specifically for employees/self employed individuals who don’t have access to a workplace
pension * Called a Voluntary Retirement Savings Plan (VRSP) in Quebec * Your assets are pooled with others participating in the plan, resulting in lower admin costs * Contributions must adhere to your RRSP limits |
* Available for an often overlooked demographic * Low fees, including admin costs * Can bring the plan with you even if you switch employers * Contributions may be matched by the employer (but do not have to be) * Attractive for employers as it requires minimal costs and responsibility |
* Employer contributions are not mandatory * Susceptible to market drops * Not as accessible or easy to navigate as other options * Not available in all provinces * Income splitting not available |
Employer-sponsored pension plans |
| Registered retirements savings plan (RRSP) | * Personal plan * Registered with the federal government * Individually managed by you, the account holder * Holds various investment types of your own choosing * Subject to federal rules regarding contributions and withdrawals |
* Tax-free withdrawals available for certain situations * Contributions are tax deductible * Holds a wide variety of investment types * Protected from creditors * Allows for tax-free growth |
* Contribution room is income-based * Making an early withdrawal means you lose contribution room * Can affect eligibility for federal benefits * Mandatory withdrawal before the age of 72 |
Registered Retirement Savings Plan |
| Tax-free savings account (TFSA) | * Available to anyone for any reason, not just for retirement * There are limits for how much you can contribute each year, but no lifetime limit * Holds various investment types of your own choosing |
* Provides tax-free investment growth * Withdrawals can be made at any time and without penalty * Contributions are not limited by income amounts * No end date or mandatory withdrawals * Doesn’t affect federal benefits |
* Contributions aren’t tax deductible * Not protected from creditors * You’re responsible to keep track of your own contributions * No spousal TFSA option (unlike an RRSP) * No limits/tax on withdrawals can make it too easy to use your savings |
The Tax-Free Savings Account |
| Canadian Pension Plan (CPP) | * A federal benefit program * Amounts you receive are based on your earnings, person CPP contributions, and when you being receiving payments * Can choose to receive payments as early as age 60 or as late as age 70 * Called the Quebec Pension Plan in Quebec |
* Available for all working Canadians * Can choose to begin payout earlier than retirement * Can continue contributions and receive payments while working during retirement * Able to combine with other government benefits |
* Unavailable to those who are unemployed * Maximum contribution limits are a hindrance for some * Deciding when to begin payouts can be complicated * Early payouts can result in a higher tax bracket * Early payouts can affect OAS benefits |
CPP Retirement pension overview |
| Old Age Security (OAS) | * A federal benefit program * Available for those age 65 and up * Monthly payments are provided to help seniors with living expenses * Funded by the government, not your personal contributions * Considered taxable income |
* Available for all Canadian residents (of at least 10 years) * Deferring can mean higher payment amounts * Income splitting is available * Able to combine with other government benefits |
* Clawbacks mean paying back amounts from the previous year * No option to receive payments early * Not available to those who’ve permanently left Canada * Not usually available for sponsored immigrants |
Old Age Security Overview |
| Guaranteed Income Supplement (GIS) | * A federal benefit program * Available for low-income earners who already receive OAS * Provided to those age 65 with low incomes * Not considered taxable income |
* Available for all Canadian residents (of at least 10 years) * Enrollment is usually automatic * Certain provisions are made for retirees who continue to work * Can be combined with other federal benefits and programs * Also provides a Spousal Allowance |
* The definition of “low income” is strict * Benefits can be significantly reduced as your income increases (clawbacks) * Not available to those who’ve permanently left Canada * Not usually available for sponsored immigrants * No option to recipe payments early |
Guaranteed Income Supplement: What these benefits offer |
As you can see, each group plan, personal plan, and government benefit has pros and cons, and some will be better suited to your personal needs than others. You can always consult a financial advisor if you’re unsure of which path is the right one for you.
Just be sure that you’re well educated on all the options before making any final decisions.
Scout out various programs, accounts, and options for retirees and seniors
When planning for retirement, you should also consider the numerous benefits and seniors discounts available for Canadians, such as low or no-free bank accounts and discounts on transit.
There are many municipal, provincial, and territorial-based services and programs for seniors, ranging from supplemented housing, to recreation and exercise groups, to transportation services.
For the financial aspect of your retirement, you may want to switch to a bank account that’s specifically for seniors as this can save you money and provide a few interesting perks. For instance, the Scotiabank Preferred Package offers:
- a seniors discount on the monthly fee,
- unlimited debit transactions,
- unlimited Interac e-Transfers, and
- a $700 welcome bonus for new clients.
If you’re not sure that this is the account for you, the government has a handy Account Comparison Tool you can use to find the one that fits your needs.
Have you already started retirement planning?
It’s true that beginning your retirement planning early can make the whole process much easier and allow you to enjoy your golden years the way you’ve always wanted. But the planning and implementation require dedication.
What do your retirement plans look like? How early did you start planning?
Feel free to tell us about your experiences in the comments section below.
FAQ
Can you tell me how to plan for retirement?
The basic steps for retirement planning include deciding when you’d like to retire, where you want to live, whether you want to continue to work, and making other decisions regarding your later years. You’ll also want to revisit your retirement plan from time to time and ensure that your plan still aligns with your goals.
When should I start planning for retirement?
We suggest that the first stage of retirement planning should take place during early adulthood, once you are gainfully employed and can put money aside for your later years, even if it is just a small amount. But even if you don’t start until later in life, there are still ways to make investments and outline a plan that will work for you.
What kind of retirement savings plan is best?
There isn’t one retirement plan that’s best for everyone, but reviewing information on all of the pension plans available to Canadians can help you choose the right one for you. You can review the list of common retirement plans here – some are group plans, provided through your employer, others are personal plans, and others are government benefit programs.
What are the first steps of retirement planning?
One of the first things you should do when planning your retirement is to decide when you’d like to retire. You should also consider where you’d like to live, whether you’d like to travel, and if you’ll continue to work full or part-time. You can read our list of retirement planning steps here.
Do I need a registered retirement savings plan?
No, you don’t need a registered retirement savings plan in particular, but you should look at the various types of retirement plans and choose one or more that will work for you. RRSPs are a very popular option for retirement savings, but other options may suit your needs better, or you may want to combine an RRSP with other types of investments.
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Comments
Hey Marpy,
Great points as always! Some living situations will definitely make investing harder than others, but it's still beneficial to start thinking about the future now, even if you can't afford to act on your plans just yet.
Thanks for your comment :)
Hey Carmela,
It definitely depends on their personal situation, you're right. The example given is meant to inspire action, and while entirely possible, it's not necessarily the norm.
It's all about recognizing your personal situation and what you can afford to invest. But it's better to start thinking about that sooner than later.