This Cheat Sheet summarizes some important factors to keep in mind when you're considering retirement plans like Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs).
Plan for inflation if you're retiring soon
A large cohort of Canadians are approaching or already in the 50+ age group. Most people in this group are beginning to think even longer and harder about retirement preparedness. If they’ve read this book, they likely already though about it!
While most Canadians retire from their last full-time job somewhere in their 60s, many need or want to take on part-time work after that. Regardless of what scenario you fall into, if you’re retiring in your 50s, 60s, or even beyond, you need to visualize and plan for the nasty little bug called inflation. (Okay, it’s a big bug!)
Assume that you’re retiring at the end of this year, you’re in your late 50s or early 60s, and your salary for this year is, for argument’s sake, $50,000. I keep it simple here.
According to an industry-embraced, albeit crude, 10:1 benchmark for retirement at a later stage in life, you should save $500,000 to hit the 10-times goal. Sound like a lot of money? It is, but it would provide approximately $30,000 a year of inflation-adjusted income over 25 years, which assumes:
- The average rate of inflation over the long-term is 3 percent.
- Only a small cushion will remain at the end of 25 years.
- You invest 50 percent of your nest egg in stocks and 50 percent in bonds during this period.
A yearly income of $30,000 may not sound like much or even be realistic to your situation but remember that your taxes will be lower when you retire, and you won’t need to save for retirement anymore. Your expenses will likely be less than when you were working.
Your income should also be supplemented by other savings, as well as any CPP and OAS benefits you receive from the federal government of Canada. Altogether, this could add up to provide you with an adequate or minimum level of retirement income.
What goes up — or inflation-adjusted income
What is inflation-adjusted income? Inflation is the rate at which prices increase over time. When you plan for your future, you have to plan for prices to go up; otherwise, you’ll run out of money too soon.
Inflation-adjusted income essentially refers to the purchasing power of your money — what your loonies can buy. If you achieved the $500,000 savings and $30,000 annual income goals I described above, your quest is not quite over. That’s because if over the next 25 years you want to be able to buy what will cost $30,000 today, you’ll need significantly more than $30,000. Huh?
You can’t know for sure what the inflation rate will be. Recently, it has spiked above 8 percent in Canada. No one knows how sustained inflation will remain, so you need to make an assumption. I use 3 percent, which is on the low side compared to today but realistic in the context of the last decade or two, and for long-range planning in my opinion.
The table below shows how much income is needed to keep up the buying power of $10,000 over the years. (Using $10,000 makes it easy to adjust to whatever income you think will be right for your situation.)
For example, you can calculate that you’ll need $60,984 in the 25th year of your retirement to buy what $30,000 will buy in the first year ($20,328 × 3).
| Number of Years After You Retire | Annual Income Needed |
| 1 | $10,000 |
| 2 | $10,300 |
| 3 | $10,609 |
| 4 | $10,927 |
| 5 | $11,255 |
| 6 | $11,593 |
| 7 | $11,941 |
| 8 | $12,299 |
| 9 | $12,668 |
| 10 | $13,048 |
| 11 | $13,439 |
| 12 | $13,842 |
| 13 | $14,258 |
| 14 | $14,685 |
| 15 | $15,126 |
| 16 | $15,580 |
| 17 | $16,047 |
| 18 | $16,528 |
| 19 | $17,024 |
| 20 | $17,535 |
| 21 | $18,061 |
| 22 | $18,603 |
| 23 | $19,161 |
| 24 | $19,736 |
| 25 | $20,328 |
Calculating when your retirement is farther off
I can hear you calling, “Hey, a little help over here . . . I’m not retiring tomorrow, so how do I know how much I’ll be earning the year before I retire?” Not to worry. That’s because as with so many things in life, you can find a tool online to develop a workable retirement plan.
The Internet hosts many financial organizations whose websites provide free retirement calculators and similar online tools. Some calculators figure out what you need to retire money-wise. Others help you budget and figure out future spending needs.
Remember that each calculator uses different methods and makes different assumptions; so different calculators can produce widely varying results. Check the assumptions each calculator uses to see if they make sense for you and your situation.
The major benefit of using a retirement calculator is that it gives you an investment reality check. Will the amount you’re saving and the investment mix you choose enable you to accumulate what you need? A good retirement calculator will answer this question and may also help you decide how to close any savings gaps.
Generally, you can close a gap by increasing your contributions, adjusting your investment mix and risk profile to achieve a higher long-term return, or a combination of the two.
Rather than listing the best retirement calculators offered by Canadian websites, I suggest that you check out the web sites of the financial companies you do business with or are familiar with.
I am willing to bet that almost all of them will have a retirement calculator in one way, shape, or form that will work for you. OK, I’ll cave in one time and ask you to check out Wealthsimple’s calculator.
The really super-powerful calculators are not free. However, your financial advisor will likely sport one of those so be sure to ask them to run those numbers, as often as you like. Just remember, the financial planner you choose to work with knows your personal situation; a website really doesn’t and never will.