fbpx
financial-planning

Financial Planning for Retirement: How Much Money Do I Need to Save?

Starting your financial planning for retirement can seem daunting. And while the Canadian government provides supplements like the Canada Pension Plan and Old Age Security, this generally is not enough for individuals once they retire from a full-time salary.

The minimal support leads people to seek other options for retirement savings, whether through their workplace savings plans or an individual account to which you can make contributions.

In this article, we will break down all the most common retirement savings plans and the pros and cons of each. But first, we want to start with a few essential tips and guidelines when financial planning for your retirement.

General Tips and Guidelines

How much should I save?

Experts recommend that individuals should save about 80% of their annual income for each year you plan on being retired. This recommendation means that if you currently make a salary of $80,000 a year, you should have about $64,000 saved for each year of retirement.

Don’t worry – this doesn’t mean that you have to live off of only $16,000 a year and save the rest for retirement. What this does mean though is that you should start investing in a smart retirement savings plan that works for you. Retirement savings plans will allow you to earn interest and compound your contributions over the years.

Start Early

Starting earlier means that you can save less each month and earn a more significant amount of compound interest on each item. Take this example from the Government of Canada website:

Years you have to saveHow much you need to save per monthAmount savedAmount of interest earned
With 20 years to save$181$74,400$30,960
With 10 years to save$480$74,540$16,940

Notice how, despite saving much more per month, the person with ten years to save only earns about half the amount of compound interest than the person with 20 years to save. The results show that both people end up saving almost the same amount, but the one with fewer years to save will have to save more money every month to catch up.

The lesson here is to start saving as soon as you possibly can. Even if you can only afford a two-digit figure per month, it’s better to put down that amount than wait until you can provide more later.

Think About Inflation

Remember the goods and services that are valued today at $100 will cost much more in the future. Inflation increases costs and reduces your buyer power over time.

So how do you know how much money to put away when the costs keep increasing? While we can’t predict the exact rate of inflation year over year, generally speaking, experts say to account for 2% inflation per year. Let’s see how inflation affects your retirement planning:

Let’s say your monthly fixed expenses add up to 50% of your monthly paycheck, and let’s say your annual income is $100,000.  That means you spend more or less $50,000 a year on fixed expenses. If you expect your fixed expenses to be the same expenses when you retire (let’s say 30 years from now), then your fixed expenses in retirement would account to:

$50,000(1.02)30
= $90,568

Work With Your Current Budget

You probably have a lot of other financial obligations to worry about, so it can feel stressful trying to juggle retirement savings on top of that. Remember that your savings plan should feel comfortable and work with your current lifestyle.

By entering your goals and prioritizing your needs, Finally will calculate precisely how much you need to put away each month to reach each of your goals. If your budget or your goals ever change, use our simulator to adjust your plan to keep more money in your pocket or increase your savings to fast track your financial goal.

Be Consistent

One of the most significant setbacks of reaching your financial goals is not maintaining a consistent plan.

Set up auto-deposits to go into your retirement savings account every month or from your bi-weekly pay cheque. Or better, you can let Finally do it for you.  This way, you don’t forget to make your contributions because it’s all automated.

If you’re a freelancer or receive sporadic payments, you may also want to try having a small percentage added to your savings for every deposit over a certain amount. Even though you’re not receiving a regular paycheque, you are still making a small contribution with every deposit.

Ways to Save for Retirement

There are endless ways to save for retirement in Canada, and weighing out all the options can be confusing and stressful. Below we have given you a quick breakdown of each type of retirement savings plan so you can plan for a better financial future.

RRSPs and TFSAs

Both of these savings accounts have significant tax advantages that help you save for the future.

The RRSP was created by the Canadian government to help individuals better save for their retirement. Canadians can contribute up to 18% of their income earnings for a maximum of $26,500 per year.

A TFSA is a personal savings account that allows you to save money for almost any purpose. People 18 years and older can save up to $6,000 per year in a TFSA.

For a breakdown of the pros and cons of each one, check out our blog post titled Knowing the Difference: RRSPs vs. RESPS vs. TFSAs.

Workplace Savings Plans

Many employers offer savings plans as part of their employee benefits packages which make financial planning for retirement much easier. If you are currently looking for a job, consider the retirement packages they provide. Here is a quick rundown of standard workplace savings plans:

Group RRSPs: These are the most common type of workplace savings plan where employees make contributions to the Group RRSP. Employees’ contributions are taken directly from their pay. Many employers will also contribute a certain percentage to the RRSP as well.

Defined Benefit Pension Plans (DBPP): The DBPP gives an absolute value to an employee’s future retirement benefit. The retirement benefit is based on a combination of salary and years of service. Typically, both employers and employees make contributions. DBPPs are structured to benefit long-term employees the most, giving retirees a guaranteed income, known in advance.

Defined Contribution Pension Plans (DCPP): With DCPPs, the future retirement benefit is unknown. What is known, however, is the amount of the contributions made to the fund. Employers will typically match the contributions of an employee.

Deferred Profit Sharing Plans (DPSP): This savings plan is similar to the DCPP, where employers distribute a portion of their income to employees. The difference is that employees do not add to a DPSP.

Pooled Registered Pension Plans (PRPP): This is a newer type of retirement savings plan that is a variation on the DCPP. PRPPs were designed for small business owners and self-employed entrepreneurs who want to reap similar rewards to employees of larger businesses. Smaller business owners can pool together resources with other companies for a more cost-efficient savings plan that benefits all parties.

Conclusion

There you have it. There are so many workplace savings plans to look for, retirement accounts to consider, and general guidelines to keep in mind when planning your retirement savings. The most important thing is that you have set a consistent, feasible financial plan that will help you work towards a more secure future.

If you are still feeling a little overwhelmed about financial planning for retirement, that is very normal. Let Finally help you create a financial savings plan to ease your stress in a matter of minutes for FREE. Sign up now.

Know someone that could use the financial tips shared in this blog? Share it on social media.

Don’t forget to connect with us on Facebook, Instagram, and LinkedIn.

Leave a Comment

Your email address will not be published. Required fields are marked *

Add Comment *

Name *

Email *

Website

Enjoy a better financial planning experience

Financial planning should be available to every Canadian, regardless of their financial situation. Finally, we are here to help you get where you want to be.