Financial obligations are taking up more and more space in the lives of Quebecers. As we juggle mortgage and car payments, the children’s education and the daily lifestyle, we come to wonder if we will have saved enough money for retirement.
How much should you save each year to live a comfortable retirement? When you are still 15, 20, or even 25 years away from retirement, it can be difficult to estimate the amount to set aside annually.
By calculating the cost of your retirement now, you can determine the amount to save each year to get there more easily and have peace of mind!
Know the cost of the desired retirement
Before you can determine the amount to save each year for your retirement, it is important to calculate the cost of the desired retirement and to know all the other income on which you can count.
List your various sources of retirement income
In the past, many people have been able to base their retirement income largely on their employer’s pension funds. Today, the situation has changed a lot, and it is important to take advantage of all possible and available sources of income for your retirement. It will then be easier to determine the amount of money to be drawn from personal savings.
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Your employer’s pension plan
Employers still often cover a portion of retirement savings needs, whether through a group RRSP, the VRSP or one of the various defined benefit or defined contribution pension plans. One can estimate the retirement income they will provide by consulting one’s annual statements.
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Government public savings plans
Sources of income from public savings plans should not be overlooked, as they can constitute 30 to 50% of retirement incomeAttention, this link will open a new tab.Attention, this link will open a new tab.Attention, this link will open a new tab.Caution, this link will open a new tab.Caution, this link will open a new tab.Caution, this link will open a new tab.Caution, this link will open a new tab.Caution, this link will open a new tab.Caution, this link will open a new tab. tab.Attention, this link will open a new tab.Attention, this link will open a new tab.. These may be Old Age Security (OAS), Guaranteed Income Supplement (GIS) and Quebec pensions (QPP). Together, they form a non-negligible contribution to the retirement savings effort that the
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Own financial assets, other than savings
We must not forget the major assets accumulated throughout his life, such as his main residence or his chalet, which can generate significant income. Once retired, if the children have left home, it may be worth selling one of your residences or opting for a smaller property when you need less space.
Choosing retirement age and retirement style
Each retirement project is unique and everyone experiences it differently. Thus, in order to be able to calculate the cost, you have to take the time to define what you want to do with it. Some people will want to continue contributing to society by working differently, while still generating a small income, while others will prefer to stop altogether. The age at which you want to retire is also important, because stopping work at age 55 will require more savings than if you do so at age 65.
Calculate the cost of retirement
Most people will need 60-80% of their current income to live a comfortable retirement. Thus, a person with an income of $55,000 will have to rely on nearly $38,500, since he will have fewer expenses and will pay less tax and contributions. However, his annual expenses will vary during retirement, as activities and travel in the early years gradually give way to expenses for comfort and health care.
Succeed in saving for retirement
Once the cost of your retirement has been determined and the different incomes calculated, you can determine the amount to save personally in order to achieve your goals. To help you determine this amount, take advantage of our personalized budget tool.
Calculate the amount to save each year
The use of savings simulators, such as the FondsAttention, this link will open a new tab. or Retraite QuébecAttention, this link will open a new tab., will allow you to determine the amount to save annually to reach your retirement goal. The annual savings effort will vary greatly depending on the age at which you start saving, the performance of your savings and when you retire. For example, to achieve a personal savings goal of $200,000 at age 65, a 35-year-old worker will have to save close to $4,500 annually, if he receives a 5% return. However, a 45-year-old worker with the same objective will have to save more than $6,000 per year!
By creating several annual savings scenarios based on your current and projected capacity, you can determine how to distribute your efforts over time. It is recommended to be accompanied by a financial planner who can develop different strategies to maximize your annual savings.
Maximize all strategies to save
While the financial obligations are numerous, between the house, the car and the children, it can be difficult to make room for your retirement savings each year. The best way to do this is to revise your budget and set aside about 10%, or more if possible, for retirement savings. Payroll source deductions or direct debits can make things easier. The earlier you start, the less effort!
Bet on automatic savings
Automatic bank withdrawals allow you to adjust the amount you contribute to your RRSP according to changes in your financial situation and according to your needs. This strategy allows you to start saving now, rather than waiting until you have more money to do so. With regular direct debits, you put your money to work, without having to think about it!
And if you contribute to an RRSP+ at the Fund, it’s the automatic savings that gives you access to the 30% additional tax savings1. A distinct advantage to reach your retirement savings goal.
It can be very interesting to use unexpected or one-time income to reach your savings goals each year. For example, tax refunds offer a great opportunity to save without too much effort. You can even use the refund of contributions to an RRSP for one year to finance your contribution for the following year, and so on.
If it is difficult to save when one’s income is still low, then it may be wise to fully reinject each salary increase into retirement savings. You can thus maintain your standard of living while increasing your savings.
Although it can be tempting to pay off all your debt before you start saving, it’s not always the best option. It may be relevant to compare the interest rate of the debt to the rate of the tax deduction or to the estimated rate of return of the investment. In some cases, it can be beneficial to do both: contribute to your RRSP, for example, and apply the tax refund on the repayment of the debt. Each debt is a unique case whose advantages and disadvantages must be compared.
Leverage every year
When you want to save for retirement, every year counts and can make a big difference. By starting as soon as possible, you take advantage of the exponential return on your savings over time, thanks to compound interest. A simple way to reduce effort and let time work for you.
For example, a person contributing $5,000 per year for 25 years will have accumulated nearly $188,000 with a return of 3%, or $63,000 more in return. However, starting barely 5 years later, she will have accumulated $138,000 and a little more than half the return, or $38,000.
In addition to saving each year for retirement, you have to make sure you get a good return. For example, a 6% return, instead of 5%, on an annual savings of $5,000 for 25 years can accumulate more than $32,000 without any additional effort. A simple 1% increase can change everything… This is also why it is important not to pay high management fees and to compare the return on your savings to the annual inflation calculated by the Banque du CanadaAttention, this link will open a new tab.. This ensures that we are on the right track.
Starting to save for retirement as soon as possible is the best strategy to ensure you have the retirement you dream of. In addition, we can then know how much it will be necessary to save and integrate it into our everyday financial life. Enjoying the present moment, while securing money for your future projects is the best calculation possible!
