Understanding what financial thresholds you should achieve in Canada by a certain age to retire securely is a vital step in ensuring you’re prepared for your later life. Canada is unique in many aspects. Therefore, you can’t just use the same metrics that US residents rely on. Instead, you need to build a retirement strategy based on Canadian markets and pricing. Here’s everything you need to know.
Canada Is Unique
Several factors make Canada much different than the US in terms of saving for retirement. For one, Canada has higher housing costs than the US. On average, a home in Canada is about +40% more expensive than in the US. This means that it will take you more time and resources to pay your home off – so plan accordingly!
Source – MLS
Lower Wages
Another factor that requires you to take a more localized approach to retirement is that Canadian wages are lower than their US counterparts. The wage gap between the countries is most evident when dealing with technical and skilled professions. As such, US employees will secure more pay for their efforts. However, there’s a trade-off.
Living Healthy Is Easier
While, overall, the cost of living in much of Canada is more than in the US, this can quickly change for those with a medical condition. While not perfect, Canadians benefit from free healthcare nationwide. As you age, healthcare will gradually become one of the largest expenses you will accrue. As such, Canadians have a major advantage in that you don’t have to worry about healthcare eating up your retirement.
Starting Early is Crucial
No matter where you live, starting your retirement planning early is going to bring you the most success. For those under 40, it may seem nearly impossible to save up to $1M+. However, you need to remember that this isn’t a one-time massive lump sum you need to acquire.
Instead, think of it as a culmination of your life’s efforts. Consequently, the earlier you start saving, the easier it will be to hit your milestones. The keys to success are to start early, keep your contributions consistent, and expand your passive income-producing assets.
Amount You Need to Retire in Canada
Notably, no one set amount will provide you with the best retirement. Every person has individual factors that they need to examine to ensure they are prepared for when they retire. Here are a few common rules that can help you generalize what your goals should resemble.
According to recent statistics, you will need around 70% of your yearly pre-retirement income to fund one year of retirement. Additionally, the average Canadian lives for around 25 years after retirement. Recognizing this should allow you to calculate what you should shoot for in terms of saving using a few simple universal strategies.
For example, if you make $100k per year, you will need about $70k per year to retire without significantly reducing your lifestyle. You can multiply this $70k by 25 years to get a good idea of your recommended nest egg. In this example, you would need to save up to $1,750,000. More when considering inflation.
Age You Want to Retire
One of the first factors to examine when determining how much you need to save is when you plan to retire. If you have early retirement plans, then you need to aggressively pursue a retirement strategy from your early 20s. For most people, the retirement age is increasing.
As such, the workforce now has more 60+ year-old employees. In most cases, these workers are supplementing a fixed income that hasn’t kept up with the rising cost of living. Good planning will help you avoid this scenario.
Where You Want to Retire
Another factor that will determine your retirement strategy requirements is where you plan to retire. Certain areas can cost a lot more than others, so consider your expenses carefully and plan accordingly. If you want to retire in a fast-paced city like Toronto, it’s going to cost a lot more than a country home in the wilderness.
Lifestyle
The next factor is the lifestyle you want to live. For most people, there’s a small decrease in lifestyle following retirement as they need to adjust to their lower income. This factor will fall in line with where you decide to retire. If you want to travel or have an active nightlife, then it will be more expensive than people seeking to relax quietly.
Will you Work?
How retired will you be? Many retirees still have some form of income generated from their businesses or efforts. If you have income from side gigs, you may want to continue to do these activities to supplement your lower income.
Family Support
Another factor is your family. Will you have support from them or will you be supporting them? Depending on the answer to this question, you may find that you need to boost your retirement savings up a notch to cover family expenses like weddings, medical bills, first homes, and more.
Current Debt
Debt can be crippling. Do you own your home? What are your current and outstanding bills? The best scenario is retiring with your home paid off and minimal debt, meaning that you can focus on obtaining assets and ensuring your income grows alongside the cost of living.
Assets
Another critical factor is your assets. Assets provide income that can make your retirement much easier. You can think of assets as your portfolio, rental properties, businesses, and other income-producing items. The more assets you own that produce passive income, the faster you can quit working and retire.
Retirement Living
Another interesting factor to consider is how you earn income when you retire. If you are properly positioned, your assets will continue to provide enough income to supplement the fact that you’re not working. The 4% Rule is a common recommendation for retired individuals. It dictates that you withdraw 4% of your investment portfolio every year for living expenses.
The key to this approach is that your withdrawal percentage remains 4%, even as your investments increase. This strategy allows you to adjust for the rising cost of living and inflation without draining your assets. Ideally, your withdrawals will continue to increase in value as your portfolio grows.
Start Saving and Monitoring Your Progress
One of the crucial steps you need to make to ensure that your retirement is on pace is to start tracking progress via milestones. Thankfully, Fidelity and Statistics Canada has provided much-needed insight into what goals you need to meet to remain on schedule. Here are a few crucial benchmarks to track your progress.
20s – Financial Thresholds in Canada
You’re in your 20s and you just entered the workforce. Unless you have some serious family connections or talent, you’re going to begin at an entry-level position. As such, savings is going to be minimal at this point in your life. Most analysts recommend that you begin your 20s saving 15% of your annual income.
At this age, you aren’t going to have much but as you approach your 30s, your savings and portfolio should start to grow. By the end of your 20s, you should have around 1x your yearly salary saved. In terms of investments, you probably won’t have a lot of assets.
You should start saving for your first home during this stage in your life. As Canadian home prices are higher, it means that the average 20-something-year-old has fewer retirement savings than their US counterpart at this stage in the game. However, by your late 20s, you should reach a career path and gain the ability to start investing.
30s – Financial Thresholds in Canada
You’re now in your 30s and there are more life goals you want to achieve. This is the time that most people will obtain their first home. It’s recommended that you have at least 1x your yearly salary saved at this point.
On average, Canadians have around $80k in savings by the end of their 30s. Additionally, you should hopefully control around $30k in assets including stocks, bonds, crypto, and more. This puts the average Canadian at $110,000 in total retirement savings.
Investments
Your 30s is the perfect time to begin building up your assets. Stocks, bonds, ETFs, and other portfolio assets should become a focus. Thankfully, you have savings from your 20s. You can use this to acquire more assets. Some analysts state that you should spend at least 50% of your savings during this time on portfolio and real estate assets.
40s – Financial Thresholds in Canada
You’re 40 now and retirement keeps inching closer by the decade. The average Canadian will have around $270,000 in their savings account by this stage in life. Additionally, another $52,000 in assets brings the total average to $322,000. Sadly, this average is about $100k+ below the recommended amount you need by this point to retire securely.
You should already have some portfolio savings like an RRSP, TFSA, and other assets that you have acquired. Notably, aim to save 3 times your yearly salary by this point. For most Canadians having a net worth of $430,000 is a good goal.
Investments
In your 40s, your investment strategy should shift to a more conservative approach. You may want to focus more on real estate and bonds versus stocks. You should also be putting money into your RRSP and/or TFSA and building up a pension if your employer offers one. All of these factors will make the final stages of your retirement planning much smoother.
50s – Financial Thresholds in Canada
Your 50 and retirement is knocking at the door. You should have around 6x of your yearly salary saved by this stage and hold multiple assets across your diversified portfolio. There’s no need to be risky at this point. Most should stick to reliable and proven revenue-generating strategies to avoid unnecessary losses. It’s recommended you have around $500k in savings and assets by this time.
Investments
Your stocks and real estate investments should be providing a decent income at this point. This is a good time to consider more real estate options. Remember, you shouldn’t get too risky with your portfolio at this point as your retirement is around the corner. Additionally, you should prepare to start living on a fixed income. Your pension and assets will be key to this step.
60s – Financial Thresholds in Canada
You’re in your 60s and it’s time to hang your hat up and retire. Hopefully, you have had an exceptional career and have been able to save accordingly. By this stage in life, you should have around 8x your yearly salary or around $500k+ in savings and a variety of assets to keep you funded while you relax.
It’s vital to hold your retirement in a diversified portfolio to ensure that a market crash, inflation, or other asset-specific turmoil doesn’t leave you suffering. Diversification is key to ensuring your stability no matter how the market moves. As such, it should be a priority throughout your savings career.
Hitting Financial Thresholds for Retirement in Canada
Now that you have a better understanding of what your financial goals should be as you age, you’re ready to begin ironing out the key details. The main things to consider are where, when, and how you plan to fund your lifestyle. Use the tips in this guide to create a stable and effective strategy that works while avoiding common mistakes.
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