Affordably Saving Up for Retirement

WRITTEN BY Dan Kent | UPDATED ON: December 11, 2019

Guide To Retirement

Disclaimer: The writer of this article or employees of Stocktrades Ltd may have positions in securities listed in this article. Stocktrades Ltd may also be compensated via affiliate links in this post. Stocktrades Ltd will run advertisements on our posts. These advertisements do not represent an endorsement by us.

Many Canadians are now fast-tracking their knowledge of investing and buying stocks so that they can retire one day.

Retirement planning is an absolute necessity in today’s times, but how much is enough?

Literature on this topic is peppered with all sorts of facts and figures, with C$1 million or C$2 million being bandied about as the magic number.

Truth be told, the financial services industry routinely ups the figure because it benefits them.

For example, rudimentary statistics indicate that a $2 million retirement portfolio generates approximately $23,500 in annual fees for the fund managers. That’s a substantial amount of money to hand over, and one of the primary reasons why Canadian investors are looking elsewhere, particularly at Wealthsimple RRSP, TFSA and RESP accounts which significantly lower management fees.

Deciding where to invest

And then, there is the issue of your preferred retirement investment vehicle. How will you invest your money? Where will you invest your money? Will it be diversified enough?

Canadian Pension Plans span the full spectrum, including RRSPs, Canada Pension Plan, Old Age Security, and various other options that are readily available to you. The precise dollar amount that you need to have saved up by retirement age depends on a host of factors, notably the age that you can afford to comfortably retire.

This comprehensive guide to saving for retirement in Canada covers all the bases. You will find valuable information vis-a-vis the size of your financial nest egg, the best investment vehicles, and useful retirement income calculation tools to assist you in your journey towards your autumn years.

During the course of this guide, we will make certain assumptions regarding retirement options. For starters, the median income for Canadian seniors is $36,050 for an individual and $64,800 for a couple. Depending on your lifestyle requirements, and earnings capacity, this figure can be adjusted accordingly. A standard assumption is that there is a CPP of $8,077 per annum, and that retirees get the full quota of $7,210 for OAS per person per year.

Many Canadians use a TFSA for retirement savings, so there are no tax considerations to worry about with withdrawals.

Retirees typically have investment portfolios comprising a mix of stocks and bonds (or even bond ETFs.) If you are a conservative investor, it is 70% stocks and 30% bonds. If you are an aggressive investor, it is 80% stocks and 20% bonds.

Given that people are living longer in Canada, retirement planning is sacrosanct. According to Statista, the average life expectancy in Canada is 84 for females and 84 males (those born in 2019.)

Incidentally, this is markedly higher than the average life expectancy in the US. Since people are living longer, they are also working well into their 60s, and sometimes beyond. These are all factors that can impact your retirement planning strategy.

Median Incomes

TIP: The younger you start planning for retirement, the quicker your retirement nest egg will build up into a substantial portfolio. Thanks to compound interest, early savings allows interest to do much of the work for you. Provided your retirement plan is not burdened with high costs, commissions, management expenses and brokerage fees, you can create a comfortable nest egg for your autumn years. To this end, it’s worth looking into reputable robo-advisor options like Wealthsimple.

Picking an affordable retirement vehicle is key

The Canadian investment landscape is peppered with all sorts of retirement planning options.

Many of them saddle you with high fees, commissions and charges. Fortunately, a cost-effective solution like Wealthsimple makes it much easier to enjoy maximum leverage from your investments.

Their bundle of retirement planning options can be managed exclusively online, and once you have connected your banking details, it’s easy to establish automatic contributions to your retirement planning regimen.

The unnecessary stress of last-minute decision-making can easily be avoided with a variety of tailor-made accounts through Wealthsimple.

What accounts does Wealthsimple have?

There are primarily 3 high-value accounts available to account holders through Wealthsimple, notably: RESP accounts, TFSA accounts, and RRSP accounts.

As a robo-advisor, Wealthsimple was first to market by offering a high interest savings account, or HISA. Currently, the company is offering 2% interest on HISA accounts, ad infinitum. With no minimum balance requirement needed, it dovetails as the ideal savings account, with unlimited transactions, making it considerably more lucrative for investors than the low-interest paying bank checking accounts or bank savings accounts.

The Wealthsimple solution is protected with 128-bit SSL security, firewall protection, and is insured by the Canadian Investor Protection Fund (CIPF) up to C$1 million for each account.

Additional depository insurance is provided by the Canadian Deposit Insurance Corporation (CDIC), up to C$100,000. With no account minimum balance, this robo-advisory resource is easy-to-use, with automatic re-investments of dividend income, and socially responsible investment practices.

All of this is done within the ambit of affordability, with a low fee structure to ensure that retirees get maximum bang for their proverbial buck on their retirement nest egg.

Socially responsible investing with Wealthsimple brings total feels to 0.65% – 0.90%. These numbers make a strong case when they are compared to actively managed mutual funds.

For example, Wealthsimple’s overall fees amount to 0.5% – 0.70% for non-SRI accounts, compared to commissions in the region of 2% – 2.5% for actively managed mutual funds.

At these comparative levels, Canadians are paying substantially more for their retirement investments.

When should you retire?

Most people target an age of 65 for retirement purposes.

Precisely how much income you will require in retirement depends upon your lifestyle needs. One figure that is used to determine the requisite savings amount for retirement purposes is 4% of your retirement portfolio per annum. If you have C$1 million saved up, you can safely withdraw 4% of that per year throughout your retirement from 65 years of age onwards.

Many retirement planning experts utilize this figure. The purpose of calculating that magic number is to be able to safely provide for your expenses during retirement. If your financial portfolio generates a return of 7%, you can expect inflation to reduce the real returns.

When all is done and dusted, the 4% figure certainly makes sense.

Other experts promote the 70% rule. This rule states that you need 70% of your annual income before retirement, during retirement to maintain your lifestyle.

If you earn $50,000 a year before you retire, you would need at least C$35,000 a year after retirement.

Another measure of determining your retirement needs is simply calculating your annual retirement needs and multiplying that number by 25. Let’s say your annual expenses are $50,000. If you multiply that by 25, your retirement goal is C$1.250 million.

As a rule, the longer you work the less retirement you have to worry about. Working beyond 65 can guarantee much greater retirement funds for your autumn years, but this particular decision rests entirely with the individual.

Statistics Canada found that less than 40% of Canadians have work-based retirement plans. For those who have them, it’s good news on the proviso that substantial retirement funds are available.

This quintessential retirement planning guide will explore the costs/benefits of different types of plans, and the many different options for maximizing returns while minimizing costs for RRSP, TFSA, and RESP accounts.

Easy Guide to Registered Retirement Savings Plans – RRSPs

RRSPs are personal savings plans. These are powerful vehicles to help you save money for retirement.

They are tax-sheltered, allowing your money to grow much faster. With an RRSP, your annual contributions to this account are deductible from your gross income. This reduces your tax burden for the years that you make contributions.

With RRSP accounts, all earned income is protected from tax and this allows it to grow much quicker.

Once you’re ready to retire, your tax bracket will likely be less than your pre-retirement tax bracket and you’ll be able to withdraw the funds at less of a burden to yourself.

With RRSP retirement accounts, it is possible to withdraw funds to purchase real estate, or even pay for education without being penalized, on the proviso that the repayments are made on time.

RRSP calculators provide guidance on how weekly contributions can generate expected returns over time.

The most common RRSPs include the following:

  • Locked-in RRSPs
  • Individual RRSPs
  • Spousal RRSPs

These RRSPs typically hold multiple investments, including savings deposits, mutual funds, portfolio solutions, guaranteed investment certificates, bonds, stocks, et al.

For 2019, the contribution limit per year for an RRSP account is $26,500.

Fortunately, RRSP options are tax-free through age 71. Even at age 50, you still have 21 years to contribute towards your RRSP and enjoy tax-free status. Given 7% investment growth per annum, you can expect your money to double every decade.

However, if you’ve chosen the ‘right basket’ of investments in your RRSP and you generate 10% growth per annum, you can expect your investment portfolio to double within 7 years.

When considering RRSP retirement accounts, it’s worth evaluating them against Registered Pension Plans (RPPs).

RPPs are provided by companies to their employees. These pension plans are not taxed for Canadian residents. Money generated through RPPs is not subject to capital gains tax or income tax. Your maximum contribution on Registered Pension Plans (RPPs) are dependent on specific plan under consideration.

There are essentially two types of RPPs, notably Money Purchase RTPs and Defined Benefit RPPs. Money purchase RPPs have the same annual contribution limits as RRSPs.

Easy Guide to Tax-Free Savings Accounts – TFSAs

Tax-Free Savings Accounts (TFSAs) are a terrific option if you are ineligible for RRSP contributions.

These retirement planning vehicles were created in 2009, and they are a hugely popular option for retirement planning purposes. The benefit of opening a TFSA is that there is no tax penalty when funds are withdrawn. The annual contribution limit for a TFSA account is $6,000 for 2019. Given the low annual limits on these accounts, they are clearly insufficient as a stand-alone option for retirement planning purposes.

All capital gains, dividends, and interest earned on a TFSA account is tax-free for life.

You can withdraw savings from these accounts at any time, and for any reason. If you over-contribute to a TFSA account, the Canada Revenue Agency imposes a 1% penalty for each month that your contribution exceeds the limit. The most obvious benefit of a Tax-Free Savings Account is the fact that your savings grow tax free, over time.

All taxable income can be converted into tax free income with a TFSA account. Generally speaking, TFSA accounts can encompass multiple asset components including Guaranteed Investment Certificates, cash, and mutual funds.

NICE TO KNOW: TFSAs are protected by the Canada Deposit Insurance Corporation (CDIC) up to a maximum of C$100,000.

Easy Guide to Old Age Security (OAS) and Canada Pension Plans (CPP)

OAS and CPP options are available for retirement planning purposes. However, the amount of assistance you will receive is dependent upon several factors.

For Old Age Security (OAS), it depends how long you have lived in Canada and for Canada Pension Plans (CPP), it depends on how much you’ve contributed to the plan over time. Currently, OAS payable amounts are $7,217.40 while CPP annual payable limits are $13,854.96.

If you immigrated to Canada as an adult, your eligibility amount will be greatly reduced. Based on the maximum permissible allowances, you can expect $21,072.36 per annum from these government pensions. Clearly, there is a need to supplement these income sources with RRSPs and TFSAs.

Easy Guide to RESP Accounts

RESPs are known as Registered Education Savings Plans. These tax-sheltered retirement planning vehicles are ideal for saving money for post-secondary education for your children.

A lifetime amount of $50,000 can be socked away in an RESP per child for educational purposes. With automatic government grants issued, RESP accounts can grow even quicker.

Contributions to RESP accounts are not tax-deductible, however income earned in each plan is not taxed until the account holder withdraws it. This tax-deferred growth strategy is met with federal government contributions of 20% of the value of the deposits up to $500 per annum.

The lifetime maximum provided by the Canadian government is $7,200 for each child in the RESP plan. For low-income earners, government contributions are even greater. There are several types of RESP plans available, notably:

  • Individual RESP Options
  • Family RESP Options

In both cases, the owner of the plan controls how money is invested, and when the beneficiary gets payments, how the beneficiary gets payments, and how much payment the beneficiary receives.

Keeping Retirement Accounts Managed Affordably

All of these retirement options can provide an excellent cushion when planning your retirement.

Many folks are already familiar with the aforementioned options, even though they may be short on specifics. People without the requisite financial information oftentimes struggle to pick a basket of retirement investments that will serve them well in later life.

For this reason, people turn to investment specialists, fund managers, retirement planning experts, brokers and others who provide for their retirement planning needs. Unfortunately, these services don’t come cheap. Whether you are looking for a RESP, TFSA, RRSP, business, or joint account, it’s worth looking into alternative investment solutions like Wealthsimple to reduce your financial burden.

Luckily, the safe & secure Wealthsimple App puts plenty of power in your pocket, allowing you to access a concierge investment service, anytime. A full suite of retirement planning options is available too, including managing asset allocation, adding funds to your portfolio, and analyzing the performance of your retirement investments.