Saving for retirement is one of those things everyone knows they should do. But for most of your life it’s so far away that it can be hard to convince yourself to sock some cash away for later.
If you’re not making a ton of money — or if you have pressing financial matters you need to deal with right now — it can feel downright impossible to think long-term.
Luckily, there are some tried-and-true ways to create a retirement savings plan that works for you.
Read on for the ultimate blueprint to make yourself one of those blissed-out retirees you see in Canadian Tire commercials.
The number one thing most retirees will tell you: they wish they had started saving earlier.
Because of the magic of compound interest — where the interest your investments earn, earns interest as well — starting investing five years earlier can leave you tens or even hundreds of thousands of dollars wealthier in the long run.
Try playing with an investment calculator to get the full effect. Here’s one scenario:
You’re 25. You put $5,000 into an investment portfolio that earns a 6% rate of return compounding annually, and contribute just $500 per month. You retire when you’re 65. You’ll end up with $1,005,267.47.
If you instead started when you were 20, you’d have $1,380,017.53.
That’s nearly $375,000 you’d get just for starting a few years earlier.
Figure Out Where You Are
That's all well and good, but the above example likely isn’t your exact scenario. You need to figure out how much you can responsibly save per month to get to where you want to go.
The Canadian government has a retirement calculator to help you do just that. It’ll take into account:
- Your annual retirement income estimate
- How much you make right now
- How old you are
- Your life expectancy (grim but necessary to think about)
- Your applicable pension plans, both private and public
- Your savings and investments
- And other information
And it will spit out what it expects you to earn in retirement. Keep in mind that it’s just a rough estimate. Lots can change in the coming years! And you have the power to change it.
Canada has some other good information about saving for retirement here.
Make a Budget
A key step to exercising your financial power is making a budget, and sticking to it.
There are lots of different types to try. A zero-based budget will have you decide what to do with each dollar before you earn it. An envelope budget splits up your income into as many different sections (or envelopes) as you want. And Google Sheets has a pretty powerful and customizable budget spreadsheet.
Whatever saving plan end up using, make sure you stick with it. Compound interest is your friend — but it requires diligent, regular saving to really work its magic.
A good rule of thumb when starting a budget is the 50/30/20 rule. Try to spend 50% of your income on needs, 30% on wants, and 20% on savings or paying off debt.
This won’t be doable for everyone — especially people paying Toronto rents. But if you can’t get there today, think of it as a goal for tomorrow.
Think About When You Want to Retire
To FIRE or not to FIRE? That is the question.
The FIRE (Financial Independence, Retire Early) method advocates saving as much as you can in your younger years, so you can live a comfortable lifestyle on the interest generated by your investments earlier than the traditional age of 65.
Some people go hog-wild with this, eating rice and beans for a decade or two to retire at 40. Others will just prioritize saving money over having the latest gizmos. Others plan to work part-time. Still more want to do the tried-and-true method of working until they’re 65 and retiring the traditional way.
It’s up to you! But it’s important to think about when making your budget. As we discussed earlier, starting on your savings journey early in life can reap huge benefits down the line.
Also, think about how much income you’ll need to live comfortably in retirement. Most people don’t need as much as they did during their middle years. The kids have moved out, they’ve sold the big house, and they’re spending less day-to-day.
Just remember to keep track of inflation. If you retire in 20 years and plan to save what $50,000 buys today, assuming a 2% annual inflation rate, you’d actually need to save $74,300.
Pay off Debt
Debt is the chain that holds many people back from an enjoyable retirement. Just like compound interest is your friend when it’s working for you in the stock market, it can be a dastardly enemy when it’s working against you.
There are rare cases where taking on debt today can pay off for tomorrow — like by investing your home equity line of credit (HELOC) in the stock market. But for most people, debt is a dragon to be slain before the real saving can begin.
The reason is simple: even if you’re invested in an exchange-traded fund (ETF) that gives you 8% returns, credit card interest rates can run up to 20% or more.
Plus, debt can do a number on your mental health. It can feel like you’re walking through quicksand if you’re making minimum payments on credit card debt, or if you’re dragging around a student loan well after you’ve graduated.
When you make your budget, after your needs, prioritize spending as much as you can on reducing your bad debt, as fast as possible.
Make Saving Easier on Yourself
It can be hard to sit down at the end of every month and move your money around to your savings and investment accounts. Auto-deposits can make things a lot easier.
You probably automate some or all of your bill payments. Why shouldn’t you automate paying yourself?
Nearly every bank has an auto-deposit service. These will take a certain amount of money from your chequing account and put it into your savings or investment accounts. They work on a daily, weekly, monthly, or custom repeating time frame.
Many investment services come with the same perks. Robo-advisors are especially user-friendly here. Some will even round up every purchase you make on linked credit or debit cards to the nearest dollar, $5, or $10, and invest the difference. That adds up fast!
Tip: Every Little Bit Helps
If you have some unexpected expenses one month — say, a car accident or veterinarian bill — you might not be able to save as much as you want. Or, if you’re living paycheque-to-paycheque, you might not be able to save very much at all.
But something is better than nothing. Even if you put $5 in, compound interest will turn it into a lot more down the line.
Here’s a trick I use: whenever I spend cash on something unnecessary, like a video game or a brunch, I try to invest the same amount. The way I look at it, if I’m willing to blow $40 on a mimosa and eggs benedict for Present Me, I can spend $80 and benefit Future Me as well.
Invest Your Savings in the Right Retirement Accounts
Both TFSA and RRSP accounts let you skirt some taxes. And they both have limits on how much you can put into them each year. You should try to max out your TFSA and RRSP contributions if you can swing it.
Check out our article on the full differences of RRSPs vs. TFSA accounts for the full details, including when you should contribute to which account. It depends on your tax rate, and your expected tax rate in the future.
Of course, just putting money into an RRSP or TFSA won’t get you very far. You can think of the accounts simply as “baskets” where you can put your money. You have to invest them in the stock market to get the full benefits.
Luckily, that’s not as difficult as you may have feared.
Plan Your Pension
When thinking about retirement income sources, the Canadian retirement calculator is a great place to start here — especially if you don’t know what any of those acronyms mean.
In addition to Canada’s government pension plans, you might get a private one from your employer. Make sure you look into the details there.
And of course, you can draw on the RRSP and TFSA and other investment accounts you've built up in your younger days. Eventually, you'll convert your RRSP into a Registered Retirement Income Fund (RRIF) to make withdrawals.
Tip: Take Advantage of Pension Matching
Some things in life are too good to be true. Workplace pension matching is not one of them.
Some employers will match the amount their employees pay into their own pensions. They’ll allow you to pay more or less, depending on your preference.
If you can make it work financially, always put in the maximum contributions. That way, your employer’s “matching” amount will be the highest possible.
If your employer offers it, make sure you take this sweet deal.
Frequently Asked Questions
How much income will I need in retirement?
A good estimate is 80% of your pre-retirement income. So if you make $100,000 now, you might need $80,000 per year in your golden years. Just remember that inflation will bump that number up.
What percentage of my income should I save for retirement?
According to the 50/30/20 rule, you should spend 20% of your after-tax income on savings or paying down debt. If you can save more responsibly, go for it. Every dollar invested now will be worth many more in a few decades.
How much do I need to save to retire on $50,000 a year?
Try Canada’s retirement calculator to figure out how much you can expect to earn in retirement. A simpler version is Vanguard’s calculator. It’s written in plain English and takes about 30 seconds to fill out.
Retirement planning can be intimidating — even downright scary. But it doesn’t have to be.
Investing is easier than ever nowadays. Many services offer a set-it-and-forget-it approach, and nearly every financial institution has auto-deposits so you don’t even have to think about saving.
Once you figure when to use an RRSP vs. a TFSA, and take advantage of perks like employer pension matching, you’ll start to feel confident and in control of your financial future.
By understanding budgeting basics, paying off debt, and saving a little bit every single month, you can build a nest egg that’ll serve you well in your golden years.