How to save for retirement: Your step-by-step guide to starting now
Wondering how to save for retirement? Here's your first tip: start saving now.
Wondering how to save for retirement? Here's your first tip: start saving now.
It might seem like just yesterday you got your first job. And if that is the case, the concept of how to save for retirement might feel a bit distant or abstract.
“There’s plenty of time between now and then to save and plan,” you might say to yourself. And while that’s true, time also has a way of passing much faster than you think.
Planning and saving for retirement is the ultimate long game. A little bit of strategy now can lead to a winning future later. Credit unions are here to help you get there, as you plan how much you’ll need in retirement savings to live well in your golden years.
Picture this: After getting up and clocking in to work every day for most of your adult life, there comes a day where you get up and can do whatever you want—and that day is not a Saturday, Sunday, holiday, or vacation day.
Retirement is a time to enjoy the efforts of your hard work and focus a little bit more on you, your passions, family and friends. But to pay for your groceries or travel once you’re no longer holding down a 9–5, you’ll need to make and stick to a solid savings plan that can replace the income you made through your job.
The amount of funds you need to retire depends on your current income, lifestyle, and expenses. The general advice is that you should aim to replace 70% to 90% of your annual pre-retirement income through savings for retirement.
For example, say you earn an average of $63,000 per year before retirement. That means you should try to budget for $44,000 to $57,000 per year in retirement. If you’re curious how much you should aim for, check out our retirement savings calculator.
HONEST TIP: It’s never too early to start saving.
Want to learn more about how to get started? We’ve created a saving and investing guide, and have packed it with everything you need to get started.
Like most things in life, there’s no one set way to save for your retirement. It’s more about understanding your options and picking the right approach for you. When it comes to financing your retirement, there are essentially three sources of income you can draw from: government benefits, workplace or employer benefits, and personal savings.
In Canada, there are two primary sources of government benefits designed to help support those who are of retirement age. Once you reach retirement age, it’s a good idea to check out federal government programs you may qualify for.
The Canada Pension Plan (aka CPP) is a monthly, taxable benefit that you are eligible to receive when you retire. The amount you receive each month is based on a combination of your average earnings throughout your working life, your contributions to the CPP, and the age you decide to start your CPP retirement pension.
How much you contribute to the CPP is based on your earnings. There is also a cap on how much you can contribute each year. People who earn a higher salary may reach their contribution maximum before the calendar year is over. This means what you can expect to receive once you retire might not be based on your full income.
CPP payments are not automatic—you need to apply to receive them. To be eligible, you must be at least 60 years old and have made at least one valid contribution to the CPP over the course of your working life.
For higher earners, or for those who have more expenses, CPP alone might not be enough to sustain your lifestyle once you retire. It’s important to understand the full picture and to crunch the numbers so you know what amount works best for you.
The Old Age Security (aka OAS) pension, by comparison, is a taxable monthly payment you can receive once you’re 65 and older. Depending on where you live, you might not even need to apply to receive it; Service Canada may automatically begin payments. How much you’re eligible to receive each month depends on how long you’ve lived in Canada (or certain other countries) after the age of 18.
For those who are in a lower income bracket, you might also qualify for additional funds under the Guaranteed Income Supplement. This is available to low-income recipients of the Old Age Security pension.
HONEST TIP: What is a taxable payment?
A taxable payment or benefit means you have to pay income tax on the money you receive.
Before you retire, you usually spend a number of years working. Depending on where you work, your employer may offer programs or incentives to enhance your retirement income, mainly via a group RRSP or workplace pension.
Some companies or organizations may offer a defined benefit pension plan—that means you pay into a company-sponsored pension plan that comes with terms and conditions when it comes to how much you’ll get, and when.
Some organizations might offer an RRSP matching program. That means for every dollar you contribute to your own RRSP, you organization will match it, usually up to a certain dollar amount or percentage.
Other organizations might offer preferred interest rates or group RRSP programs that could give you a better interest rate than you might be able to access on your own. Some companies also offer bonuses, which might come with an option to transfer those funds directly into an RRSP so you can delay paying the tax until the funds are withdrawn.
The bottom line here is every organization is different, so it’s important to speak with your manager, HR department, or to review your onboarding materials closely to understand what may be available for you to take advantage of.
When it comes to retirement savings, every little bit really does add up over time, so make sure you’re taking advantage of all programs that might be available to you. And, make sure you are connecting with an expert who can help you navigate your savings options.
Personal savings are another important piece of the pie, so it’s important to review them alongside the other programs and options that might be available to you.
In the remainder of this guide, we’ll walk you through the ins and outs of personal savings for retirement, but don’t forget that your credit union is here to help with this, too.
Registered savings are a savings plan that is registered with the Canada Revenue Agency (CRA) that are designed to help build money for retirement. When we’re talking about retirement, there are two main types of registered savings: Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs).
You can only put a certain amount of money into both your RRSP and TFSA, so it’s important to have a plan as you start making use of these savings plans.
A Registered Retirement Savings Plan (or RRSP for short) is a CRA-registered savings plan that is designed to help you set aside money for retirement. You can also use your RRSP to help you buy a house or go back to school.
Money contributed into an RRSP is tax deductible and that money, along with any income it earns, grows tax-free until it’s withdrawn.
Money that goes into an RRSP can be held in a variety of ways. Eligible products that can be held in an RRSP are term deposits (aka a guaranteed investment certificate or GIC), mutual funds, stocks, bonds, and real estate.
A Tax-Free Savings Account (TFSAs) is also a CRA-registered savings plan, meaning they allow you to hold cash or other investments (ex. GICs, mutual funds). You can use a TFSA to save toward your short-, medium-, or long-term goals, including retirement.
Unlike the RRSP, any money held inside of a TFSA grows tax-free and the growth is never taxed, even once it’s taken out. When it comes to comparing TFSAs and RRSPs, it’s helpful to consider how each of them can support your different goals, not as an either/or where you only make use of one type of plan.
An RRSP loan allows you to borrow money to contribute to your RRSP even if you are short on cash. It works like any other loan, where you borrow a lump sum of money you agree to directly deposit into your RRSP account. You must then make principal and interest repayments regularly over a period of time, typically within a year.
Note: your money can’t stay in an RRSP forever. You’ll eventually need to move it to your Registered Retirement Income Fund, which you can learn more about (and even calculate how much you’ll end up with) with our RRIF calculator.
Investing in real estate can be another option to consider when it comes to your long-term retirement savings plan. The way it works is you buy income-generating properties with the plan to liquidate, or sell your real estate investments just before or once you retire.
You could also consider hanging onto your investment properties indefinitely and use the rental income generated from those investments. This option takes careful planning and it can be costly, so it might not be for everyone, but it is another option to consider.
How much you’re able to put aside each month toward retirement depends entirely on your budget. While there is no set amount or magic number you must save each month, a common amount to save is between 5 to 10% of your monthly earnings.
At the start of your career, you might only be able to afford to save $20/week. Over time, as you begin to progress and make more money, you’ll be able to contribute more to your savings, too.
Regardless of what you can contribute, the best advice is to start early and make saving for retirement a habit.
You’re going to need to save a lot for retirement. Even more than for other big-ticket purchases, like a home or car. That’s because you aren’t saving towards one item, but rather towards living comfortably for at least 20 years, which probably isn’t something you’re going to be able to afford to do in just a year or two.
The more you’re able to save now, the more that money will work for you in the future thanks to something called compound interest. Simply put, compound interest is basically earning interest on your interest.
Here are two different saving scenarios, which we’ll use to help explain what we mean:
| PERSON A | PERSON B | |
|---|---|---|
| Current age | 25 | 25 |
| Current income | $40,000 | $40,000 |
| Want to retire at | 60 | 60 |
| Current savings | $5,000 | $0 |
| Current monthly contributions | $200 | $300 |
| Estimated rate of return | 4% | 4% |
| Projected savings at age 60 | $250,200 | $344,957 |
| Kudos to Person A for kickstarting their savings, however, their lower monthly contributions compared to Person B leave them with almost $100k less at age 60. | Person B may not have a saving nest egg but by increasing their monthly contributions by only $100 more a month compared to Person A they will have almost $100,000 more at retirement. |
While we’ll give a huge kudos to Person A for kickstarting their savings, their lower monthly contributions compared to Person B leave them with almost $100,000 less at age 60. They’ve been saving longer, but putting away less money overall. That means their money has generated less in interest.
Person B, on the other hand, started without a savings nest egg. But, by increasing their monthly contributions by only $100 per month, compared to Person A, they’ll have nearly $100,000 more at retirement. That’s compound interest at work for you!
Saving for retirement really is about the long game. So, the earlier you’re able to make your money work harder for you, the better the outcome once you’re ready to put your feet up. And like any good habit, the earlier you get into it, the more likely you are to stick with it.
One of the easiest ways to do this is to set up regular preauthorized payments from your primary bank account to your retirement savings account. This can be done with investments such as mutual funds and direct stock purchases, which can really reap benefits when sheltered in a TFSA or RRSP.
If you’re purchasing stocks and the company pays you a dividend, it’s considered taxable income. If you’re able to place that income into a TFSA or an RRSP, you can avoid paying some of those taxes.
Planning for anything that’s 40 years in the future can be challenging, and when it comes to something as ever-changing as your financial situation, it’s pretty much impossible to expect that what’s working for you right now is going to work for you forever.
Flexibility is key. Just as you might make more money as you progress in your career, it’s reasonable to expect your expenses will increase, too. Cheap rent and a house full of roommates (or your old bedroom at your parents’ house) won’t always be appealing, so there’s a mortgage payment to think about. And then don’t forget property taxes, maintenance, furniture, etc. Or maybe you want to add to your family. Kiddos—of the human or fur variety—can be expensive. Whatever your long-term plan is, it’s going to cost money to make it happen.
Be honest with your goals and budget, and keep in mind that there will be many ups and downs before it’s finally time to enter your golden years.
Learning about retirement savings might be a bit of a snooze now, but there’s nothing sleepy about being empowered to take on your future. Your money can work harder for you—it’s just about knowing how to make that happen.
Want to learn more about saving and investing? Check out our Guide to Saving and Investing.
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