A Guide to Retirement Planning in Canada

How to craft the best retirement plan for you

As you start building your retirement plan, it’s essential that you understand what a reasonable retirement date might be. This lets you know how much time you will have to save and prepare for it. You will also want to start setting some retirement goals from the outset and evaluate your spending and savings habits accordingly.

Your current age and the age at which you wish to retire should form the foundation of your retirement strategy. These variables will also dictate the amount of risk you can take in your financial planning. For example, if you are in your 30s and starting your retirement plan, you might be able to invest in higher risk investments compared to if you build your retirement plan during your late 50s, as you have more time before the money is required.

When you start to craft your retirement plan, consider how much your retirement lifestyle will cost.

It’s possible that you might need less income to live on during retirement than when you were employed full-time. In retirement, you may not have larger expenses like supporting your family or paying off student debt, and you may even reach the final month of your mortgage loan. However, it’s important to keep realistic expectations for how much you might actually spend.

In addition to budgeting for leisure activities and big-ticket bucket list items (like an international trip or helping your children pay for their weddings and new homes), you should also save for emergencies such as unforeseen medical expenses. Since most of us end up spending more than what we initially plan, you should build ample wiggle room into your retirement planning budget.

After you’ve set your retirement goals, calculated current and future savings, and assess your ability to take on financial risks, you should decide on an ideal retirement age. You will want to choose an age by which you’ve been able to accumulate enough savings to maintain your retirement lifestyle budget.

Different types of retirement accounts and plans in Canada

Several types of retirement accounts and plans can help you get a leg up in saving for your golden years while giving you a tax break. Depending on your needs, you may choose to dabble in them all, since no single plan is designed to replace all your income. Here are three key retirement plans to consider.

The amount you choose to contribute to your RRSP may be deducted from your annual income in the year that you contribute. These RRSP contributions could be used to reduce your taxes and potentially result in a tax refund when you file your tax return. Meanwhile, the money you’ve put away in your RRSP can be invested and continues to earn interest until you withdraw it at retirement or earlier at which point, the withdrawal will be taxable. There is a maximum amount you can contribute, so make sure to check and see how much contribution room you have every year.¹

A Tax-Free Savings Account is similar to a RRSP in that it generally allows you to grow your savings tax-free. It also has a limit to how much can be contributed too, so you will need to verify how much contribution room you have available each year. However, unlike a RRSP, if you need to access the funds in a TFSA at any time, it is tax free upon withdrawal. While you won’t get the immediate tax deduction that you would by contributing to an RRSP, you will never get taxed on any principal in the TFSA or the income generated by it.¹

The Canada Pension Plan is meant to replace a small portion of your lifetime income. It is funded by the contributions you and your employers have made throughout your working life. You can start receiving it as early as the age of 60 or as late as 70.¹

Tips to build a successful retirement plan

As a best practice, saving now as much as you can afford can always help fund your retirement and build healthy savings as you age. Here are some other best practices to help guide your retirement strategies and build a nest egg that supports your life after work.

To maximize your retirement savings, it’s best to start putting away a portion of your paycheque as early as possible.

While it may be difficult to prioritize retirement when other expenses might feel more pressing, pre-authorized plans can help you put money away automatically without even thinking about it. Over time and with the help of compound interest, these regular deposits into your retirement savings account can grow substantially.

Stash away three to six months of living expenses in an emergency fund, as you never know what bills you might suddenly have to face. Having enough savings for a rainy day could mean being able to pay for unexpected expenses like a medical issue or a leaky roof. Without that fund, you might need to take out high-interest loans that could wipe out your nest egg.

The more you whittle away at your debt, the less money you throw away on interest fees that could be going towards your disposable income instead. Reduce your debt as much as possible before you retire so that you can focus on your post-retirement life.

If you can arrive at retirement without any monthly debt payments, you will be in a better position to cover your monthly costs.

One way to cut down on expenses after you retire is to move somewhere with a lower cost of living. If your retirement plan includes living in a place where expenses could be slashed in half without sacrificing the lifestyle you want, you may want to adjust your saving and spending goals accordingly.