Retirement Planning in Canada: How Much Money You Need

Planning for retirement is one of the most important financial steps you can take in your lifetime. As the cost of living continues to rise and the economic landscape evolves, understanding how much money you will need to retire comfortably in Canada becomes crucial.  This blog aims to provide you with a guide to retirement planning, covering everything from estimating your daily and one-time expenses to understanding the different income sources available during retirement.

In this article:

• What Factors Contribute to Financial Worries About Retirement?
  • Crunching The Numbers by Estimating Your Retirement Expenses
• What Government Programs Are Available for Retirees in Canada (CPP, OAS)?
• What Are the Benefits and Differences Between RRSPs and TFSAs?
• What Are the Different Types of Life Insurance, and How Do They Benefit Retirees?
• Why is Life Insurance Important During Retirement?
• Frequently Asked Questions (FAQs) About Retirement Planning in Canada

What Factors Contribute to Financial Worries About Retirement?

While Canada’s real estate market is particularly expensive, overall, the incomes of Canadians have not grown quickly enough to keep up with the rising cost of living. The consumer price index (CPI) has driven faster increases than both average and median incomes.

This means that between 1980 and 2022, the median salary grew only by 26% and the average salary grew only by 50%. This yields minimal annual change year-over-year. But when we examine CPI development, it surged far faster than wages—growing almost 400% between 1980 and 2023.

To show this, take a Tim Hortons’ cup of coffee right now—$2.50 in 2024. Here is a comparison of the cost in past years:

Given wages have not grown at the same rate, this shows a declining purchasing power. When looking at real estate values, especially in cities like Toronto and Vancouver, the trend gets much more clear. For example, in 1980 a Toronto house sold for $75,694 on average. It rose to $255,000 by 1990 then to $243,255 in 2000. The average price in 2010 was $431,262; by 2020 to $939,636. Prices hit $1,126,591 in 2023.

Additionally, Canada’s life expectancy rose concurrently, from 75.1 years in 2023 to 82.96 years in 2023. This general figure, however, is distorted by several elements, including those whose health pre-conditions lower their expected quality of life. Currently, one out of ten Canadians aged twenty today are expected to live to 100 years of age and five out of ten are expected to reach age 90.

Since salaries are not increasing at the same rate as the cost of consumer goods and real estate, it is understandable that Canadians are wondering if they will be able to afford a decent retirement in a world where people are living longer than ever.

Crunching The Numbers by Estimating Your Retirement Expenses

Estimating your retirement expenses is a crucial step in planning for a comfortable and financially secure future. Daily living expenses, such as food, utilities, transportation, and insurance, form the core of your retirement budget. For instance, a retired couple might spend around $800 per month on groceries and dining out, $300 on utilities, and $400 on transportation, including car maintenance and fuel or public transit passes. Additionally, health, home, and auto insurance premiums could total $450 monthly. Altogether, these daily living expenses might amount to $1,950 per month, or $23,400 annually.

Beyond daily expenses, retirees should also prepare for one-time costs like home repairs, major purchases, and family support. These expenses can be substantial; for example, a new roof might cost $10,000, an HVAC system replacement $5,000, a new car $25,000, and new furniture $3,000. Additionally, providing financial support to family members, such as contributing $15,000 towards a grandchild’s college education or $10,000 for a child’s wedding, should be factored into the budget.

Consider Emma and Oliver, a retired couple in Canada. Their estimated annual daily expenses are $23,400, while their one-time expenses, including a new roof, car, and contributions to their grandchild’s education, total $50,000. By understanding and estimating these costs, Emma and Oliver can better plan their retirement budget, ensuring they have enough savings to cover both daily and unexpected expenses, thus allowing them to enjoy their retirement comfortably.

What Government Programs Are Available for Retirees in Canada (CPP, OAS)?

Canada offers several government programs designed to provide financial support to retirees. The two primary programs are the Canada Pension Plan (CPP) and Old Age Security (OAS).

Canada Pension Plan (CPP)

The Canada Pension Plan (CPP) provides a monthly income to eligible retirees. You can begin receiving CPP payments as early as age 60. The amount you receive depends on how much and how long you have contributed to the plan throughout your working life. Contributions to the CPP come from your earnings, with both employees and employers making contributions. If you are self-employed, you are responsible for both the employee and employer portions of the contributions.

Old Age Security (OAS)

The Old Age Security (OAS) program offers a monthly payment to most Canadians aged 65 or older. Unlike the CPP, the OAS is not based on your work history or contributions. To qualify for OAS, you must have lived in Canada for at least 10 years since turning 18. The amount you receive from OAS depends on how long you have lived in Canada after the age of 18.

In addition to the OAS, the Guaranteed Income Supplement (GIS) provides additional monthly income to low-income OAS recipients. The GIS is based on your income and marital status, helping to ensure that those with lower incomes receive the financial support they need.

What Are the Benefits and Differences Between RRSPs and TFSAs?

When planning for retirement in Canada, it’s essential to understand the benefits and differences between Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs). Both are powerful tools for saving, but they serve different purposes and offer unique advantages.

Registered Retirement Savings Plans (RRSPs)

Tax-Free Savings Accounts (TFSAs)

Consider Sarah, who is planning for her retirement. She contributes to both an RRSP and a TFSA. Her RRSP contributions reduce her taxable income, providing her with immediate tax relief. She plans to use her RRSP savings primarily for retirement, benefiting from the tax-deferred growth. On the other hand, Sarah uses her TFSA for both medium-term goals, like buying a new car, and additional retirement savings. She appreciates the flexibility of the TFSA, knowing she can access these funds tax-free whenever needed.

Both RRSPs and TFSAs offer significant benefits for retirement planning. RRSPs provide tax deductions and are ideal for long-term retirement savings, while TFSAs offer tax-free growth and flexibility for a variety of savings goals. Understanding the differences and advantages of each can help you create a balanced and effective retirement savings strategy.

What Are the Different Types of Life Insurance, and How Do They Benefit Retirees?

There are several types of life insurance that benefit retirees. The main types are term life, whole life, and universal life insurance.

Term life insurance provides coverage for a specific period, such as 10, 20, or 30 years. It is often the most affordable option. If the policyholder dies during the term, beneficiaries receive the death benefit. This can help cover funeral costs, debts, or provide financial support for loved ones.

Whole life insurance offers lifelong coverage. It includes a death benefit and a cash value component that grows over time. Premiums are higher than term life but remain level throughout the policyholder’s life. The cash value can be borrowed against or withdrawn, providing financial flexibility.

Universal life insurance also provides lifelong coverage but offers more flexibility. Policyholders can adjust their premiums and death benefits. It also has a cash value component that earns interest. This type can be a good option for retirees seeking flexible financial planning.

Each type of life insurance offers unique benefits. Term life is cost-effective for specific needs. Whole life builds cash value for long-term security. Universal life combines lifelong protection with financial flexibility. Retirees can choose the type that best fits their financial goals and needs.

Why is Life Insurance Important During Retirement?

Life insurance is crucial during retirement for several reasons. It provides financial security for spouses and dependents. If the policyholder passes away, the death benefit can help cover living expenses, debts, and medical bills. This ensures that loved ones are not left with financial burdens.

Life insurance can also supplement retirement income. Some policies, like whole life or universal life, build cash value over time. Retirees can borrow against this cash value or make withdrawals, providing an additional source of funds.

Furthermore, life insurance can be a tool for estate planning. It can help cover estate taxes, ensuring that more of the estate goes to heirs. It can also be used to leave a legacy, funding charitable donations or setting up trusts.

Frequently asked questions (FAQs) About Retirement Planning in Canada

Find a solution for what you’re looking for 

With careful planning and informed decisions, you can secure a comfortable and financially stable retirement, allowing you to enjoy your golden years with peace of mind.  At Protect Your Wealth, we work with and compare policies and quotes from the best life insurance companies in Canada to ensure the best solution for you and your needs. We provide expert life insurance solutions, including no medical life insurance, critical illness insurance, term life insurance, and permanent life insurance to build the best package to give you the protection you need.

Contact Protect Your Wealth or call us at 1-877-654-6119 to talk to an advisor today! We’re proudly based out of Hamilton, and service clients anywhere in Ontario, British Columbia, Alberta, and Manitoba including areas such as Toronto, Abbotsford, Medicine Hat, and Winnipeg.