Retirement income: How much do you need?
The first step in planning for your retirement is knowing what sources of income will be available to you.
Although it's generally difficult to determine the exact amount to save every year for your retirement, personal finance experts say that, to live comfortably, your retirement income should be 50 to 70 of your gross earnings during your working lifeAttention, this link will open a new tab.Attention, this link will open a new tab. (video in French only). Of course, this amount depends on your situation and retirement plans. Fortunately, various sources of income will help you reach your retirement goals. In addition to your personal savings, you can access government programs such as the Québec Pension Plan (QPP) and the Old Age Security (OAS) program. Here's what you need to know to plan for your retirement.
The 50 to 70 percent rule
Once you're retired, you likely won't need the same income as you did during your working life, because you'll have fewer expenses. For example, you'll no longer be spending on work-related items such as transportation, lunches at restaurants, and work clothes. Although your budget for social activities will probably go up when you first retire, it will eventually decrease as you get older. That's why experts say that you need about 70 percent of your working-life income when you first retire, and that this percentage will drop to about 50 percent over time.
According to a 2017 opinion poll the Fonds conducted with Léger, Quebecers think they'll need an average of $721,000* for their retirement. Experts generally agree that it's possible to retire comfortably with $750,000. Once again, your financial needs in retirement will vary depending on your plans, lifestyle, and health, so this amount is just a ballpark figure. In any case, your personal savings should represent about 30 to 40 percent of your income after you stop working. Here are some tips to ensure your annual income lasts through your retirement—a span of about 30 years, by average estimatesAttention, this link will open a new tab.Attention, this link will open a new tab..
To help you save more easily, consider setting up automatic bank transfers or payroll deductions**. That way, your money gets invested before you're tempted to spend it, which means it could also starts earning you compound interest right away. You'll have a better chance of meeting your goals as you approach retirement.
There are a variety of savings instruments to choose from: registered investments like registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSA), which let you save money tax-free, and non-registered investments.
Whichever you choose, it's important to diversify your personal savings instruments and products. Other financial assets could also constitute a source of income once you retire, such as with the sale of a second residence. Consult a financial planner to determine the best savings strategy for your situation.
If you're self-employed
Self-employed workers face several challenges when it comes to saving for retirement. In Quebec, 50 percent of workers don't have access to a savings plan through their employer. That figure includes self-employed workers, who have the added challenge of paying their full contribution to the Québec Pension Plan (QPP). For salaried workers, QPP contributions are split equally between them and their employer.
Some employers offer savings plans to supplement public pension programs, such as supplemental pension plans (SPPs), group RRSPs, deferred profit sharing plans (DPSPs), or voluntary retirement savings plans (VRSPs). However, in Quebec, only half of all workers have access to a group retirement savings plan through their workplace. If you don't have a group savings plan, it's even more important to cultivate good personal savings habits.
Since each of these plans has different terms and conditions, you should speak to your financial advisor for a better understanding of the details. The annual statements provided by plan administrators also contain a wealth of information that can help you plan, but as a general rule, group plans such as group RRSPs and VRSPs are a wise choice when it comes to saving for retirement.
The importance of management fees
Before you invest, make sure to ask about management fees. These fees have a direct impact on yields, since every dollar paid in management fees represents one dollar less in returns. What happens if management fees are too high? Your savings grow more slowly, which impacts your retirement income. Normally, group savings plans offer more competitive management fees than individual savings, since the amount being managed is larger. Although contributing to a group plan can help you adopt healthy saving habits and therefore reach your retirement goal faster, group savings options don't always let you choose a product with a risk profile that meets your needs. Consult the plan administrator or your financial planner to make an informed decision.
Once you've retired, you can expect government programsAttention, this link will open a new tab.Attention, this link will open a new tab. (French only) to replace about 40 percent of your gross earnings. That means that, if you intend to live on 70 percent of your pre-retirement gross income, it's even more important for you to save.
The Québec Pension Plan (QPP)
Workers who have contributed to the QPP for a full year can claim pension benefits starting at age 60. The amount is calculated based on your annual salary and the number of years you contributed.
Since every situation is unique, it's up to you to decide when to start receiving your pension. However, your age when you apply will affect the amount you receive.
- If you're between 60 and 65 years old, your pension will be reduced by 0.5 to 0.6 percent per month
- If you're 65 years old, the amount will remain the same
- If you're between 65 and 70 years old, your pension will increase by 0.7 percent per month
Although the QPP previously replaced 25 percent of the average monthly income on which you made your contributions, the plan has recently been enhancedAttention, this link will open a new tab.Attention, this link will open a new tab. to replace 33 percent, for the number of years you contributed to the enhanced part of the QPP.
To properly plan your retirement income, it's better to use the average pension amount, a total of $535 per month rather than the maximum pension amount, which only 3.2 percent of new retirees received in 2020. It is also important to note that the pension is taxable and indexed to the cost of living every year. Request your Statement of ParticipationAttention, this link will open a new tab.Attention, this link will open a new tab. to get the most accurate estimate of your pension benefits.
Old Age Security (OAS)
The federal government also pays a monthly benefitAttention, this link will open a new tab.Attention, this link will open a new tab. (French only) to all people over the age of 65 who have been living legally in Canada for at least 10 years, regardless of whether they have worked. However, it is not paid if you have an annual income of $133,141 or more (in 2022).
You can start receiving the OAS pension when you turn 65, or you can defer it for up to five years to increase the amount of your benefits by 0.6 percent per month. From January to March 2022, the maximum annual OAS benefit was $642.25. This amount is taxable and indexed to the cost of living four times a year.
People receiving the OAS pension with an income of $20,832 or less (not including the pension) are eligible to receive the Guaranteed Income SupplementAttention, this link will open a new tab.Attention, this link will open a new tab. (GIS). These monthly benefits are not taxable, and they are indexed to the cost of living four times a year.
Although retirement may seem like an abstract concept, planning for it is in your best interest. When you consider that you will need roughly 50 to 70 percent of your pre-retirement gross earnings to live comfortably (depending on your plans), it's vital to have various sources of retirement income. That's why your personal savings carry such a huge weight.
To get an early idea of your path to retirement, use Retraite Québec's simulation toolAttention, this link will open a new tab.Attention, this link will open a new tab. to find out how much money you need to save every year to meet your retirement goals.
Lastly, to figure out your retirement plans and what you'll need to make them happen, consult our Retirement Guide.Legal notes
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