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Not sure if you’re on track for retirement? We outline how much you should aim to have socked away based on your age.
For many Canadians, investing in a registered retirement savings plan (RRSP) is the primary way to save for retirement. RRSPs are an invaluable tool, allowing you to stow away funds for golden years while reducing your taxable income today. However, there is no one-size-fits-all way to use them, so it can be hard to know whether or not you’re on the right track. We enlisted the help of Ayana Forward, a Certified Financial Planner with Retirement in View, to provide insight on both determining—and meeting—your financial goals for retirement. Here’s how much you should have in your RRSP by age. But first, some background on RRSPs.
An RRSP is a nest-egg account that you (or, in the case of a spousal RRSP, your spouse or common-law partner) can contribute to and use to buy investments. You earn new RRSP room based on a percentage of your earned income, and contributions reduce your taxable income for the year. You can check your RRSP room on your notice of assessment to ensure you don’t over-contribute. If you don’t max out your RRSP each year, the unused portion of your contribution room rolls over into subsequent tax years. You can hold cold, hard cash in your RRSP as well as qualified investments like ETFs, mutual funds, GICS, stocks and bonds. (Here’s how to determine if your savings should be invested in an RRSP or TFSA.)
When you retire, or by no later than December 31 of the year you turn 71, you generally convert your RRSP to a registered retirement income fund (RRIF) from which you draw funds. An RRSP can also be used to purchase an annuity prior to turning 72, but RRIFs are much more common. The savings you have in your RRIF are tax-deferred until they are paid out, at which point they are taxed. More on that below.
When you save funds in your RRSP, you’re not only preparing for your future. Your present self can also benefit greatly, since those contributions are tax-deferred, and contributions generate a tax refund. If, like most Canadians, your tax bracket is lower upon retirement, you will likely benefit by making RRSP contributions.
When it comes to getting the most out of your RRSP, timing is everything. “You should time the use of the deduction for when you are in a high tax bracket,” Forward advises, adding that you can save deductions made while you’re in a lower bracket and claim them later when you need them. Like RRSP room, undeducted RRSP contributions can be carried forward. The second major benefit of RRSPs, she says, is that “the investments grow tax-sheltered while being held in the plan.”
Determining your goal amount is highly individual and will depend on a number of factors. Forward recommends that you begin by considering the following variables:
Beyond that, identifying your future needs is the priority. “The challenge is anticipating how your spending needs will change during your retirement years,” says Forward. Significant expenses like a mortgage may be paid off by retirement and you can likely depend on a significantly lower tax bill. On the other hand, she says, you might plan on completing home renovations or travelling in retirement—activities that you’ll need to budget for. “Everyone is different, but many retirees I speak to find they are spending 60% to 70% of their current income in retirement.”
Account for other retirement income sources, too. “Once you’ve established your target spending needs and retirement age, you will need an estimate of your guaranteed income sources,” Forward says. These sources might include Canada Pension Plan (CPP)/Quebec Pension Plan (QPP) and Old Age Security (OAS). These can be confirmed with Service Canada (CPP/OAS) or Retraite Québec (QPP).
Once you know how much money you’ll need in retirement, Forward says, you can work backwards to signpost your savings goals. As an example, let’s say you’ve set a retirement target of $40,000 pre-tax income annually and you wish to retire at 65. If your pension and CPP/OAS contributes $20,000 (close to the maximum), you will need an additional $20,000 annually to meet that goal. If you live to be 95 years old, you might need a total of $600,000. Compound interest will help you get there. Let’s take a closer look.
To make your RRSP projections, use an online calculator or even the old-school method. Interest rates fluctuate, but a 4% rate of return on your RRSPs after fees is a conservative estimate, according to Forward.
If you’re in your 20s, you’re probably just starting out in your career. You may have a modest salary and other debts, like student loans, to pay off. “The biggest asset you have right now is time,” Forward says. She advocates for establishing a regular contribution schedule, however small, and taking full advantage of access you might have to any employer pension-matching programs. An individual who deposits $400 monthly starting at age 20 will have more than $600,000 in their RRSP by the time they’re 65 (assuming the 4% rate of return). Those who deposit the same total annually ($4,800) as a lump-sum contribution will also reach their goal, though they will accumulate less in interest.
Many Canadians in their 30s and 40s face new demands on their disposable income. “While your gross income might be rising,” Forward notes, “you likely have a mortgage, daycare costs and less time on your hands to dedicate to managing your finances.” Still, your tax bracket is probably increasing at this point, and you still have time and compounding on your side. By the end of your 40s, though, you’re reaching the end of your peak spending years. “Make sure you have started saving for retirement in some form.”
With a starting point of $275,000 in your RRSP at age 50 and monthly deposits of $500, you’ll make your RRSP goal. If you’ve not yet put money in your RRSP by the end of your 40s, it will take significant contributions to make your goal.
Your RRSP contribution age limit is 71 (more specifically, you can contribute until December 31 of that year). That is, unless you have a younger spouse. You can make contributions to a spousal RRSP owned by your spouse and based on your contribution room until December 31 of the year they turn 71.
When you turn 50, you have only 15 years left to make your RRSP goal—that is, if you intend on retiring at 65. “Savings tend to accelerate in this period as more disposable income is available, but your time horizon is much shorter now,” Forward says.
After age 60, you’re focused on the next phase of your life: retirement. “It’s time to start winding down your career, choose a firm retirement date and start planning an optimal withdrawal strategy,” she says, adding that your target is to have reached 100% of your goal by this age.
Saving for your retirement with an RRSP is an individual process with many variables to consider. “It is important to note that financial planning is an ongoing process,” Forward says. “Your income, spending and savings rates will change through time and there is value in constantly setting savings targets, monitoring your performance and identifying opportunities to reduce tax, so that you can build your retirement nest egg as efficiently as possible.” With planning and forethought, you can make the most of your RRSP investments—at any age.
This is an editorially driven article or content package, presented with financial support from an advertiser. The advertiser has no influence on the creation of the content.
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This article is based on very stereotypes view of family life: when your mortgage is paid off and the kids finished university. What if you are single (divorced, separated, not married at all), what if you are in your 40-50s and just got the mortgage, what if your kids didn’t go to university, etc. There is so many life situations, different then “ you, your spouse, mortgage done and kids done universities”. In the case you are in the shoes of 80% other family situations, you need to talk to your financial advisor. But this is just my comment…
How much money do I have in rrsp’s my age is 51, I have cancer and thinking of pulling out my rrsp’s early to help pay bills n get my life staightend out n funeral plans payed for
Article really doesn’t tell you anything. It would be nice to have a link to a calculator that estimates how much you’ll need. I know everyone’s situation is different but generalizing like this article is a waste of time.
Another thing to be considered is what is your employer’s benefit (Pension or RRSP) plan is. My last 2 employers had no actual pension plan but they matched my RRSP contributions up to a limit so I contributed via payroll to get their max contributions. Best return on any safe investment. Also be very sceptical of financial planners who want you to max out your RRSP and put it into their company’s funds. They’re just looking to get the max for themselves.
I think that one sentence in an early paragraph can be interpreted 2 ways. It says: ‘many retirees I speak to find that they are spending 60% to 70% of their current income.’ As they’re retired they are living in their retirement income and if they’re only spending 60 to 70% then doesn’t that indicate that they may have save too much and their assets will be increasing?
We’ve been retired for 10 years now and based on our cost of living, we’re not coming close to spending 60 to 70% of our pre-retirement income and CPP and OAS covers the majority of our costs. I did start contributing to my RRSP in 1976 and didn’t always contribute the maximum but never withdrew any until my RIF and age made it compulsory.
It’s a lot of generalizations here, one size does not fit all. It depends on how life goes, and what you can accumulate to address your retirement over time. What I draw from this is try to do your best and accumulate what you can, no matter how small and take advantage of what’s available, RRSP’s, TFSA’s, RESP’s if you have kids, especially newborns – start the RESP early for them as the Gov’t throws in 20% too, I mean where else can you get that from the Gov’t ? Use part of your Child Tax Credit to fund it, double bonus ! It can really make a big difference over time and help fund their post-secondary education.
I appreciate all the discussion about saving for your RRSP. However, I wish there was much more detailed advice as to how to excess and withdraw your investments once you are retired!
Thank you for your comment. You may find this article helpful: https://www.moneysense.ca/columns/ask-a-planner/how-much-to-take-out-of-your-rrsp-in-your-60s/
If you don’t invest your tax return a tfsa should be your first choice and anything remaining should be invested in a rrsp. Tfsa and corporate accounts are much better than rrsp but mutual funds and banks sell rrsp more. My 2 cents. Retired for 3 years living what I sowed.
“retirement target of $40,000 net income annually
If your pension and CPP/OAS contributes $20,000, you will need $20,000 annually”
Way off base. Depending on your income level your “gross” income will be taxed. The RRSP is a tax deferment regime.
My objective prior to retirement was exactly as mentioned – $40K net
I had $20K in government programs. When I went to see a financial planner, he immediately said $60 gross. So $20K above what is mentioned above.
The government(s) get 30% of gross at that level.
There are other ins and outs but pretty well your RIF/LIF will get taxed subject to income.
RICARDO
I would like to see an article comparing saving inside an RRSP vs outside assuming the same rate of return. Inside an RRSP my capital gains and dividends grow tax free. However I am axed on every dollar when I withdraw the money. Outside an RRSP my capital gains and dividends are only partially taxed. My capital gains grow tax free until I eventually sell. And then they are only taxed at 50%. And I believe that dividends are only taxed on 2/3.
So wouldn’t it be better to save outside an RRSP. I have asked this question to many financial planners and advisors, but have never received an acceptable answer. Can someone please write an article about this.
We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists.
An individual would require about 44K to create 40K net (4K for taxes), while a couple could create 40K tax free. This is depending on Province. Using the personal exemption, income splitting, age credit and pension credit a 65 year old BC couple could create 50K in income (29K of RRSP/RRIF) and pay almost no tax at all.