If you start an RRSP early in life and contribute to it every year, you can retire on $1.7 million in Canada.
A recent BMO poll found that Canadians estimate they will need $1.7 million to retire comfortably. If you're just starting out on the long road to saving for retirement, you may have heard about this data.
Based on the press release, inflation has driven the number up to $1.7 million from $1.4 million in 2020. it would take an individual saving $42,400 annually for 40 years (25-65 years old) in an RRSP to have an estimated savings of $1.7 million - which is much more than the maximum you can contribute. But, if you start saving early on, you don't need to save as much each year to reach this goal.
The best way to save $1.7 million for retirement
If $17,000 a year in RRSP contributions for over 40 years gets you to $1.7 million if you earn a 4% rate of return (ROR), I certainly sympathize with Canadian millennials or gen Zers feeling discouraged by such a large number.I also assumed a 4% return on investment (ROI) from fixed income (such as guaranteed investment certificates, or GICs) or dividend-paying Canadian stocks. These assumptions may seem too conservative.
According to Erin Allen, vice president of online ETF distribution for BMO ETFs, I was on the money with my guesstimates.
Allen agrees with your conservative 4% ROR on the portfolio, which is likely how we would frame it. With a 4% annual return on investment, $17,000 in RRSP contributions should lead to $1.7 million over 40 years with an annual return on investment of 4%. The compounded investment returns in an RRSP are tax-deferred, which means that you won't need to save anywhere close to that much in your 20s. Even 4% compounded annual investment returns will get you to the promised land of retirees over a period of 40 years due to the value added by time in the invested money.
Using calculator.net, Allen estimates that to reach $1.7 million by the end of year 40, you will need to contribute $17,900 each year (rounded) at the end of each year. The total contributions amount to $716,000, while the interest payments amount to $984,400.
In case you earn more than 4%, you can contribute even less to your RRSP. If you earned 5% a year, you would need to contribute $14,073 (rounded) per year for 40 years to reach $1.7 million. As a result, $562,915 was contributed and $1,137,085 was earned with interest.
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In his client projections, Matthew Ardrey, a wealth advisor at TriDelta Financial in Toronto, assumes a 5% return net of fees and an inflation rate of 3%. His portfolio includes stocks, bonds, and alternatives. According to the Morningstar financial planning program, a balanced portfolio will earn 4.55% gross of fees according to the Morningstar numbers.
In addition, Ardrey considers the length of time his clients intend to be in retirement, their life expectancy, their marital status, their investment accounts, and how much they want to spend in retirement, as well as the level of payments they would like to receive from the Canada Pension Plan (CPP) and Old Age Security (OAS). He adds that he also performs a Monte Carlo stress test when doing his projections to see what might happen if everything weren't perfect.
In the Monte Carlo stress test, Ardrey examines how much retirees with $1.7 million could spend assuming a paid-off home and full CPP and OAS benefits for each spouse.
Using that $1.7-million example, he found that a Canadian couple could spend $8,500 per month under ideal conditions with a 4% return. However, the stress test indicates that this scenario is only 57% likely to succeed. By lowering spending to $7,000 per month, the probability of success rises to 97%.
“Ideal conditions get them to $9,250 per month of spending under ideal conditions,” Ardrey says. “And in order to have a reasonable probability of success, they need to reduce their spending to $8,000 per month.”
Are all Canadians required to save for retirement: couples, singles, those with pensions at work?
Obviously, there are a lot of variables to consider. Singles have a tougher time saving than long-term couples. If you're in a couple, you each need to save $850,000 of the $1.7 million.
Also, those with classic defined benefit (DB) pension plans may not need anywhere near $1.7 million saved to retire. Government workers and some private-sector workers may find their DB pensions alone are worth $1 million if they keep their jobs for 40 years if they're inflation-indexed.
According to Financial Planner Steve Bridge of Money Coaches Canada, a couple with two deferred pensions may need $0 in retirement. On the other hand, Bridge says: “A person without a pension and planning to retire at 50 with an expensive retirement lifestyle (say $200,000 a year) would need many millions.” Especially if they plan to retire at 50.
For those employed in the private sectors and holding a non-indexed pension, the suggestion of amassing $1.7 million is more applicable. Yet many additional opportunities to build nest eggs exist aside from RRSPs - tax-free savings accounts (TFSAs), non-registered savings, or perhaps even an employer-sponsored defined contribution plan or group RRSP if available.
Third, all Canadians who have lived and worked in Canada for even a few decades can apply for CPP (as early as age 60) and OAS (as early as age 65) even if you do not have an employer pension linked to inflation. And the longer you delay receiving those benefits (ideally until age 70), the less money you'll need from your other retirement savings.
For example, Ardrey at TriDelta said "the results are similar, though slightly better in both cases if one spouse receives an employer pension indexed to inflation instead of an RRSP" (leaving the other with an $850,000 RRSP). In each case, the probability of success rises by about 10% to 15%, but does not reach 100%."
The numbers change if the funds aren't in RRSPs, but instead in TFSAs or taxable accounts.
However, RRSPs still provide real value for those with high earnings today and low earnings in retirement, says Ardrey.
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Malcolm Hamilton, a retired actuary and Canada's top retirement expert, had the following to say about the results of a BMO poll: "My thoughts on how much Canadians should put away for retirement have not changed. Couples who own their home and are parents to two children can lead a comfortable lifestyle with half of what they earned while in employment. Plus, when you halve your income, taxes reduce by more than 50%. What is more, Canadian Pension Plan (CPP) and Old Age Security (OAS) can provide for most couples' needs. Although it is great if people can save extra money, there is no reason to worry about saving less than what financial planners or financial institutions recommend."
The baby boom generation has been told for years that they will never be able to retire because they are not saving enough. Hamilton disagrees now. Today, most boomers have voluntarily retired at or before the age of 65, much earlier for government employees, and are enjoying active retirements.
Aaron Hector, a private wealth advisor with CWB Wealth in Calgary, is not fond of the concept of target figures like $1.7 million and refrains from commenting if it's a reasonable average. According to him, a big lesson he has learnt as a financial planner is that every individual or couple has unique circumstances which cannot be generalized as an 'average'.
In Hector's view, $1.7 million means something different to one person than to another. A person may have $1.7 million in an RRSP and another $1.7 million in a combination of non-registered and TFSA accounts. On an after-tax basis, the money outside the RRSP is far more valuable. These aren't a true comparison.
Hector says he understands the natural desire to compare financial situations, but says there is no ‘one size fits all’ [solution] when it comes to financial planning... In order to figure out if you are on the right track for retirement, you need to think about your unique circumstances. Then plan accordingly.”
If you don't live in Vancouver or Toronto, how much do you need to retire?
Obviously, the amount of money you need to retire depends on where you live. According to Kyle Prevost, MoneySense's columnist behind "Making sense of the markets this week," $1.7 million is "probably more than most people need, especially if they own their home." Most upper-middle-class Canadians—especially those with children who’ve moved out, [and] own their home—overestimate what they’ll spend, and how little tax they’ll pay in retirement.
If you live in Manitoba and have $1.7 million in savings, you will definitely be among the top 1% of retirees, says Prevost. Even in Calgary, Montreal, Edmonton, Halifax, maybe Ottawa and Victoria, that's likely more than you'd need for a comfortable retirement as a couple, assuming decent CPP and maximum OAS." However, Vancouver and Toronto residents who don't own their own homes may need “a lot more than $1.7 million.”
Whether you need $1.7 million to retire is up to you and your financial planner, if you have one.
You can also read more about this in the below articles
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