I'm sometimes asked by the media to comment on how much money Canadians should put into Registered Retirement Savings Plans (RRSPs). There isn't an easy answer -- but there is a better question: How much money do you need to retire comfortably?
RRSPs aren't the be-all, end-all, of retirement planning. They're a piece of the puzzle for many Canadians, thanks largely to the lure of the tax deductions that come with them. But to determine how much you need to contribute (if anything at all), look at the big picture. It's critical that you do this early and often: our research has found that roughly half of Canadian homeowners aged 50 and up believe they'll run out of money within 10 years of retiring. Want to avoid being in that position? Here are some questions to think about as you build your retirement plan:
What sources of income will you have in retirement?
Many Canadians can expect to qualify for some federal government benefits. These include the Canada Pension Plan (CPP), Old Age Security (OAS) and the Guaranteed Income Supplement (GIS). The amounts you're eligible for (if any) can differ. The CPP, for example, is a monthly benefit that you've paid into through taxes that is designed to replace about 25 per cent of your lifetime pre-retirement employment earnings, up to a maximum amount (in 2013 this amount was $1,012.50, the average was just over $500 a month). Visit Service Canada to find out what you can expect to receive from government retirement plans and benefits.
Beyond government benefits, other potential sources of income include:
•Workplace pensions
•Rental income (if you're a landlord)
•Royalties (from music or publications you've created)
•Dividends (from investments)
•Post-retirement work (such as contract, part-time and consulting opportunities)
Add everything up to get a sense of what your monthly income will be. Be conservative, as some of these income sources might not be guaranteed.
What kind of a lifestyle would you like to lead? Everyone has different dreams for their golden years. Do you want to travel the world, move closer to grandchildren, be members of the golf club, or regularly take part in your city's cultural offerings? Take the Investor Education Fund's Retirement lifestyle quiz to set your sights on life after the office. Once you have that in mind, take a look at our retirement planners on GetSmarterAboutMoney.ca, which can help you figure out the cost of living big or small -- including how projected inflation will make an impact.
What assets and debts will you bring into retirement?
Would you be willing to sell your home, downsize and use the difference to cushion your retirement? Alternatively, do you think you'll have lines of credit, a mortgage or other debts that will chip away at your income through monthly payments?
How soon would you like to retire and what's realistic?
To make the most of pension options, you might need to wait until you're at least 65. On the other hand, factors like health and capabilities might take you out of the workforce earlier. Use this retirement age and your potential life expectancy to calculate how many years you'll likely need covered. Some of the planners and calculators I mentioned above can help you estimate the costs of living. If the sum you need exceeds your projected income, you may need to adjust your date of retirement.
What kinds of investment risk are you willing to take?
When you take all of the factors into consideration -- your expected income sources, your assets and debts, and the amount of money you'd need to enjoy retirement until the end -- any differences left are what you'll need to fill with retirement savings (like an RRSP). While higher risk options have the potential to get you to your goals faster, there are no guarantees; you could also lose your money.
Get a sense of the amount of risk you're comfortable with -- and how you compare to other Canadians -- by completing the Canadian Money State of Mind Risk Survey. That, and the advice of a registered financial adviser or planner, can help you craft a plan that works for you.
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