Yahoo Finance Ask the Expert: How much money do you really need to retire in Canada?
Most Canadians believe they'll need $1.7M, per BMO, but 'there's no magic number'
It's an age-old question that Paul Lalonde, the head of wealth planning at BMO Private Wealth, hears often.
“The latest example was actually last week,” Lalonde said in an interview with Yahoo Finance Canada.
“I was in Maine cycling with friends of mine, we’re all beside each other, and one of the guys on the bike says, ‘So, what’s that magic number? How much do we need to retire?’”
An early 2023 survey from BMO found that Canadians believe they’ll need $1.7 million – up 20 per cent from 2020. That number “seemed to be high,” Lalonde says, and was more representative of the mood of Canadians in the current economic climate.
So, how much do you really need? Most financial experts will tell you the same thing: it depends.
Lalonde compares it to buying a car. "What's the perfect car out there in the marketplace? And you know what, I think it's completely different (for everyone)," he said.
"One will prefer a pickup truck, with larger families it's going to be an SUV or a family van, the other one is going to be an (electric) car. So, obviously there’s no magic number.”
Rather, the number will be unique to each individual.
Think about your desired lifestyle
There are many questions people should consider. When do they plan to retire, and what sources of income will they have in retirement? Do they have a defined-benefit pension plan, or will they be relying on the Canada Pension Plan (CPP)? What are their expenses? And, most importantly, what sort of life do they hope to lead in retirement?
The answers to those questions will help determine your approach, says Julia Chung, CEO and senior financial planner at Spring Financial Planning.
For example, one couple Chung works with had between $500,000 and $700,000 in personal savings and investments when they retired. But since they have an inexpensive lifestyle and defined-benefit pension plans that provide a steady stream of income, they’ve been “totally fine.”
“They don’t like to travel, their home is very cheap to run, she likes to go to the library on a daily basis, and he very much enjoys fishing every time of year," she said. "And they never eat out."
“All of those things totally work for them, and they’re delighted.”
That couple’s retirement plan is very different from another Chung works with, whose current lifestyle spend is between $10,000 and $15,000 a month.
“And that’s absolutely going to go up in at least the first 10 years of retirement because they want to take some big trips, and they want to give down payment gifts to their kids, and all these kinds of things,” Chung said.
“So, we’re making sure that when they retire, they have a significantly larger net worth and more sources of income.”
Forecasting your nest egg
To help determine how much money they might need in the future, one of the first questions people need to ask themselves is how much they’re spending now, says Jeet Dhillon, senior portfolio manager at TD Wealth.
As a rule of thumb, Dhillon advises her clients to expect 70 to 80 per cent of their current annual living expenses to remain in retirement. Then, add in discretionary spending based on their desired lifestyle. From there, it can become easier to project how big that nest egg needs to be, factoring in the anticipated length of their retirement and how much they’ll be earning.
“The gap between your [retirement] income and what you’re going to spend, that’s going to have to come from savings,” Dhillon said in an interview with Yahoo Finance Canada, adding that it will also depend on an individual’s investment strategy.
Dhillon says anywhere from $700,000 to $1 million would be a “good ballpark figure” for the average Canadian, but stresses that this should only be used as a starting point. It’s also important not to confuse net and gross income, Lalonde adds, as $1 million in a Tax-Free Savings Account would provide significantly more disposable income than the same amount in a Registered Retirement Savings Plan.
“Retirement has changed in terms of what it means,” Dhillon said.
“There are people who may retire from one job, but they might be doing other jobs that still generate income. There are people who may retire early so they might need more resources. It’s not like everyone retires at 65 and they sit on a porch and watch the world go by. It’s very different now for everyone.”
Farhan Devji is a freelance journalist and published author based in Vancouver. You can follow him on Twitter @farhandevji.
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