Do you really need $1.7 million to retire? We surveyed financial experts — and they all agreed you don’t
A recent BMO survey found Canadians expect they’ll need to save $1.7 million to retire comfortably. Such reports stoke unnecessary fear, financial experts say.
According to the experts, people looking to retire need to focus on three income streams: government benefits, workplace pension and personal retirement savings. - Ramon Ferreira / Toronto Star Illustration
Apparently, you’ll need $1.7 million to retire.
That’s how much the average Canadian believes is required for comfortable golden years, according to a Bank of Montreal survey last month.
But can that really be the magic number? After all, most Canadians would likely never reach that goal — or even come close. And fewer than half surveyed say they are confident of reaching that figure.
The Star reached out to several financial experts and all agreed: you don’t need $1.7 million to retire. In fact, that number is “absurd,” said Malcolm Hamilton, a retired actuary.
“This survey says all Canadians need to save the same, but we know that’s not the case,” said Hamilton. “If someone was earning $30,000 a year and went to BMO for retirement planning advice would they tell that person they need to save $1.7 million? No.”
It’s a myth, he added, and it needs to be debunked.
“Canadians have been bombarded by financial institutions for decades which suggest Canadians don’t save enough and that no one can afford to retire,” he said. “But many households do have an adequate amount of savings.”
In 2014, Statistics Canada surveyed a group of nonretired Canadians about their expectations for retirement. Around two thirds said they expected their retirement income enough to maintain their standard of living. In 2020, the same group of people, then in retirement, were asked if their income was indeed, adequate. More than 81 per cent said “yes.”
While marginalized groups (racialized, people with disabilities) were less optimistic about their financial situation in retirement in 2014, the majority of retirees said they were living comfortably in 2020.
“For people on a less than average income they don’t need to save much more as government benefits will be able to cover their needs,” Hamilton said. “For higher than average earners they’ll need to save more to sustain their lifestyle.”
The income replacement ratio
Experts say a general rule of thumb for calculations is 70 per cent — the percentage of your current annual income as the amount you should be able to retire on.
This income replacement ratio is a good place to start, said Ian Calvert, vice-president and principal of wealth planning, at HighView Financial Group.
That means if you earn $100,000 a year while working, you’ll need $70,000 to live comfortably in retirement.
“Now is that the number for everyone? No.” says Calvert. “But it’s a productive number to follow.”
Depending on income, the magic number can range for many households, said Hamilton, who knows many people that have retired comfortably on half their working income.
“If you earned $70,000 and when you retire you only have $35,000, people look down on that, but that gives you a good standard of living because most of your major expenses in retirement are paid off.”
Three pillars of retirement income
People looking to retire, said Calvert, need to focus on three income streams: government benefits, workplace pension, and personal retirement savings.
Someone receiving a full Canada Pension Plan (CPP) amount today could earn about $15,000 a year, said Calvert, but this can be a difficult number to reach taking many years of employment and making maximum CPP contributions along the way. It’s more common, he said, for Canadians to receive between $12,000 and $13,000.
Another possible benefit is the Old Age Security (OAS) which can amount to a maximum of $9,000 a year, said Calvert.
“When you break that down, you could get around $22,000. And if it’s a double income you’re looking at $44,000 of recurring income,” Calvert said. “That’s a meaningful component and it adjusts each year to inflation.”
If a household earns $100,000 and they need $60,000 to live comfortably, $40,000 could already be covered by the government. That means the household must make up the difference of $20,000 a year. If you look at that number over 30 years from age 65 to age 95 the household must save $600,000 for retirement.
It’s also crucial to enrol in a company’s pension plan as employers often match contributions, said Dan Hallet, vice-president of research at HighView Financial Group.
According to Statistics Canada, about 40 per cent of workers in Canada are members of a defined benefit pension plan — 43 per cent of women and 37 per cent of men, largely in the public sector. Only about 25 per cent of private sector workers are covered by a pension plan.
“The biggest mistake is not enrolling in your company’s pension plan,” Hallett said. “I’m always floored by the number of people that leave free money on the table.”
Personal savings, which can be in the form of Registered Retirement Savings Plans (RRSPs) or personal investments, can also boost income streams in retirement, he added.
Earn less, spend less
While retirement incomes are most often less than what people make while working, spending also declines on things like mortgages, child expenses and savings, said Hamilton.
“Most of those expenses stop before you retire,” he said. And while retirement income is still taxed, it’s at a much lower rate.
There could be other expenses such as travel, but in Hallett’s experience many of his retired clients don’t travel as much as they thought they would.
“There’s a notion that I’ll be travelling half the year but most Canadians don’t travel that much in retirement,” he said. “The further away you are from retirement the further you are from being able to conceptualize what retirement actually looks like.”
It’s still important to start saving as soon as you can, said Janet Gray, financial planner at Money Coaches Canada.
“If you can start saving by the time you’re in your 20s and 30s,” she said “even if it’s just $25 a month, you’ll be so far ahead of people who only start to plan in their middle age.”
Clarrie Feinstein is a Toronto-based business reporter for the Star. Reach Clarrie via email: clarriefeinstein@torstar.ca
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