RRSP by FlexFi Team

Why all Canadians should start saving early for retirement

by the FlexFi Team

Did you know that a large percentage of Canadians are heading into retirement with inadequate savings? A report by the Broadbent Institute contends that half of all Canadian couples between the ages of 55 and 64 have no employer pension, and of those, less than 20% of middle-income families have saved enough to adequately supplement government benefits and the Canada/Quebec Pension Plan.

The CPP pays out a maximum of $12,780 a year and many retirees don’t even qualify for the maximum amount.  Seniors can also collect old age security payments to a maximum of $6,839 a year but the combined plans fall below $20,000 a year per individual.

CPP pays out a maximum of $12,780 a year and many people don’t even qualify for that amount

Looking at these numbers, clearly you shouldn’t rely on the government to finance your retirement. If you have children, you probably wouldn’t mind spending as much time with them as you possibly can. However, having to live with your children because you don’t have the financial resources to live on your own isn’t how most people want to spend their retirement years. Being financially dependent not only means depending on someone else to cover your living expenses, it may also mean giving up your freedom and your independence!

Apart from winning the lottery or receiving a big inheritance, the key way to ensure that you remain independent is to make sure that you save enough to cover your expenses during your retirement years. You should start saving for retirement as early as you can.

Understanding the numbers

To see why this is important, take the example of Lucas and Ana, a couple currently thinking about their retirement. Their goal is to have a monthly income of $4,000, which is approximately 70% of their current earnings. They figure they have 30 years before they retire.

The retirement plan became a huge priority in their lives when they calculated the amount they would receive monthly from CPP at retirement.  Why? CPP will likely pay them the average amount, which is around $650 per month, resulting in a combined income of approximately $1,300; That’s not even half of the $4,000 amount they need.

Saving for Retirement Chart

The shortfall of $2,700 a month will need to come from savings, investments, and other sources. It turns out they already have $25,000 invested in a TFSA account, but they know that is not enough.

Faced with this reality Lucas and Ana revisited their household budget and identified a few areas they could reduce their expenses. As a result, they were able to set aside $500 a month in savings. If they manage to keep this up, the $500 saving a month, on top of their TFSA, will grow to around $430,000 after 30 years, and at an interest rate of 4%, compounded monthly.

Will this amount be enough? Not quite, but it certainly gets them closer to the goal. If they invest their savings in an Annuity (a product offered by many financial institutions), it can generate an additional $1,800 a month in guaranteed retirement income for 25 years after retirement.

To narrow the gap even more, they can look for ways to increase their monthly saving for retirement over time, which in turn will increase their retirement income. Speaking to qualified licensed advisors is also a great idea to identify ways of getting better returns on their savings.

Bottom line

The Government pension plan helps provide a minimum income level when you retire, but for most people, it will not be enough. So, in addition to contributing to CPP you need to start saving for retirement as soon as you can and have a solid plan.


1) It is never too early to start saving for retirement.
2) Every single dollar invested towards your retirement helps.
3) Even if you are not able to save as much as you’d like, start saving something

Compound interest and time are your best friends in this process. The sooner you start saving, the better.

FlexFi Inc. is not a financial advisory firm.
This article is for informational purposes only and is not a substitute for individualized professional advice.

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