The Rising Cost of Retirement: How Much Canadians Really Need to Save

Retirement planning is becoming increasingly daunting for Canadians, with the amount needed for a comfortable retirement continuing to climb. Recent surveys reveal a growing gap between Canadians’ savings and their retirement goals, fueled by inflation and economic uncertainty. Whereas the dream of a secure retirement remains, achieving it requires careful planning and a realistic understanding of the financial landscape.

The Increasing Retirement Savings Target

According to BMO’s Annual Retirement Survey, Canadian couples now estimate they need an average of $1.7 million in savings to retire comfortably. This represents a significant increase from the $1.54 million estimated in the previous year’s survey. For individuals, this translates to roughly $850,000 each. An RBC survey suggests a similar figure, around $814,000 per person, but millennials anticipate needing closer to $999,000 individually to account for the anticipated rise in the cost of living.

The Impact of Inflation and Individual Lifestyles

It’s crucial to remember that these figures are averages. Terri Szego, a senior portfolio manager at BMO, emphasizes that the actual amount needed varies significantly based on individual spending habits and desired lifestyle in retirement. “Every individual and couple are different in terms of what they spend now, what they’re saving and then what they think they’ll spend in retirement,” she explains. A more modest lifestyle requires a smaller nest egg, potentially as low as $750,000.

Millennial Concerns and the Savings Gap

Despite these ambitious goals, many young Canadians feel they are falling behind. The RBC survey reveals that the average millennial has saved approximately $126,000 so far, with a majority (64%) expressing anxiety about their financial future and 59% feeling financially insecure.

Time to Reach the Goal: A Long Road Ahead

Based on calculations from Wealthsimple, RBC, and TD, the average millennial may not reach their target savings of $850,000 until their 70s. For example, a person earning $50,000 annually who contributes $425 monthly to their Registered Retirement Savings Plan (RRSP) could reach approximately $880,000 by age 73 (Wealthsimple), $861,235.85 by age 75 (RBC), or $855,203 by age 75 (TD). These calculations assume an average investment growth rate of between 5% and 5.75% per year.

Planning and Strategies for a Secure Retirement

Canadians generally initiate planning for retirement around age 30, with an anticipated retirement age of 61, according to a CIBC survey. Although, maximizing savings requires proactive strategies. Jodi Wright, head of RBC Financial Planning, acknowledges that contributing the recommended 10% of income can be challenging for young Canadians facing immediate financial pressures.

The Dual-Income Advantage

Having a dual income significantly impacts retirement savings potential. “You’ve got your rent or mortgage, utility bills, insurance, property taxes to pay. When you’ve got two incomes that are working towards that, mathematically, you should be able to have a greater amount left over to save or to invest,” Wright explains. This has led some single Canadians to consider cohabitation to pool resources and accelerate their savings.

The Power of Investing

Szego emphasizes the importance of investing RRSP funds rather than simply using them as a tax shelter. Compounding returns over the long term can substantially reduce the amount individuals need to save. “When you earn, let’s say five per cent on your investments, the next year you’re going to earn five percent on the previous year’s five per cent and then next year, you’re going earn five per cent on the previous two years’ five per cent. That function of compounding really starts to kick in when you start investing at a young age,” she says.

Start Small and Stay Consistent

Even small, consistent contributions can make a significant difference. “Starting small and starting somewhere is more important than not starting and putting your head in the sand,” Wright advises. Adjusting contributions based on life stages – increasing savings during periods of higher income and potentially reducing them during expensive life events like childbirth or homeownership – can provide financial flexibility.

Key Takeaways

• The estimated cost of retirement for Canadian couples is rising, now averaging $1.7 million.
• Millennials face a significant savings gap and may need to work well into their 70s to reach their retirement goals.
• Inflation and lifestyle choices significantly impact the amount needed for a comfortable retirement.
• Starting to save early, investing wisely, and consistently contributing to retirement plans are crucial for long-term financial security.