Photo by RODNAE Productions from Pexels
For many Canadians, investing in their registered retirement savings plan (RRSP) is the primary way they save for retirement. RRSPs are an invaluable tool, allowing you to stow away funds for golden years while reducing your taxable income today. However, there is no one-size-fits-all way to use them, so it can be hard to know whether or not you’re on the right track. We enlisted the help of Ayana Forward, a Certified Financial Planner with Retirement in View , to provide insight on both determining—and meeting—your financial goals for retirement. Here’s how much you should have in your RRSP by age. But first, some background on RRSPs.
An RRSP is a nest-egg account that you (and your spouse or common-law partner) can contribute to long-term. Every year, you can stash a percentage of your income in your RRSP, reducing your taxable income for the year. Note: The contribution limit changes each year, so check the current limit to ensure you don’t over-contribute. If you don’t max out your RRSP each year, the unused portion of your contribution room rolls over into subsequent tax years. You can hold cold, hard cash in your RRSP as well as qualified investments like ETFs, mutual funds, GICS and more. (Here’s how to determine if your savings should be invested in an RRSP or TFSA.)
When you retire, you can convert your RRSP to a registered retirement income fund (RRIF) from which you can draw funds. The savings you have in your RRIF are tax-free until they are paid out, at which point they will be taxed. More on that below.
When you save funds with your RRSP, you’re not only preparing for your future. Your present self can also benefit greatly, since that money is not taxable until it’s withdrawn. If, like most Canadians, your tax bracket is lower upon retirement, you can shelter a great deal of money.
When it comes to getting the most out of your RRSP, timing is everything. “You should time the use of the deduction for when you are in a high tax bracket,” Forward advises, adding that you can save deductions made while you’re in a lower bracket and claim them later when you need them. The second major benefit of RRSPs, she says, is that “the investments grow tax sheltered while being held in the plan.”
Determining your goal amount is highly individual and will depend on a number of factors. Forward recommends that you begin by considering the following variables:
Beyond that, identifying your future needs is the priority. “The challenge is anticipating how your spending needs will change during your retirement years,” says Forward. Significant expenses like a mortgage may be paid off by retirement and you can likely depend on a significantly lower tax bill. On the other hand, she says, you might plan on completing home renovations or travelling in retirement—activities that you’ll need to budget for. “Everyone is different but many retirees I speak to find they are spending 60% to 70% of their current income in retirement.”
Account for other retirement income sources, too. “Once you’ve established your target spending needs and retirement age, you will need an estimate of your guaranteed income sources,” Forward advises. These sources might include Canada Pension Plan (CPP)/Quebec Pension Plan (QPP) and Old Age Security (OAS). The more funds available to you through these sources, the less you’ll need to save in your RRSP.
Once you know how much money you’ll need in retirement, Forward says, you can work backwards to signpost your savings goals. As an example, let’s say you’ve set a retirement target of $40,000 net income annually and you wish to retire at 65. If your pension and CPP/OAS contributes $20,000, you will need $20,000 annually to meet that goal. If you live to be 95 years old, you’ll need a total of $600,000. Compound interest will help you get there. Let’s take a closer look.
To make your RRSP projections, use an online calculator or even the old-school method . Interest rates fluctuate but a 4% rate of return on your RRSPs after inflation and fees is a conservative estimate, according to Forward.
If you’re in your 20s, you’re probably just starting out in your career. You may have a modest salary and other debts, like student loans, to pay off. “The biggest asset you have right now is time,” Forward says. She advocates for establishing a regular contribution schedule, however small, and taking full advantage of access you might have to any employer pension-matching programs. An individual who deposits $400 monthly starting at 20 will have more than $600,000 in their RRSP by the time they’re 65 (assuming the 4% rate of return). Those who deposit the same total annually ($4,800) will also reach their goal, though they will accumulate less in interest.
Many Canadians in the 30s and 40s face new demands on their disposable income. “While your gross income might be rising,” Forward notes, “you likely have a mortgage, daycare costs and less time on your hands to dedicate to managing your finances.” Still, your tax bracket is probably increasing at this point, and you still have time and compounding on your side. By the end of your 40s, though, you’re reaching the end of your peak spending years. “Make sure you have started saving for retirement in some form.”
With a starting point of $275,000 in your RRSP and monthly deposits of $500, you’ll make your RRSP goal. If you’ve not yet put money in your RRSP by the end of your 40s, it will take significant contributions to make your goal—deposits that may amount to more than the contribution room you have available.
Your RRSP contribution age limit is 71 (more specifically, you can contribute until Dec. 31 of that year). When you turn 50, you have only 15 years left to make your RRSP goal—that is, if you intend on retiring at 65. “Savings tend to accelerate in this period as more disposable income is available, but your time horizon is much shorter now,” Forward says.
After age 60, you’re focused on the next phase of your life: retirement. “It’s time to start winding down your career, choose a firm retirement date and start planning an optimal withdrawal strategy,” she says, adding that your target is to have reached 100% of your goal by this age.
Saving for your retirement with an RRSP is an individual process with many variables to consider. “It is important to note that financial planning is an ongoing process,” Forward says. “Your income, spending and savings rates will change through time and there is value in constantly setting savings targets, monitoring your performance and identifying opportunities to reduce tax, so that you can build your retirement nest egg as efficiently as possible.” With planning and forethought, you can make the most of your RRSP investments—at any age.