Is one million dollars enough to retire in Canada?
The short answer to this question is, of course, a resounding “yes”, but it may not be the kind of retirement that you’re thinking.
Whether or not one million dollars is enough to retire in Canada all depends on your lifestyle, spending habits, and health at retirement.
One million dollars is a huge chunk of money to retire on but in contrast, it isn’t as big of an amount as most Canadians would think.
While not all Canadians have a million dollars of a retirement portfolio, it isn’t something that could afford a lavish retirement lifestyle. Well, at least if you plan to make it last throughout your lifetime.
When properly managed, a million bucks can provide you with $40,000 per year or around $3,000.00 a month of retirement income. That’s without considering any other income sources like government and/or company pensions (if any).
If not further invested, and at a withdrawal rate of $40,000.00 a year, a million bucks of retirement fund will last you 25-years. So if you’re looking to retire at 65 years old a million dollars, your money should last you until age your tender age of 85, the obvious risk here, of course, is the potential outliving your funds, in case you withdraw too much on a yearly basis.
So, yes, you can retire with one million dollars in Canada but it may not afford a luxurious lifestyle.
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The average Canadian retirement income
According to Statistics Canada, the median after-tax income for senior households is $64,300 ($32,150 each), while unattached retirees after the age of 65 have a median income of $29,500.00 a year.
To retire with one million dollars, you would need to aggressively fund your retirement nest egg during the accumulation phase of your retirement planning. For example, if you’re 30 years old today, and you want to have at least $1 million dollars by age 65. You have to save $1,500 a month. This can be invested in traditional market portfolios, or a dividend-earning insurance wealth plan.
Projecting your average rate of return when invested in the market should be done conservatively to make sure that you will achieve your $1 million dollar target by retirement age. An average rate of return of 4% is a safe assumption since you don’t really know how much your average rate of return will be in the next 20 or 30 years.
A conservative projection, such as the above will require you to put in more capital but will realistically help you achieve your target.
During the decumulation phase of your retirement, it’s necessary to move your retirement nest egg out of market portfolios to avoid it being affected by market downtrends. Ideally, your retirement portfolio should be moved into high-interest savings accounts or a guaranteed investment account (GIC/GIA) 2 to 3 years before your target retirement age. So in case the market crashes on the year you start withdrawing funds, you won’t have to wait for the market to recover.
If your retirement funds sit on traditional investments such as mutual funds, segregated funds, or shares of stocks, there’s a risk of outliving your funds if you live too long. While most Canadians will live between 20 to 25 years after retiring at age 65, some live well into their 90s.
The goal is to not run out of money at retirement. Unfortunately, traditional savings and investments tend to erode once you start withdrawing funds, so the risk of outliving your retirement nest egg is always there.
If you retire with $1,000,000 in retirement savings and want to live off of that for the rest of your life without any other external income sources, careful planning should be taken during the decumulation phase of your retirement funds, if you withdraw more than what’s necessary, you risk running out of funds while you’re still alive.
The best way to NOT run out of retirement funds at retirement is to save more than enough during the accumulation phase and to put yourself in a position where you need not erode your retirement nest egg to fund your retirement.
There is an asset class that puts you in this position, so instead of simply investing in traditional investments, you’re positioning yourself for a non-eroding, tax-efficient retirement, while preserving your wealth for a tax-efficient wealth transfer. Learn more about this by chatting with us.
CPP and OAS at Retirement
As of this writing (2021), the maximum monthly income you can receive from the Canadian Pension Plan, starting your pension at the age of 65 is $1,203.75, while the average is $619.44. How much Canada Pension Plan benefits you’ll receive at retirement depends on your specific situation.
The maximum monthly OAS (Old Age Security) that you can receive, on the other hand, is $626.49, provided that your annual income does not exceed $129,581.
Most Canadians, 59 years of age and older, who have made at least 1 CPP contribution will qualify to receive monthly CPP payments, the amount of which depends on one’s contribution.
The OAS pension amount, on the other hand, is determined by how long you’ve worked in Canada after the age of 18 years old. Most immigrants who have moved here mid-age will receive a lesser amount, based on how many years they’ve worked before retiring.
You can log in to your My Service Canada account to get an estimate on how much you can receive from government pensions.
FIRE (Financial Independence, Retire Early)
Are you younger than 65 and are you retirement ready?
If you have one million dollars and are looking to retire early, perhaps you’re part of the FIRE movement (Financial Independence, Retire Early), then know that you will not qualify for any government pensions just as yet, well, at least not until after age 59 when you can start receiving CPP payments if one so chooses.
Retiring young, without any government pensions means that you’re going to solely depend on your own retirement money. No government or company pensions, to supplement your retirement income. That said, your retirement funds should last longer compared to conventional retirement.
Members of the FIRE movement usually retire between the tender ages of 30 and 40 years.
These are people who have saved up between 50% to 90% of their earned income in the early years of their working careers, with the ultimate goal of retiring early.
Most members of the FIRE movement do retire with at least one million dollars of retirement funds, further invested into a conservative or moderate risk portfolio, withdrawing an average of 4% retirement withdrawal rate.
If you’re young, and already researching the internet as to whether or not one million dollars is enough to retire on, then you’re in luck.
As they say, the best time to start saving for retirement is the moment you earn your first paycheck. Of course, almost every Canadian misses this, as financial literacy is oftentimes not part of the Canadian education system. Hence, the second best time is now!
The younger you are, the longer your wealth-building time horizon is. With that said, you have to take advantage of this time horizon. If a 30-year-old needs $1,500 a month to build a $1 million dollar of retirement nest egg by age 65, a 25-year-old, will need to put away $1,125 a month to achieve this goal.
While not every 25-year-old Canadian can afford to save $1,125 a month for retirement due to income restraint, you may be able to afford to put away this amount if you prioritize wealth building over material things and mindless spending.
If you really can’t afford to save toward a million dollars of retirement funds, start where you are. Can you set aside between 10% and 25% of your annual income? Maybe, there are some things that are eating up the cash flow that prevents you from doing so. I can help you identify these, cut unnecessary spending, and be on your way to a better financial future. Book an appointment here to become a client.
How Much Annual Retirement Income will You Need?
The retirement fund that you’ll have to raise will mainly depend on your planned annual retirement income or your annual expenses at retirement.
If you can live off an annual retirement income of $40,000.00 and you already have your million bucks then you can happily retire with your million-dollar portfolio.
Any money that you may receive from CPP and OAS is a bonus and therefore be treated as a supplement to your own retirement fund.
What if you don’t have a million dollars to retire on? Actually, not everyone will need 1 million dollars for retirement. If you managed to build $700,000.00 in retirement funds, you can expect to have between $21,000.00 to $28,000.00 in annual retirement income from your own nest egg. Add whatever it is that you’re going to get from CPP and OAS, and you’re a happy camper(retiree)!
Setting Your Retirement Expectations
Most Canadians will receive Between $14,000.00 to $15,000.00 of annual retirement income from social security such as CPP and OAS, while most migrants who moved here middle-aged, will receive less due to pro-rated calculation of OAS, which is based on residency from age 18.
If you’re born in Canada, or you moved here before 18 years old, conservatively, you’re going to have around $14,400.00 a year from government pensions.
This is a good basis for planning and building your own retirement fund.
Calculating Your Income Requirement
Most experts assume that an average Canadian retiree would need around 75% of their current income. That of course, if your cost of living is smaller than when you’re actively working, considering that you don’t go out as much and that your home is paid off.
One thing to keep in mind, however, is the fact that every day is a Saturday at retirement, during your active working years, you spend most of the week working at either a job, career, or your business. Then you’ve got your Friday or Saturday to go out, have fun with friends or go for an out-of-city adventure.
When you retire, you pretty much have the whole week to do whatever you want! This, and your spending habits will challenge the 75% retirement rule of thumb.
So, if you plan to stay home pretty much most days for the rest of your retirement years, you’ll probably need less.
If you love to travel, and you plan to have a more active lifestyle, you need more.
When calculating your retirement income, it’s also a good idea to consider inflation. What $2,000.00 can buy today, would probably require $4,000.00 20 or 30 years from now.
On average the inflation rate in Canada averages out to between 2% to 3%, with a 2.25% expected annual salary indexation (income increases).
Your retirement income calculation should include all these factors.
To keep it simple, it’s advisable to start investing for retirement the moment you earn your first paycheck.
If you’re in your 20s, you should start investing at least 10% of your gross income, the more the better.
Middle-aged Canadians (35 years old and up), should target investing at least 25% of their gross income on a periodic basis.
This, of course, is a tall order for most Canadians, since most of us are programmed to accumulate financial obligations first, i.e. dream cars, dream homes, and other material dreams, then save whatever’s left (if there’s any).
Most Canadians' accounting formula is:
Income – Expenses = Savings/Investment
Your Personal Accounting Formula:
If you plan to retire with at least one million dollars, your personal accounting formula should be:
Income – Savings/Investments = Expenses.
Your Desired Annual Retirement Income
If given a choice, what is your desired annual retirement income?
Knowing this will help you proactively plan your wealth during the accumulation phase.
Say you plan to have an annual income of $50,000.00 a year from your own investments. You’re going to need $1,250,000.00 of retirement funds.
$1,250,000.00 x .04 = $50,000.00
At a 4% retirement withdrawal rate, your retirement fund should last you a good 25-years, if not further invested.
Non-eroding Retirement Nest Egg?
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Your Retirement Time Horizon
How much time you have before your target retirement age also plays a huge factor in mapping out your retirement plan.
If you start investing at 20-years old, and you plan to retire with 1 million dollars of your own money. Investing, $250 bi-weekly with an annual increase of 2.25% will help you build a $1,116,443.01 retirement portfolio at an average rate of return of 5%.
On the other hand, investing $250 bi-weekly, with an annual increase of 2.25% at 40-years old, will only build a $398,156.80.
Not a million dollars but $400,000.00 of accumulated wealth is still a good amount of personal retirement savings if starting late but if you’re reading this and you’re in your 20’s, definitely start investing a portion of your income as soon as you can.
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$400,000.00 at an annual withdrawal rate of 4% equates to $16,000.00 a year of retirement income.
This calculation shows you the time value of money and the power of compounded growth.
In reality, the person who built the $1,116,443.01 portfolio, only saved a total of $414,610, while the person who accumulated $398,156.80 really only saved $214,976, the rest of the amount are all compounded growth from their funds’ investment income.
Person A (20-year old) gained: $701,833
Person B (40-year old) gained: $183,181
Calculating Your Savings Rate
There are generally two approaches in determining your retirement savings rate:
Saving a percentage of your gross income:
The desired income calculation method:
In this method, you calculate how much annual retirement income you need, depending on your specific situation, you may or may not include government pensions in the calculation.
Say, you’re planning to retire on a $60,000.00 annual income. First, you have to determine how much capital you’re going to need to fund your desired retirement income.
The rule of thumb in retirement withdrawal is only withdrawing 4% of your fund, and remain invested (conservatively at retirement).
Knowing this, you know that you’re going to need $1,500,000.00 of retirement capital ($60,000.00 / 4% = $1,500,000.00).
Now that you know how much retirement capital that you’re going to need to achieve financial independence, you can work back how much you need to invest on a bi-weekly, monthly, or annual basis.
You have two options here, either you contribute a level amount or apply annual indexation.
Considering you’re making a good living, and you’re okay cutting down on your monthly spending. Starting at 30-year old, and investing $850 bi-weekly will help you build your desired freedom capital at age 65.
If on the other hand, you plan to index your retirement contribution, you can start investing $655 bi-weekly in your first year and increase at a rate of 2.25% annually.
Again, these amounts are a tall order for most working Canadians but it’s a matter of priority, really.
You may play around with the financial calculator here to calculate your retirement saving rate.
If you want to keep things simple, shoot for investing a percentage of your income.
Estimating Your Government Pension Income
As mentioned above, the average government pension income is around $14,000.00 to $15,000.00 a year. This of course is a vague estimate.
If you want to calculate your specific government pension (both CPP and OAS), you can calculate them using the Canadian Retirement Income Calculator.
To do so, you're going to need the following handy:
How much do you need to retire comfortably in Canada?
The answer to this question is quite different for every person. For some, one million dollars might be enough for others it might not be.
A general rule of thumb is that you will need an annual retirement income of around 70% of your annual pre-retirement income.
If you make $100,000.00 a year, you will need $70,000.00 a year of retirement income for a comfortable retirement. If you make $50,000.00, you will most likely need at least $35,000.00 a year for your retirement.
Rules of Thumb at Retirement
The 4% Rule
Most experts say that retirement is the stage in one’s life where one can already live off 4% of one’s assets.
The four percent rule is often taken as a guideline for calculating how much money one needs to retire on, but it’s not foolproof.
There are many different answers as to how much you need in order to retire and maintain your lifestyle during retirement.
Generally speaking, $500,000 might be enough if you want a modest retirement with less travel or spending; whereas, someone who enjoys more luxurious lifestyles or plans to work part-time may find that this amount will run out too quickly.
The four percent rule states that most experts recommend living off of just under five percent of your total cash-flow generating assets each year – so around $40,000 annually from an investment portfolio valued at roughly $1 million dollars (assuming between two people).
The most common rule of thumb for retirement is the “safe” withdrawal rate, which assumes that you’re going to withdraw a certain percentage from your savings account each year.
This number is usually between three and six percent.
For example, if you have $500,000 in your retirement account after 30 years of saving at an annual growth rate of five percent, then withdrawing four percent will give you about $20,000 annually or $1667 monthly
Rule of Thumb 2: 70% - 80% of Active or Current Income
Most experts find that an average retiree will need at least between 70% to 80% of their active income.
Personally, I’m gearing toward 80% for most Canadians. So, if you’re earning $75,000.00 a year, you could comfortably live off $60,000.00 a year of retirement income.
Rule of Thumb 3: Retire at Age 65
While most young Canadians plan to retire early, you may want to retire at 65 to get the maximum government pension benefits. The longer you are in the workforce, the more you can personally save, and the more your company pension (if any).
On average, you have to make your portfolio value last at least 25-years. Retiring at age 65 helps you achieve this.
Rule of Thumb 4: Reallocate your Investment Portfolio
Retirement planning has two phases:
- The Accumulation Phase
- Withdrawal or De-accumulation phase
Depending on your risk profile, and your time horizon, the aim is to maximize your compounded growth during your wealth accumulation phase.
At retirement, however, you would want to reallocate your investment portfolio to more conservative investments so as to avoid market downturns during your retirement years. You may still experience fluctuations if you’re not entirely out of the market but this can be to a minimum.
If you’re young and starting to invest to build wealth for retirement, you may invest more of your capital on a 60% Equity, and 40% fixed income ratio. At retirement, you may want to switch most of your assets on fixed income portfolios, with a small percentage exposed to Equities to still participate in market gains. This is a general suggestion, your specific retirement portfolio is dependent on your risk profile, time horizon, and goals.
Can a couple retire on 1 million dollars?
While it is possible for a couple to retire on one million dollars, this amount may not be sufficient if they want to retire with a luxurious lifestyle.
Following the 4% rule, a retiree would be able to withdraw $40,000 per year without the risk of running out of money at retirement.
If you’re solely relying on a total retirement fund of 1 million dollars, without any other source of retirement income, a retired couple would have to live off of $20,000 per year each.
On the other hand, if you and your partner qualify for CPP and OAS, as well as have company pensions, you may be looking at a higher annual retirement income, retiring as a couple with 1 million dollars.
Important factors to consider in retirement planning
Where you Plan to Retire
Your geographic location can play an important factor as the cost of living differs from one Canadian city to the next.
Vancouver, and Toronto, has a generally higher cost of living compared to most areas in Canada. If you live in an expensive metro, you may want to plan to “downsize”, and move into a smaller suburb or city where your retirement funds can last you longer.
Your Lifestyle and Spending Habits
Your lifestyle and spending habits are certainly some of the most important factors that could affect your retirement.
If you’re retiring with a million dollars, you know that you only need to withdraw $40,000.00 a year, and stay conservatively invested to make your money last.
If you’ve worked in Canada for at least 10-years, you’ll qualify for a government pension. If you worked longer, you may get the full amount, so, let’s just say, you’re going to receive $15,000.00 a year on a government pension.
Your total annual income at retirement will then amount to $55,000.00, and depending on where and how you’re withdrawing the $40,000.00 will determine your tax bracket at retirement.
How Much Retirement Funds You Saved Up
One of the most important things to check when you’re at the brink of retiring is how much you actually have.
When you’re actively working. You earn money when you’re at work. At retirement, you need to make your money do the work, so it earns you money. If you didn’t save enough, and you can barely work to earn a living, that’s a problem.
Longevity or Life Expectancy
Most of us would love to live long and healthy lives. If you belong to this group, you have to make it a point that you don’t run out of money.
As per statistics, on average, female Canadians tend to live up to age 87, while their male counterparts will live up to age 85. More and more, we see people live past this age range, with some living well up to their late 90s.
Longevity or life expectancy is one of the most important factors that will affect how much money a retiree needs to retire comfortably. Longevity will be affected by the retiree’s age, health, and family history of longevity. This variable has an impact on the retiree’s savings rate before retirement.
The Cost of Healthcare
Healthcare is one of the biggest costs that can eat into retirement savings. If you retire in Canada, our universal healthcare can help lower your healthcare expenses at retirement but know that not all healthcare services are covered by our provincial government.
Most health insurance companies provide discounts to new retirees provided they apply within 90 days of retiring, and that they are coming from a group health insurance plan (you can inquire with us here.)
Health insurance covers the cost of dental, vision, prescription, and other services such as physiotherapy, and massage therapy.
For some of us, long-term care may be inevitable, and though there are government-subsidized facilities, you can get into a private facility when you have a long term care plan.
If you’re retiring with one million dollars, you need to make this money work for you as hard as it can that’s why we suggest that you stay invested, albeit conservatively.
It’s vitally important to move your retirement portfolio into conservative funds at retirement to minimize the impact of market volatility, exposing more of your capital to equities may not be a good idea if you’re not prepared to go back to work during market downtrends.
Inflation is a term that describes the increase in the cost of living over time. Inflation refers to a general rise in prices for goods and services. In other words, inflation devalues our dollar, or any other monetary instrument.
Indexing your retirement contributions is an effective way to combat inflation, this means that you’re growing wealth at par with inflation. So instead of simply saving up a fixed amount, it’s a good idea to increase your contributions on an annual basis, this can be automated with most dollar-cost averaging contributions.
Cost of Living at Retirement
The cost of living at retirement is another factor to consider. If you’re retiring with one million dollars, your expected investment income from your funds is more or less around $40,000.00 a year.
This can run out fast if your cost of living requires an annual income of $60,000.00 a year, and you don’t have any other source of funds because you have to withdraw more than 4% of your funds every year.
Income Taxes at Retirement
There are tax-friendly ways on how you can build your retirement funds, if you have a lot of TFSA room, I would suggest that you max it out, especially if you’re not in the higher tax bracket. While you don’t have any tax incentive when contributing money into your TFSA, you can also withdraw any funds you’ve put in, and any corresponding growth tax-free.
Your government pensions are subject to taxes, much like how your active income is taxed.
If you’re in the higher tax bracket and are contributing a lot to your RRSP, it’s a good idea to channel any tax refunds into tax-friendly investment vehicles such as a tax-free savings account, instead of that Smart TV or laptop that you’ve been eyeing for months.
Another option you can take advantage of, especially if you’re starting young are cash-value generating permanent life insurance policies that helps you take advantage of tax-free growth within the policy.
At the withdrawal phase of your retirement journey, you need not make direct withdrawals to leverage the funds from within your policy.
While not often considered, government pensions are a good source of supplemental income at retirement. On average, you could expect to receive between $14,000.00 to $15,000.00 from your CPP and OAS, if you were born in Canada or you’ve moved here at or before your 18th birthday.
If you’re working for a large multi-national or a Crown-owned corporation, you may have good employee benefits and pension plan. If not, then this is something that you can’t put your hopes in.
When planning for retirement, I suggest not rely on any company or even government pensions, while it’s good that you have them, think of them as more of supplements than a sole source of income at retirement.
So, is one million dollars enough to retire in Canada?
One million dollars isn’t a small buck of a nest egg but it also isn’t as big as one may think.
While you can successfully retire in Canada with 1 million dollars, it wouldn’t be the type of retirement that you may be eyeing, otherwise, your million bucks may run out in as little as 10-years.
Retiring with a million dollars with on other income sources will realistically equate to $40,000.00 of annual retirement income, without ever having to worry about running out of money at retirement. This of course goes without saying that you should stay invested, albeit conservatively and that you should strictly follow the 4% retirement rule of thumb.
If not further invested, your one million bucks will last you around 25-years provided that you’re only using $40,000.00 a year of your nest egg. So, if you retire at age 65, your money should last you until age 85.
You may however have other sources of retirement income if you’ve lived and worked in Canada for quite a while. Depending on your specific circumstance, you may qualify for the Canada Pension Plan and probably receive the full OAS benefit at age 65, or you may not.
If you qualify for the full government pension, you may be looking at an average of $14,400 of annual income from your government pensions. With one million dollars of your own funds, you may have a total of $54,400.00 of annual retirement income.
For many Canadian retirees, $50,000.00 a year of retirement income could provide for a comfortable retirement, so if you’ve been residing in Canada since 18-years old or if you were born here, it’s pretty safe to assume that you would qualify for the full government pension plan.
Government and company pensions may supplement your retirement income but it’s a good idea to plan for retirement as if you’re not going to receive any. Whether or not you’re going to receive these benefits are a bonus. Being able to retire comfortably out of your own funds is the goal.
If you’re building a one million dollar retirement nest egg, know that you have to follow the 4% retirement rule of thumb so as not t run the risk of outliving your retirement. This means that you should be able to live off $40,000.00 a year in the worst-case event that you can’t rely on government and company pensions at retirement.
If you’re ready to start your wealth accumulation journey today, feel free to book an appointment with us. We’ll help you plan and implement an effective retirement strategy either through traditional investments or a more predictable insured retirement plan that earns dividends, instead of market returns. This shields you from market risks, so your assets still grow even when the markets are down. Book your discovery meeting here.