If you want to lower your 2025 income tax bill, the deadline to contribute to your registered retirement savings plan (RRSP) is midnight March 2.
Whether you squeak by or not, making sure you have enough money to retire goes well beyond this year’s contribution; and goes even further than your RRSP.
According to the latest BMO Retirement Survey, meant to coincide with RRSP season, Canadians estimate they need an average $1.7 million to retire comfortably. The perceived target varies wildly across the country with more than one-third saying they are unlikely to meet their retirement goals.
$1.7 million might seem overwhelming but the survey is merely a guess-timate that might not take into account personal circumstances and income sources in retirement.
In other words, you might be closer to your goals than you think. Online retirement calculators can help estimate how your savings jive with your expectations but a qualified, human, advisor can give you the most accurate snapshot.
Whether you plan for retirement through an advisor or go it alone, here are some basic factors you need to determine to find how much you need to retire, and when:
- Current dollar value of total assets in your RRSP, tax free savings account (TFSA), home equity or other investments that store value.
- Liabilities including mortgages, consumer and student debt, or any other outstanding loans. Most advisors recommend having no debt in retirement but it’s important for measuring your total portfolio value at any moment in time.
- Other retirement income sources including employer pensions, Canada/Quebec Pension, Old Age Security or other government benefits. CPP/QPP and OAS are indexed to inflation but most employer pensions are not.
- When you expect to retire and how long you expect to live. Unless you already have the answers you will probably need to run through various scenarios.
- How much you plan to contribute to your retirement savings before you retire. This is where it’s better to make RRSP contributions on a regular basis instead of rushing to the deadline. You might want to boost your savings by contributing your annual RRSP refund to your TFSA.
- Expected after-inflation rate of return on your investments. The deferred annual rate of return after inflation is a conservative five per cent but it could be higher or lower based on your tolerance for risk.
- How much you need to live each year in retirement. This is a tough one but it’s better to estimate too high than too low. Some experts have a general rule of a fixed portion of pre-retirement income but if a big portion of that income goes into saving, its much lower. Be sure to subtract savings or debt payments if you plan to retire debt free.
Also, we tend to spend less on activities as we age and that can act as an inflation hedge.
- Part time income from a side hustle might be difficult to estimate but can be a huge boost to early retirement, and act as a safety net if you need to up your income.
- Assets from inheritance. Merrill Lynch calls it “The Great Wealth Transfer”, estimating US$124 trillion in assets is poised to be passed on from baby boomers through inheritance by 2048. The global wealth manager says 46 per cent of recipients reported just knowing of their inheritance makes them feel more financially secure.
And there are all the unexpected give-and-takes that will take you through your retirement to that final T-slip. Adjust your plan when needed and keep it limber.
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