The project that defined my engineering career was the New Gold Rainy River gold mine, in Northwest Ontario. It was a project I was a part of for nearly two years, gaining incredible experience and making lifelong friends. I’d joke that it was like home, but my iPhone actually set the project location as my home. It was tough, stressful work, but I got to work with an incredible team. We oversaw all of the earthworks for the project, and were responsible for ensuring that the contractor built according to the specifications.
Our team knew the specs and designs like the back of our hand, as did the Site Superintendents from the other consultants and contractors. But I noticed that the people who were actually performing the work didn’t always. With each level of communication (Site Superintendent to Foreman to Operator), the information got more vague. This led to some issues, primarily with the quality of work. If someone isn’t doing something up to standard, it might be the instruction, not their work ethic, that’s the problem.
I didn’t believe that anyone intentionally wanted to do work below the required standard. But I realized that without knowing exactly why they were told to do something, it was difficult for them to see the importance behind it. By having a quick conversation with the people who were doing the work, they saw the importance behind what they were doing, and took pride in making sure it was done properly. Sometimes they even brought new ideas to the table. The quality of work improved, and the issues became fewer. When someone understands what they need to do, and why it’s important, you get better results. It’s that simple.
No matter what direction life takes us, we all want to retire one day. In a study by CPP Investments, over half of respondents said they don’t know how much money they’ll need to retire, with the majority not having a financial plan. That lines up with the idea that a lot of Canadians are expected to be underprepared for retirement. When we don’t have a defined goal, it’s impossible to confidently put together a plan to reach it. That makes it easier to push off, because we can’t clearly see the importance of it, and we tell ourselves we’ll deal with it another time.
Similar to the construction operators, the more information the better. By understanding the bigger picture, and not just the piece we’re on, we can see the importance of what we’re doing, which should lead to better results, because we can make it a priority and make an active effort. Knowing what we need for our retirement, and having a plan to get there, will help us achieve it a lot more easily.
If I asked a bunch of people how much they’d need to retire, I’d probably get a big, perfectly rounded number, like $1,000,000. A number that doesn’t represent how much they actually need, but their guess at what they think the right answer is. When an answer is vague and not truly representative of our situation, it’s impossible for it to feel important. To better understand our own retirement, let’s start with some basics.
Retirement basics
In a 2014 survey, participants said they spend more time planning a vacation, or buying a car, than they do planning their retirement. That statistic isn’t too surprising, even if retirement is just a 1,500-week vacation. But what is surprising is the complete disengagement from our finances. Instead of putting in a little bit of time to make sure things are right, most people use a hope-and-a-prayer approach, realizing too late that things could have been very different with a little initiative.
What retirement looks like as a chart
Retirement is essentially a two-stage process: the accumulation of assets, and the decumulation of assets. How your money is invested will impact both how your money grows and how long your money lasts. If you’ve read an article here before, I’m sure you understand the power of compound interest.
Accumulation takes place while we’re working and earning money. The amount we accumulate by the time we retire is based on how much we contribute, our rate of return, and how long we’re invested. Simply put: the more we contribute, the higher our rate of return, and the longer we’re invested, the more we will accumulate.
Decumulation begins once we start relying on that money as income. How long our money lasts is a function of how much we withdraw, how often we withdraw, and our rate of return. The less and the slower we withdraw, while still maintaining growth, the longer our money will last. Here’s what it could look like in theory:
- Accumulation · working years
- Decumulation · retirement
Example: $700 a month from age 30 to 65 earning 6%, then about $4,761 a month from 65 to 95 while the rest earns 4%. Before tax and inflation. Illustration only. Try your own numbers →
On the accumulation side, we see an exponential growth curve, as our returns have more and more to build on. You’ll notice the decumulation isn’t a straight line to $0, but slightly curved. That’s due to the small growth we should still expect as retirees. The amounts and timeline may change, but more or less, it should follow this trend.
Where retirement income comes from
In Canada, we can have a variety of sources that make up our retirement income. Some of the most common are:
- Government pensions: CPP and OAS
- Employer plans: DBPP and DCPP
- Personal investments: RRSP, TFSA and non-registered
As long as you’ve lived and worked in Canada, you should be eligible for Canada Pension Plan (CPP) and Old Age Security (OAS) benefits, although your benefit amount can vary a lot. Your CPP benefit is based on how much you’ve contributed to CPP, which depends on your past income and how long you contributed. Some income strategies let you avoid contributing to CPP. OAS is based on how long you’ve lived in Canada, but can be clawed back during retirement depending on your taxable income.
Employer plans are generally the largest source of retirement income, and take two main forms: Defined Benefit (DBPP) and Defined Contribution (DCPP) pension plans. DBPPs are usually based on your highest earnings and years of service (commonly seen in healthcare and teaching). DCPPs are more common, and are usually offered with a match, where your employer matches your contributions up to a percentage of your income. Enrolment isn’t always automatic, so it’s crucial that you take the initiative if you have access to a plan.
RRSPs, TFSAs and non-registered accounts make up the final main sources of retirement income. Within each account type, you can have a variety of investment options suited to your goals. Generally you want to use your registered accounts before non-registered accounts, but in some cases one might be more advantageous than another. The main difference between each account type is how it’s taxed and, for RRSPs and TFSAs, how your contribution room is determined. It’s important to remember that the main advantage of an RRSP and TFSA is that the growth isn’t taxed along the way: more growth = more benefit.
How retirement income is taxed
One of the issues with throwing out a number for what you think you need for retirement is that accounts are taxed differently. A number in one account might not be the same as in another, after tax.
Our two government pensions, CPP and OAS, are both fully taxed as income. Employer pensions and personal RRSPs are the same: since contributions are tax deductible (we get money back in the short term), we defer paying tax until we withdraw in the future. CPP, OAS, DBPP, DCPP and RRSP are all fully taxable sources of income during retirement. The more we get from these sources, the more tax we’ll pay.
TFSAs and non-registered accounts are a different story. When we contribute to a TFSA, we don’t get money back in the short term, because contributions have already been taxed. In the long term, that means a TFSA could grow to any number, and we’d never pay a cent of tax on it. TFSAs are a non-taxable source of income. Growth in non-registered accounts is treated as capital gains. We don’t get a deduction when we contribute, but only 50% of the growth is treated as taxable income, rather than 100% of the withdrawal like taxable sources of income.
Understanding that, we know that $1,000,000 in an RRSP (or another taxable source), a non-registered account, and a TFSA will all produce different after-tax incomes. A $50,000 withdrawal from each account type could result in the following after-tax income:
Illustration only. Assumes a 30% tax rate on taxable income, and that half of the non-registered withdrawal is growth (capital gains, 50% taxable). Your actual tax depends on your total income and province.
How funds can be managed during retirement
An often overlooked aspect of retirement is how money is managed during retirement. We don’t just invest until retirement; we can invest our entire lives. We all understand the importance of growth during the accumulation phase, but growth is an important part of the decumulation phase too.
Before retirement, we’re in a position where we’re working for money, and our money is working for us. During retirement, that switches to only our money working for us. Whether our money works for us, and how hard, is something that’s within our control.
If someone entered retirement with $1,000,000, expected to live another 30 years, and earned 0% annually, that would allow an annual withdrawal of $33,333. If instead they earned 3% a year, they could withdraw $51,019 annually over their retirement. That’s an increase of 53%, which, earning 0%, would be equivalent to needing about $1,530,578 at retirement. I’d say it’s a lot easier to earn a conservative rate of return during retirement than it is to come up with an extra $530,578 during our working lives.
Earning just 3% during retirement provides 53% more income. To get the same income at 0%, you’d need about $1,530,578. Before tax and inflation.
Even though we start to rely on our investments when we enter retirement, we won’t need all of the funds for decades. And that’s a very big difference: needing some versus needing all. That distinction lets us stay invested, although more conservatively, throughout our retirement. That allows our funds to continue to work and grow for us, which gives us a more comfortable retirement, for longer. Let our money work for us, rather than working for it.
Depending on your sources of income, at times there might be advantages to strategically using certain accounts over others. In years of high taxable income, using a TFSA or non-registered account can provide the additional income you need at a lower tax cost. Delaying CPP or OAS (up to age 70) can increase your benefit, while lowering your taxable income in the years before. Income splitting may be another way to even out taxable income between spouses. We all hate paying taxes, and a smart strategy can help you pay less, keeping more of your money.
Retirement expenses
Like most things in life, our budget really comes down to what we want to do, and how much we’re going to spend. There are really two broad approaches: active and passive. Active means planning for what we think we’ll need, and making an active effort to account for it. Passive is more about letting our end amount dictate our budget: we’re not necessarily planning, but instead making the best of what we end up with. Here are some of the main retirement expenses to think about, to get a better idea of what your retirement might look like.
Housing
For most of us, our largest regular expense is our mortgage or rent, so it’s a perfect place to start when thinking about our expenses during retirement. Preparing for retirement means increasing your assets and decreasing your debts. Ideally we’d all go into retirement mortgage and debt free, but that isn’t the case for most of us.
If you imagine your monthly rent payment, multiply it over a year, and then by 30 years to account for your retirement, the number ends up pretty big. Although there are a lot of expenses with owning a home, someone with their mortgage paid off should have lower housing expenses than someone who expects to rent for the rest of their life. If you’re going to be a renter, accounting for that is huge. If you plan on owning your home, having a plan in place to eliminate your mortgage before retirement can make the money you have that much more efficient.
Lifestyle
Retirement ends up being the time in a lot of people’s lives when they can finally prioritize what they want to do over what they need to do. See you never, 9 to 5! Thinking about how you’d ideally like to spend your retirement can give you a sense of what it might cost. Do you envision yourself taking it easy, spending time with friends and family? Maybe you’d rather travel the world, or even live abroad? Or perhaps you’ll say yes more to the finer things in life? The possibilities are only restricted by your imagination.
No matter what the perfect retirement looks like to you, it will come with some sort of cost. It could be about the same after-tax income you’re used to now, or entirely different. It can be tough to think about something so far away, especially if you’re closer to the start of your career than the end. But the sooner you begin to think about what ideal looks like to you, the sooner you can get headed in that direction, making the journey much easier. Start by thinking about your values and what’s important to you. If you feel stuck, you can look to a parent or loved one who is in or approaching retirement as a guide.
Legacy
Through our lives, we might develop desires bigger than ourselves: a way for our lives to be extended by leaving a legacy to those we care about most. This could look like making a charitable donation, giving back to your community, keeping property in the family, or passing assets on to the next generation so they can have every opportunity without financial restraints. Whatever it looks like, it’s a priority to you.
These can be funded either by insurance or by our assets. Insurance can provide a tax-free benefit, but can be very expensive later in life. If we’re considering passing on monetary value through assets, it’s important to plan ahead and figure out which accounts may be the most efficient. Pensions and RRSPs are taxed as income, resulting in a lot of inefficiency if half of your desired amount goes to tax. Non-registered accounts pass along more tax-efficiently, while TFSAs are passed on without taxes at all. Having an early idea of the big hopes you have for your retirement can allow you to plan how your income is withdrawn, or strategically kept to grow.
How much you need to retire
Retirement really is one of those things where a one-size-fits-all solution doesn’t exist. How much you need really depends on what you want most. A goal retirement amount without doing the work is like recommending a meal without knowing anything about someone. We have to consider their allergies, taste preferences, dietary choices, even what they’re used to eating. We can only make a proper recommendation when we understand the variables that influence the outcome.
It starts with what an ideal retirement looks like to you. If money didn’t matter and you could do anything in the world, what would you do? Maybe it’s not that much different from what you’re doing now, or maybe it’s totally different in every way. Write down everything that comes to mind, and then put your top five things, the things that would be toughest to sacrifice for anything else, on a short list. That should give you your core retirement ideals.
Then look into what account types you have available to you, and make sure you’re making the most of them. Employer pensions can help build the income foundation you need. But as we saw, different account types are taxed differently, so $X in one account doesn’t necessarily equal $X in another account after tax. Once you know what you want to do most, it can be easier to relate to your retirement self, and prioritize taking action for them.
Finally, it’s about building a plan to take you from where you are today to where you want to be in the future. This can be a difficult process, because it often feels overwhelming, or like there are more pressing things right now and we can make it a priority in the future. But it’s important to start sooner rather than later. The longer our money can work for us, the more benefit it can have, making it easier on us. Instead of having to fully fund a goal with contributions, we can split the responsibility with growth.
Here are some action items to make your retirement planning a little easier:
- Write down what an ideal retirement looks like for you. It’s okay if this ideal changes over time.
- Make sure you’re fully participating in employer plans, to take advantage of free money.
- Work with a planner who can help determine where you need to be to make your retirement a reality, and what effort is required to get there.
Retirement is no different than the lives we live. They all have similarities, but are wildly different in almost every way. What we value, what we enjoy, our lifestyle, what matters most: these things all make us who we are, and that extends throughout retirement. There is no one-size-fits-all answer to how much you need to retire, but I can promise that it isn’t difficult to find yours. By knowing where we want to end up and what we need to do to get there, we’ll have a lot more success doing the work required along the way.
Keep doing things your future self will thank you for.
