How Much Do I Need to Retire Early in Canada?

“Freedom 55”. You’ve likely heard someone say that’s what they want at some point in your life. But how much money do I need to retire at 55 in Canada?

Below we go over how much you need to save before retirement, what you’ll have on the day you retire, and how long that money will last you post-retirement.

Pre-Retirement

Let’s start with a straightforward example of saving $500/month until you’re 55. We’re going to assume that it’s only realistic once you’re 25 and that you’ve likely missed the boat beyond 45 — but neither are necessarily true and this is just for illustration purposes.

We’re going to assume a 7% rate of return, which is roughly what the TSX/60 has done for the past few decades once we smooth out the bumps.

Saving $500/month

Here’s the graph:

So, if you were diligent enough to start at age 25 and consistently save $500/month throughout your lifetime without skipping a payment, you’d have $609,985 or so on your 55th birthday. Pretty good. Enough to retire? Maybe, maybe not. This isn’t a “what’s your number” post — it’s more of an illustration of how long-term, consistent, systematic saving reaps huge rewards.

If you were to leave your saving until the age of 45, you’d only have $85,542 to retire on at 55.

What Does It Take to Get to $1m?

Another often bounded phrase is “I want to retire with a million dollars”. So what does it take at various starting ages to make that happen?

If you were to start at 25, it’d take a consistent payment of $820/month. If you waited until 45, it’d take nearly $6000/month.

But Saving Doesn’t Look Like This in the Real World

Let’s be honest, consistently saving a relatively large amount of money every month from the age of 25 is unrealistic for most of us. Cars break down. Houses need to be bought. Babies unexpectantly appear on the horizon. According to a poll conducted back in 2018, 32% of Canadians aged between 45 and 64 had no retirement savings to speak of — let alone had $500+ a month to do so at the age of 25.

But one thing you can try to do is frontload your savings as much as possible, and then index-link your savings payments later in life so that you’re saving the equivalent of $500 in future money 30-years from now.

Canadian Retirement Helpers

Both your Tax Free Savings Account and Registered Retirement Savings Plan can be deployed to help you save for retirement. Currently, you can contribute up to $6,000 per year to your TFSA and 18% of your previous year’s income to your RRSP (but check your Notice of Assessment for exact contribution room).

Withdrawals in retirement from your TFSA will be completely free of income tax, although you’ll have been taxed already on the income that you contribute. Contributions during your working years to your RRSP will come with a tax break at your current marginal income tax rate, but withdrawals in retirement will be taxed as income. The thinking behind an RRSP strategy is that you’re deferring taxation until you’re likely at a lower income level as most people find themselves with lower incomes in retirement.

The choice of whether to contribute to your TFSA first or RRSP is quite complicated and depends on your current income level and planned income in retirement. Higher earners might find RRSP contributions much more valuable than those with modest earnings, for example.

Avoid Depending on Your Home

With home prices having risen dramatically in recent years, many Canadians are sitting on unprecedented amounts of equity in their homes. Unfortunately, counting on this for retirement has two major problems:

  • The housing landscape could look dramatically different when you retire.
  • You have to live somewhere, and often the places you’ll want to downsize to release equity have also had proportional increases in value.

The above said, planning to be mortgage-free when you hit your chosen retirement age generally has a dramatic impact on living expenses. So if you can do that by 55 your financial forecasts may look better.

Post-Retirement

What Would $1m Be Worth at 55 If You Started Today?

If you were 25 right now and started saving for “Freedom 55” right now and amassed $1m by the time you were 55, what exactly would the purchasing power of $1m be at that time?

If we assumed inflation was a constant 2.5% over those 30-years, you’d have the equivalent purchasing power of $476,742.69 in today’s money. In other words: inflation would have eroded just over half your savings. This underscores the importance of raising the contribution to your savings over time in line with inflation.

How Long Will Your Money Last?

The 4% rule is a rule-of-thumb that says you can withdraw 4% per year from your portfolio and make it through your retired years. It was developed by financial advisor William Bengen in 1994 by backtesting some of the worst market conditions in history: the 1920s and 1970s.

The problem with this is that it was based on a retirement age of 65 and assumed you would only spend 30-years in retirement maximum.

With average life expectancy in Canada now nearly 82-years (according to the World Bank), early retirees are now needing to plan well beyond that to avoid risking running out of money.

Luckily, there’s a nice calculator at fourpercentrule.com that helps us with some of the calculations in utilizing the four percent rule.

We’re going to plug our 55-year old retirement age, expected 40-years in retirement, and $1mm portfolio into this tool along with a conservative 5% equities return and 1% fixed income return (50/50 split between those in the portfolio). You will notice that the calculator warns that you will run out of money in retirement if you withdraw 4% of your portfolio every year. Note that this is irrespective of the actual amount you start with or withdraw — even if you were to save $10m and withdraw 4% every year, you still run out of money.

Note that some experts recommend an even heavier emphasis on fixed income (bonds) during retirement as their payouts are generally safer. Given that bond yields are currently very low, it’s worth playing with the effect of that in this calculator.

If we play with the calculator some more, we find that the actual “safe” number is something like 2.8% for retiring at 55 with a planned 40-years in retirement. Quite a big difference versus reciting at 65.

So how much would you actually be getting with a $1m portfolio using a fixed withdrawal percentage rule? If you switch the calculator to table output, you’ll see you can afford to withdraw $28,000 per year and have that linked to inflation at 2.5%. Do bear in mind that $1m when or $28,000 when you retire will not have the same purchasing power as today

Don’t Panic

Even if you can’t systematically save for retirement right now or you won’t have what you think is enough saved, don’t panic.

For us Canadians, there are several benefits that you might be entitled to during retirement including Canada Pension Plan, Old Age Security, and the Guaranteed Income Supplement for lower incomes. A good financial planner should be able to factor these into a retirement plan for you. With even relatively modest savings and these benefits, due to the lower expected cost of a retirement lifestyle, you may still be fine.

Closing Words

So now you have a sense of how much money you need to retire at 55 in Canada. And how long that money might last if you choose this early retirement option.

Hopefully, this post also underscores how important it is to engage a financial planner for your retirement plans so that you’re not caught unexpectantly without money, or having to live below your expected lifestyle. It’s a complex subject with lots of potentially moving parts.


The content on this site is for informational and educational purposes only and is not intended as a substitute for professional financial advice. Always consult with a licensed financial or tax advisor before making any decisions based on the information you read on this blog.

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