How to prepare for retirement in Canada: A step-by-step guide for every age

Whether you are 25 or 55, the best time to start preparing for retirement is right now.

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What does ‘retirement ready’ actually mean in Canada?

If you ask a Canadian financial planner about being ‘retirement ready,’ most of them will say something like this: Retirees in Canada need 70% to 80% of their pre-retirement income annually. This will allow them to maintain their lifestyle in retirement.

What does this look like in terms of actual numbers?

For a Canadian earning $70,000 annually, that suggests a retirement income of between $49,000 and $56,000 each year. Taking into account things like investment returns, retirement age and lifespan, this translates to a retirement savings of between $700,000 and $1 million.

Government benefits like CPP and OAS will help reduce the amount you need to save. Even at their maximum, these benefits will not replace your working income and are not enough to live on for most retirees. This means that most Canadians are responsible for generating additional retirement income through things like investments, savings, and workplace pensions.

In reality, there is no true ‘retirement ready’ number. Every retiree will have a different figure, and it depends on lifestyle, debt load, expected retirement age, health and whether or not you have a workplace pension.

When should Canadians start saving for retirement?

The best time to start saving for retirement is now.

With that being said, time always matters when it comes to saving and investing. There’s a reason why they say compound interest is the eighth wonder of the world.

If we assume a 6.0% annual return, someone who invests $500 monthly beginning at the age of 25 could accumulate roughly twice as much by retirement as someone who waits until they are 35.

A simple age-based framework:

• 20s: Focus on building the savings habit
• 30s: Increase contributions as income rises
• 40s: Maximize registered accounts where possible
• 50s and 60s: Shift attention toward preserving income and evaluating CPP deferral strategies

And if you’re one of those who are starting late, don’t panic. There are enough ways to play catch-up with those who started earlier. Unused RRSP contribution room carries forward indefinitely, and the TFSA contribution room accumulates each year that you are eligible.

One thing that every Canadian should take advantage of, regardless of age, is an employer-matching program for things like pension contributions or RRSPs. Your goal should be to maximize this before directing money elsewhere, as it is an immediate return on your savings and can really lead to high compounding over the long-term.

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RRSP vs. TFSA — which should you use for retirement savings?

Honestly, you should use both. There’s no such thing as too much retirement savings or investments. But there are differences between the two accounts that you should be aware of.

In general, RRSPs tend to benefit higher-income earners who shift to a lower tax bracket during retirement. TFSAs often benefit the lower and middle-income earners who seek flexibility and tax-free investing.

The biggest drawback of the RRSP is that withdrawing too early can trigger a withholding tax and can even permanently reduce your tax-sheltered savings.

There is a spousal RRSP which couples should consider. This account can help balance retirement income and potentially reduce taxes later on.

For current contribution limits and eligibility rules, check the Canada Revenue Agency (CRA) website.

How do CPP and OAS fit into your retirement income plan?

These government benefits should be a part of your retirement income plan, but do not count on them to fund your entire retirement.

The CPP is not a flat benefit, meaning your payment is dependent on how much you contributed during your working years. It also depends on when you choose to start receiving these benefits.

On the other hand, the OAS is available to all eligible Canadians starting at the age of 65. You can choose to defer this to age 70 for a significant increase in payments. Higher-income retirees can potentially face an OAS recovery tax, or the OAS clawback. If you make above a certain threshold, your OAS may be paid back to the government via income tax payments.

One of the biggest decisions to make is when to start collecting your CPP. Deciding on when to begin collecting can have a major impact on our retirement income.

Here are the impacts of when you start collecting your CPP:

• Collecting CPP before age 65 reduces your payments each month by 0.6%, up to 36% if you begin collecting at age 60
• Collecting CPP after age 65 increases your payments each month by 0.7%, up to 42% if you begin collecting at age 70

If you are in good health with enough retirement savings, it makes sense to delay your CPP payments as late as you can.

Lower-income retirees should also understand the Guaranteed Income Supplement (GIS), which can provide valuable additional support.

Before making any decision, use the My Service Canada Account estimator to review your personalized retirement income projections.

How much should you save each month — and where does it go?

Let’s go back to our original hypothetical scenario. The 38-year-old Canadian earning $70,000 annually contributes either 10% or 15% of gross income and earns an annual return of 6.0% until age 65.