Aug 10, 2026
Follow us on Google for more Money.ca news
Add us on Google
While we adhere to strict editorial guidelines, partners on this page may provide us earnings.
Readying oneself for retirement can be a daunting task, and for some, that stark reality can come in unexpected ways.
Let’s consider the hypothetical case of Xavier, a 60-year-old who recently received a $400,000 settlement after losing his job through no fault of his own. He isn’t working, has no other retirement savings and isn’t sure whether the money can carry him for the rest of his life.
Advertisement
It’s the kind of dilemma more Canadians are likely to face as mid-career job losses collide with a retirement system that leans heavily on personal savings. Can $400,000 on its own really fund an entire retirement? We break down the numbers below.
Thanks for subscribing!
The best of Money.ca delivered weekly.
By signing up, you accept Money.ca Terms of Use, Subscription Agreement, and Privacy Policy.
Is $400,000 enough to live on
Xavier needs to understand what income his $400,000 could realistically generate before deciding whether to rely on it solely.
The widely used 4% rule suggests retirees can withdraw 4% of their portfolio in the first year of retirement, adjusting for inflation after that, and expect the money to last about 30 years. Applied to Xavier’s $400,000, that works out to $16,000 in year one — a modest income to say the least.
Investing more aggressively could generate stronger average returns, but that approach carries real risk. A market downturn in the early years of retirement, combined with steady withdrawals, can permanently shrink a portfolio’s ability to recover — something financial planners call sequence-of-returns risk.
It’s worth comparing Xavier’s situation with how other Canadians his age are positioned. According to Statistics Canada (StatCan)’s Survey of Financial Security, as of 2023, the median amount Canadians aged 55 to 64 hold across a Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF) or Locked-In Retirement Account is $120,000. However, that figure rises to $266,000 when looking at the average amount, due to a smaller number of large account holdings. Xavier’s windfall puts him well ahead of the typical Canadian his age on savings alone — but without a pension or government benefits flowing in yet, that comparison only goes so far.
It also falls well short of what Canadians say they expect to need overall. BMO Financial Group found that Canadians now believe they need an average of $1.7 million to retire comfortably, up from $1.54 million a year earlier.
Whether you’re a beginner or a pro, find the best trading platform for you. The best Canadian brokerage offers the tools you need to grow your wealth. To get started — and earn 2% or more on every dollar you save — open a no-fee TFSA high-interest savings account with EQ Bank. Start building your TFSA today with EQ Bank.
Advertisement
Must Read
- Are you paying too much for car insurance? Here are 3 clever ways to slash your monthly bill
- Here are 5 'must-haves' that Canadians constantly overpay for. How many of these are sabotaging your budget every single month?
- Here are the 5 biggest differences between rich and poor Canadians — which side do you fall on?
Join 19,000+ readers and get Money.ca’s best stories and exclusive interviews first — clear insights curated and delivered weekly. Subscribe now.
The 5-year bridge before government benefits kick in
Unlike many retirees, Xavier can’t lean on government income right away. The Canada Pension Plan (CPP) can start as early as age 60, but taking it before 65 comes with a permanent reduction of up to 36%. Old Age Security (OAS) doesn’t begin until 65. That leaves Xavier with a five-year gap — from 60 to 65 — during which his settlement is his only source of income.
Once he reaches 65, the picture improves. The average new CPP retirement pension paid out as of April 2026 was $877.01 a month, with the maximum being $1,507.65. OAS adds another maximum payout of $751.97 a month for those aged 65 to 74. Combined, that’s a potential government income floor of roughly $20,100 to $27,100 a year — meaningful, but still not enough to live on by itself.
Taxes will take a bite too
Xavier likely won’t keep the full $400,000, either. The Canada Revenue Agency (CRA) generally treats a wrongful dismissal settlement as a “retiring allowance” — an amount received in connection with the loss of employment — and includes it in taxable income for the year it’s received. Employers must withhold tax on the payment upfront, at a flat rate based on the total amount — 10% if it’s $5,000 or less, 20% if it’s $5,001 to $15,000, or 30% if it’s above $15,000 — not a marginal rate on just the portion above each threshold. For a settlement Xavier’s size, that means the CRA’s standard rate would apply to the entire settlement up front, before the final bill is settled on his return at his actual marginal rate.
There is a silver lining specific to Canada’s system. Because Xavier has no other retirement savings, he likely has a large amount of unused RRSP contribution room — up to 18% of his previous year’s earned income, to a maximum of $33,810 for 2026. Contributing part of the settlement to his RRSP wouldn’t eliminate the tax, but it would defer it until the money is withdrawn, while simultaneously rebuilding the retirement savings he doesn’t currently have. Legal fees paid to obtain the settlement may also be deducted, which can soften the overall tax hit.
Lessons for other Canadians in this position
Xavier’s situation is a reminder that a large windfall, on its own, rarely solves a retirement shortfall — especially without a paycheque, a pension or years of government benefits to lean on. Canadians who find themselves in a similar spot can take a few concrete steps:
- Build a bridge-period budget that covers every year until CPP and OAS begin, rather than assuming a lump sum will stretch on its own
- Check RRSP contribution room through the CRA’s My Account portal before deciding on how to allocate a settlement or severance payment
- Run CPP timing scenarios through Service Canada’s My Account to see how waiting even a few years changes lifetime income
- Consider part-time work, even temporary, to preserve savings and avoid drawing down a portfolio during a market downturn
- Talk to a fee-only Certified Financial Planner (CFP) before making any large, irreversible decision about a settlement or severance payout
None of these steps turn a $400,000 windfall into a full retirement fund on its own. But paired with careful budgeting, tax planning and a realistic view of the years before government benefits begin, it can go a lot further than the number alone suggests.
You May Also Like
- This 7-step plan from Dave Ramsey is designed to help you ditch debt, save more and build wealth — here’s how it works
- Prioritize these 4 critical investments and watch your net worth skyrocket
- Here are 8 solid money moves that could free up real cash every month — here's where to start
- Millionaires under 43 are reshaping investing — just 25% of their portfolios are in stocks. Here’s where their money is going
The most expensive financial mistakes are often the ones you don't see coming. Join 19,000+ Canadians who get the money moves, risks and opportunities shaping their finances — delivered free each week. Subscribe now.
Christy Bieber a freelance contributor to Moneywise, who has been writing professionally since 2008. She writes about everything related to money management and has been published by NY Post, Fox Business, USA Today, Forbes Advisor, Credible, Credit Karma, and more.
