Can You Get By on the Average Canadian Retirement Income?

When planning for retirement, you need a strategy to support the life you envision. This strategy should take into account your retirement income needs and any retirement goals you have. Given the personalised nature of your needs and goals, is the average Canadian retirement income relevant to your planning?

What is Average Retirement Income?

Some investors may look to the average retirement income as a goal or guideline for their retirement strategy. These figures can vary based on the cost of living in specific regions, and may initially seem to be a useful piece of information during your retirement planning. However, it doesn’t make much sense to assume the needs and goals of the average retiree household in Canada are the same as your specific needs and goals. You may have vastly different needs and goals when you retire than the average retiree. Even if your circumstances are similar, individual differences may mean you need to take a different planning approach.

Does the Median Household Income Reflect Your Needs?

According to data from the 2017 Canadian Income Survey, the median total after-tax income in Canada for families headed by an individual over 65 years old is $61,200.^[i] Single individuals over age 65 have a median after-tax income of $27,500.^[ii]

But do these figures align with your specific needs? They might, but probably not exactly. Do they bear any relation to your personal time horizon or lifespan? No. These figures aren’t designed to be specific to any particular individual’s situation or forward-looking. The data simply presents an informative snapshot of median income data, it is not meant to be a recommendation or goal for any specific retiree. 

Many factors exist when considering planning and paying for retirement. Instead of planning your retirement around an average household income figure, it might be more prudent instead to start your planning process using your own current personal retirement savings and anticipated spending. Furthermore, a current national or state average doesn’t anticipate the changes likely to occur throughout retirement—the need to increase or decrease withdrawals, or unexpected health changes and expenses which may affect your financial needs. Your personal situation should determine your financial needs in retirement.

How Much Money Will You Need in Retirement?

What are your retirement goals? Do you plan on maintaining your current lifestyle, or do you want to enhance it? Retirement goals can differ significantly, but they all come with costs. Your expenses now may be a good starting point when estimating retirement costs.

Retirement expenses fall into two main categories: non-discretionary and discretionary.

• Non-Discretionary Expenses include certain needs and associated costs that are essential. Payments for basic living expenses, healthcare, insurance, debt and taxes fall into this category. Generally these costs are unavoidable.
• Discretionary Expenses are more flexible, as they reflect wants instead of needs. Nevertheless, they may represent important lifestyle enhancements or goals.

Once you estimate how much you might need during retirement to cover your expenditures, don’t forget to factor in the impact of inflation as well as your time investment horizon when determining your longer-term income needs.

• Inflation can decrease your purchasing power over time. Since 1925, inflation has averaged approximately 3% a year.^[iii] For example, if you require $40,000 to cover annual living expenses, you would need over $70,000 in 20 years just to maintain the same purchasing power, should the average inflation rate continue.
• Investment Time Horizon is another important factor when planning for retirement. Your lifespan could potentially last significantly longer than previous generations, meaning your savings need to provide for longer after you retire. Remember—your investment time horizon can be longer than just your life expectancy. Depending on your individual circumstances, your investment time horizon could depend on other factors, such as the life expectancy of a spouse or dependents.

How Will You Pay for Retirement?

There are a number of retirement income options available in Canada. Bear in mind the benefits and limitations of some of these popular forms of retirement income.

Canada Pension Plan: The Canada Pension Plan, or CPP, likely has a place in your retirement planning. The CPP provides retirement benefits to those who qualify. CPP benefits can vary based on the age you decide to begin taking benefits, your CPP contribution amount and number of years you contributed.^[iv] Although CPP benefits can be an important part of your retirement income, they might not be enough to be your only or primary income source.

Old Age Security: The Old Age Security (OAS) pension is a government-provided benefit that does not depend on your contribution history. Instead, OAS benefits depend on certain Canadian residency requirements.^[v] Persons receiving OAS benefits may also be eligible for the Guaranteed Income Supplement if their income is below a specified threshold.^[vi]

Retirement Savings: Setting money aside in a savings account, such as a Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP) can be a useful option for investors during their working years. Both TFSAs and RRSPs have limits on yearly contributions, and both may provide tax advantages. You may also consider a taxable investment account for additional retirement savings.

Pension Plans: If your employer offers a pension, you should determine how much pension income you can expect to receive on a regular basis. Will your pension plan provide enough to retire on? Or will you need supplementary retirement income? Pension benefits may vary by plan and provider.

Salary: Some retirees choose to work part-time after retirement. This may be supplementary or primary income after you retire.

Business and Real Estate: Perhaps you have started a business. Or maybe you plan to own or maintain a rental property. When calculating how much to expect, be aware these sources could have more variability of return than other forms of income like the CPP or a guaranteed pension.

Are You on Track to Enjoy a Comfortable Retirement?

With careful planning, you may be able to achieve the retirement lifestyle you envision. If you find yourself falling short of your expected retirement needs, you still have options.

If you are still working, you may consider ramping up RRSP or TFSA contributions, delaying taking pension benefits, reducing expenditures or continuing to work part-time. If you have already retired, you may consider returning to work, reducing portfolio withdrawals or downsizing your living space.

If you aren’t sure how to proceed or need help getting started with your retirement plan, contact us today to speak with a financial adviser at Fisher Investments Canada to learn more about planning for retirement, or download one of our educational guides.

^[i] Source: Income statistics by selected family types, 2016 and 2017, Senior families, Statistics Canada, as of 01/07/2019.  https://www150.statcan.gc.ca/n1/daily-quotidien/190226/dq190226b-eng.htm.

^[ii] Source: Income statistics by selected family types, 2016 and 2017, Persons not in an economic family, Seniors, Statistics Canada, as of 01/07/2019.  https://www150.statcan.gc.ca/n1/daily-quotidien/190226/dq190226b-eng.htm.

^[iii] Source: FactSet, as of 31/05/2019. Rates of inflation are calculated using the Canadian Consumer Price Index from 30/01/1925 – 30/04/2019.

^[iv] Source: Government of Canada, as of 01/07/2019. https://www.canada.ca/en/services/benefits/publicpensions/cpp/cpp-benefit/amount.html

^[v] Source: Government of Canada, as of 01/07/2019. https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/benefit-amount.html

^[vi] Source: Government of Canada, as of 01/07/2019. https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/guaranteed-income-supplement.html