When time is on your side...
Time, and especially money, for investing in a project that is as far off as retirement is hard to come by. You will get there one day, though. And you might as well start planning early: the longer you wait, the greater the effort you'll have to make. Here's why:
Your sources of income
Do you want to maintain your standard of living in retirement? Then you will have to replace about 70% of your annual gross employment income. Why 70%? Because you will generally have less expenses once you retire. If you want to travel more often or hope to pamper yourself, you will probably need more than 70% of your income. It's up to you to decide!
The first step to planning well for retirement is determining the sources of income on which you will be able to count when you retire:
Public plans only replace part of your employment income when you retire. Take a look at the chart below to get an idea of what percentage of your earnings public plans replace.
Income replacement rates under public plans (Old Age Security pension and pension under the Québec Pension Plan)
Is your income high? Get ready to save!
The higher your income, the less public plans replace. That is why you contribute up to a certain maximum (48 300 $ in 2011) to the Québec Pension Plan, and a retirement pension under the Plan replaces 25% of the employment earnings on which you made contributions.
Now that you know roughly what percent of your income public plans will replace, you can determine what percentage of your personal savings you will need to replace your income when you retire.
If you are one of the lucky ones who has a private pension plan, you certainly have a head start. Just be careful: be sure your plan will make up the difference when you retire!
Saving early pays off
It is also the key to success. If you don't have the money now but will later, beware! The longer you wait, the more you will have to save to meet your goals. To help explain, let's take a look at Fred's situation.
Fred is 25 and makes 41 000 $ a year. He would like to retire at age 65. The public plans will replace about 40% of his employment income. According to the 70% rule, he will have to save enough to replace the 30% of his employment earnings (12 300 $) that he will have to take out of his personal savings each year.
The following table shows how much Fred will have to save each week to meet his savings objective, assuming a rate of return of 5% and a rate of inflation of 2,5%.
Amount Fred must save each week to reach his goal
| If Fred starts saving at age... |
Weekly savings |
Annual savings |
| 25 |
68 $ |
3 477 $ |
| 30 |
83 $ |
4 258 $ |
| 35 |
103 $ |
5 317 $ |
| 40 |
133 $ |
6 822 $ |
| 45 |
177 $ |
9 106 $ |
Fred thinks that 68 $ a week is much too much because he has student loans to pay off and he will soon be a father. But will he have 133 $ a week to dedicate to retirement savings when he is 40?
Are you like Fred and don't have much money to set aside for retirement? Save what you can. The important thing is to start saving now so that you get in the habit. You can always increase the amount when you are able.
For help with financial planning for retirement, read our Practical info articles. They suggest a few simple interactive tools.