Financial literacy 101: retirement planning

There’s a lot to wrap your head around when it comes to your finances, but a good understanding of some basic financial concepts can really take you a long way. While Canadians have received high scores when their financial knowledge was tested, many still lack confidence in their skills. In part three of our three-part series on financial literacy, we want to help break down some common questions about retirement planning.

How much do I really need to retire?

Different people have different ideas about how much you should be saving for retirement. Many advisors say you need retirement cash flow equal to 70% to 80% of your peak-retirement income, but one size doesn’t fit all. The 70% rule is a good place to start, but that’s all it is. Everyone’s goals are different, which is why it’s important to plan how you want to live in retirement.

Once you've defined your retirement goals, you can work backwards to figure out the steps you’ll need to take to get there. If you aren't sure where to start with retirement planning, working with an advisor can have a huge impact on meeting your financial goals. 

How can I maximize my retirement savings?

In a 2019 report from the Retirement and Savings Institute at HEC Montreal, Canadians scored an average of 36.5% when quizzed on their understanding of how retirement programs and concepts work in Canada. This factored in topics like employer plans, government pension plans, government savings plans, and other general financial knowledge. 

Here's the thing: there are many investment options, in terms of specific products you can buy or invest in, and different account types. Generally speaking, here's how you should prioritize your retirement savings:

  1. Employer-matched retirement plans: If your work offers to match contributions to a retirement plan, start here. There may be a limit to their contributions, but that's an immediate return on your investment. Maximize this plan first, then move onto step two.
  2. Use a TFSA or RRSP: with a Registered Retirement Savings Plan (RRSP), your contributions you make are tax-deductible, so you pay less taxes today when you make deposits. However, you will pay tax on that money (and any interest or gains) when you withdraw it in retirement. 

In a Tax-Free Savings Account, your deposits aren't tax-deductible, but unlike the RRSP, any interest or gains are completely tax-free. Some people use their TFSA for short or medium-term savings goals, but it's also a great tool for long-term retirement saving.

Unfortunately, both RRSPs and TFSAs are underutilized with many people not maximizing their contribution limits. This is generally not because they don’t want to, but simply because they don’t have the money left at the end of the month to contribute. Try setting up an automatic RRSP or TFSA contributions on the same day you’re paid allows you to pay yourself first and save for retirement without really thinking about it. 

I haven’t been saving as much as I should for retirement. What are some strategies for getting back on track?

One of the fundamentals of retirement planning is having a plan - and sticking to it. If you have a plan but you’ve fallen off track, it might be a sign that your plan needs some revision. If you don’t have a plan, here are 3 things you can do right now.

Along with having a plan, understanding your investment options isn’t as important as understanding the risk of your investments and the fee that each investment charges. Taking on too much risk and paying high fees can drain your savings, so it’s important to work with an advisor to determine your risk tolerance and figure out what investments will be best for you. Investments can be complex, but asking for advice with regards to risk and fees is pretty straightforward and can make a huge difference.


This article is for information purposes only and is not intended to provide specific tax or other advice and should not be relied upon in that regard. Individuals should seek the advice of qualified professionals to ensure that any action taken with respect to this information is appropriate to their specific situation.