Does ‘one more year’ of work really matter when it comes to retirement safety in Canada? Yes — and it could be the biggest retirement decision you make. Here’s why

Should I work one more year?

According to the Government of Canada, most Canadians spend 35% to 50% of their income on housing and utilities. However, if you’ve already paid off your mortgage, your expenses may be significantly less than the national average.

Let’s say, for example, you expect to live off $4,000 a month in retirement. On top of your living expenses, you want to account for things such as travel, hobbies and entertainment — let’s allot $500 a month — and, of course, a cushion in your retirement budget for out-of-pocket medical expenses — let’s suppose $500 a month.

That means you’ll need an annual retirement income of $60,000 a year (or $5,000 a month). However, you’ll also need to account for inflation throughout retirement — you can expect your living expenses and medical costs to go up over time.

If you work one extra year, you’ll be able to put more money into savings. That means a larger nest egg — and more money working for you to earn an income you can live off of during your retirement years.

Plus, there may be other benefits. For instance, if your employer matches registered retirement savings plan (RRSP) contributions, you can further boost these tax-efficient savings by working one more year. Plus, by working another year your retirement savings stay invested longer — another strong hedge against inflation and protecting your retirement nest egg.

Plus, if you keep working and delay your Canada Pension Plan (CPP) benefit by a year, you’ll receive delayed retirement credits. This means an 8.4% increase in yearly benefits for each year you delay between age 65 to 70.

From a practical point of view that means if your benefit is $899.67 — the average monthly amount of CPP paid out at age 65 — but end up delaying those CPP payments until age 66, you'll end up with a monthly cheque of $975.07. If you delay CPP payments until 70, that monthly cheque jumps to $1,277.53. Keep in mind, these figures are the average CPP payout at 65. If you were eligible for the maximum CPP payment, you could boost your payment from $1,433, at age 65, to $1937.33, by age 70.

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What else should I consider?

You can estimate how much you’d be able to withdraw each month in retirement by working with a financial advisor or using retirement planning tools, like our retirement calculator.

While it may make financial sense to wait another year before retiring, it’s not the only consideration.

If you’re not in the best of health, for example, you may want to start enjoying your golden years now rather than keep working — especially if work is a huge source of stress that exacerbates said issues.

After all, no one is guaranteed to live another 20 or 30 years after retirement. It’s also easy to fall victim to the ‘just one more year’ syndrome.

If you’re thinking about retiring early, you may want to crunch the numbers first — since working another year (or three) may provide much more financial security in your golden years.

If, however, you’ve already reached your retirement goals, then it may not make sense to wait another year.

For example, based on the income requirements of $6,500 per month in retirement and a $1.5 million portfolio, then retiring at 65 would mean CPP income of $1,277.53 per month (assuming the average CPP payment), along with $5,000 from your retirement savings, for a total of $6,277.53 per month (before tax). That's plenty for a comfortable retirement.

As with most financial questions, the real answer depends on your personal circumstances. For more precise answers, it may be a good idea to consult a financial advisor to crunch the numbers and discuss your options.

Sources

1. Government of Canada: Prepare financially: Estimate how much it’ll cost you to live in Canada