Yearning to retire younger or ahead of schedule? First of all—sure! Early retirement is a great idea, and you can make it happen. All it takes is a good analysis of your financial situation and some smart planning. The key is to make sure you can enjoy lots of great years without having to worry about money. Here’s what to bear in mind.
Although most people expect to retire between age 60 and 65, there is in fact no preset age or time limit on retirement. It all depends on your situation, and you’re the only person who knows about that.
Most government pensions in Canada are available when you turn 65, but many can be taken early or delayed.
If for example you want to retire at age 55, you won’t get any government benefits till you turn 60 or 65. You’ll need to live off your personal savings, investments, and rental income from buildings if you own any as well as part-time work and your employer’s retirement plan.
Good to know: Even if you retire early, it’s a good idea not to claim your government pensions till you’re 70. That way, you’ll get more money you can set aside to give yourself an indexed life-long safety net. It’s an additional layer of protection, especially with life expectancy getting longer all the time. But if for instance your health is iffy, you might be better off collecting earlier and enjoying your life. Talk it over with your financial advisor.
If you collect a pension while working full time, your income tax might go up. Take the time to look into how your pensions will affect your taxes. If you’re part of a couple, you might be eligible for income splitting.
Good to know: Collecting your pension and working full time doesn’t help. Things work out better financially if you’re working part time.
Naturally you’ll need to figure out your resources before opting for early retirement.
The biggest financial loss associated with retirement is your annual pay. That’s why you need to take an in-depth look at where you stand before retiring early. You’ll need a solid idea of how much money in savings you’ll need after you retire.
The last thing you want is to have to go back to work a few years later when you realize your savings weren’t enough. The younger you retire, the more you’ll need to rely on other sources of income.
You can retire and quit working all at once, but you can also continue working part time or even gradually slow your pace—what’s known as phased or progressive retirement.
Phased retirement has its share of advantages, but it has its limits too.
If you’re in phased retirement, you should be able to claim your government pension later. If not, talk about it with your advisor.
You could also retire and find a new part-time job for some extra income. Here too there are pros and cons.
To show you how it all works, let’s take a look at two imaginary 58-year-olds. They both have the same take-home pay and every year they put 18% of their salary into an RRSP that generates an average annual return of 3.5%. One retires at 58 while the other waits 5 years longer before tasting the joys of retirement at 63.
We've set a goal of their savings lasting until they're 95.
The person who retires at 58 retires making $52,231 a year and has $316,493 in an RRSP.
The person who retires at age 58 withdraws $10,991 in the first year. When that person turns 63, the amount, which is indexed, will be $12,135. Meanwhile, the person who retires at age 63 withdraws $16,631, or $4,496 more (not including the gain in salary during the additional 5 years).
In our example, the person retiring at age 63 had an additional $277,247 in gross earnings, and therefore was able to contribute an additional $111,803 to their RRSP, over 5 years. Actually the difference is even greater because the person who retired at age 58 has already started withdrawing from their RRSP. But there is more to life than money: the person who retired at 63 also had to go to work every morning for the last 5 years. Working sometimes comes with obligations and less free time.
The takeaway here is that if the financial side of early retirement is properly wrapped up, you’ll rest easy. All that’s left is to enjoy the new adventure that lies ahead. Get together with an advisor to talk things over and plan your retirement. You have questions. We’re here to help.
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