The Truth About Early Retirement

You won’t need a million dollars to do it. You do need some good planning and a little creativity.

Donna Green from Moneysense
PHOTO: © JIM LABOUNTY (TOP); © RUTH KAPLAN (Bottom)

It’s a glorious spring day on Vancouver Island, and Patricia Robinson and her husband, Ron Sadownik, are relaxing amid the West Coast splendour. Robinson, a 55-year-old retired school principal, spent the morning finishing a watercolour painting while Sadownik, a 58-year-old former high-school drama teacher, worked on a piece of molten-glass art in his studio. In the afternoon, the couple went for their daily walk along the harbour near their home in Nanaimo, then returned to putter among the daffodils in the garden of their three-bedroom house.

“There isn’t a day we’re not smiling,” says Sadownik. “Early retirement is the best thing we ever did.”

Thanks to a combination of good fortune and good planning, Robinson and Sadownik have managed to quit working a full decade earlier than many other Canadians. Will you be able to do the same?

The good news is that early retirement is possible not just for this lucky couple but for many of us. Sure, it takes a bit of financial discipline, and you may need to be creative in bridging the gap between full employment and complete retirement. But you don’t need a million dollars to be able to quit working. So how much do you need? Join us as we show you how to plot your own escape from the working world.

Ignore the 70- percent rule
According to the conventional wisdom parroted in mutual-fund ads and most financial-planning books, you must replace a whopping 70 percent of your income to have a comfortable retirement. But the more you scrutinize the logic behind this time-honoured rule, the more questionable it becomes. Sure, if you want to spend your retirement years dining in five-star restaurants, you’ll need at least a million dollars in savings. But if you would be content to live as well as you did during your working life, then retirement planning begins to take on a far friendlier aspect.

Malcolm Hamilton, an actuary at the consulting firm Mercer Human Resource Consulting in Toronto, says most Canadians overestimate how much they need in retirement because they don’t realize how much of their current income is eaten up by a combination of high taxes and once-in-a-lifetime expenses. And because most retirement calculations ignore government stipends such as the Canada Pension Plan (CPP) and Old Age Security (OAS), Hamilton says those projections often grossly exaggerate the savings you need to generate the required level of income. “You can live quite well on a modest income if you don’t have mortgages and children and governments to support.”

As long as you can enter your mid-50s with a paid-off house and ample savings for your kids’ education, your need to earn a big income will fall dramatically. And your tax bill will plunge if your income declines. In many cases, 50 percent of your previous income will suffice to keep you and your spouse in the same style you were accustomed to during your working life.

How much, then, should I save?
One way to estimate how much you need to save for retirement is to calculate your real disposable income. Begin with your nominal income: the full, before-tax value of your salary and other income. Then deduct what you pay in taxes and subtract your mortgage payments. Lop off your RRSP contributions, job-related expenses and your savings for your kids’ education. What you are left with—your real disposable income —is what you should aim to replace in retirement.

Once you turn 65, government stipends will replace a big chunk of most couples’ current disposable income. But if you want to retire early, you have to rely on your savings to help you bridge the gap between the age you retire and 65.

Let’s assume you and your spouse are the same age and have a real disposable income of $35,000 a year. Your goal is to continue to enjoy the same income at retirement. One way to accomplish this is by purchasing an annuity, a financial product issued by insurance companies that guarantees you steady income in exchange for an up-front cash payment.

At 55, you and your spouse can purchase an annuity for $370,000, which will immediately give you $35,000 a year. At 65, when government benefits begin, your annuity drops but your total income remains steady at $35,000 annually and will continue as long as you both live, according to Lucie Cossette, vice-president of seclonLogic Inc., a pension software developer in Toronto. Be aware, however, that your annuity payments will fall to 60 percent of the full amount in the event your spouse dies.

Is $370,000 still too much for you? If you put off early retirement from 55 to 59, the amount you need falls to just $315,000. To retire at 62 all you need is $260,000. If you’re prepared to work part-time in retirement, the amount you must save falls even further, to a figure that is well within the reach of most families.


Can I count on CPP?
One of the nastier tricks played by some mutual-fund companies and financial planners is letting people believe that Canadians can’t rely on government pension plans to be there at retirement. The reality is that you can and should rely upon receiving a healthy paycheque from the government once you turn 65. The CPP plan, in particular, is funded through a payroll tax and is a bedrock of retirement planning. “The plan is solid,” says Sheryl Smolkin, a lawyer and director of the Canadian Research and Information Centre of Watson Wyatt Worldwide, an international human-resources consulting company.

OAS is a trickier matter since it’s paid out of general tax revenues and hence depends upon the will of whatever government is in power. (Currently, the government starts to claw back the benefit when your personal annual after-retirement
income reaches $56,968.) A future government could cancel the program, but that would alienate the third or more of the electorate who are retired or near retirement age, guaranteeing certain defeat at the polls.


What other tricks are there?

Get ready, Get Set

Plan your way to early retirement by logging on to some expert on-line help

www.finactive.com: This easy-to-use site from Desjardins Financial Security includes a calculator for figuring out how much money you’ll need to save for retirement. And its capital projections include anticipated social benefits.
www.howmuchisenough.ca: Diane McCurdy’s on-line worksheet will help you determine how much income you really require upon retirement.
www.hrdc-drhc.gc.ca/isp: To get a handle on what you can expect from government benefits when you turn 65, check out this government of Canada web site.
www.seclonlogic.com: This site’s retirement-income calculator assumes that you will buy an annuity with your retirement capital and takes into account estimated CPP and OAS payments.

—Donna Green in MoneySense

In many cases, people have to be creative, especially when it comes to bridging the gap until government payouts begin. When Sadownik and Robinson took the plunge in September 1999, their first step was strategic downsizing. They sold their home in Calgary for $250,000 and bought a $205,000 house in Nanaimo. The money that remained provided a nice contingency fund as they settled into retirement. And the move saved them money on living expenses. “The whole trick is to find a smaller city with a less expensive cost base,” says Sadownik.

Sadownik receives $29,000 a year from his teacher’s pension plan. He supplements that with income from his molten-glass art. Robinson retired two years before she could begin tapping her pension plan. Three years younger than Sadownik, she has had to live off her severance package and RRSP savings. To make sure she’d have regular income, she put her money into an RRIF, a tax-sheltered plan that lets her money grow, while allowing her to take several hundred dollars out each month for living expenses.

Other people use different strategies to bridge the gap between early retirement and their first CPP cheque. After Hugh Conrod, 73, of Chester, N.S., retired 22 years ago, he renovated an ancient chicken hatchery into a palatial three-bedroom house with a two-bedroom rental unit attached. The rental apartment spins off a steady $450 a month.

When it comes to constructing your own retirement plan, remember that it’s not just your total income that matters—it’s how that income is split between you and
your spouse. Ideally, you should have equal incomes. This places each of you in the lowest possible tax bracket and shrinks your tax bill. The simplest way to achieve this is for the higher-earning spouse to contribute to a spousal RRSP. The higher-earning spouse then gets to claim the tax deduction, but the lower earning spouse owns the RRSP and reaps the income from it.

The other big challenge is timing when to start tapping government pensions. You can choose to start collecting a reduced CPP payment from the age of 60, or you can wait until you turn 65 for the full amount. Robert Grose, a financial planner with Investors Group in Nanaimo, advises clients to start collecting CPP as early as possible. “Statistically, you will collect more in the long run,” he says. In other words, most people die before the larger CPP payments they get by waiting until 65 make up for the five years of payments they could have had by starting to collect at 60.


What can I do now?
Actuary Malcolm Hamilton recommends that once you’ve paid off your home and saved for your kids’ education, ideally in your early 40s, you should divert every possible penny to your RRSP. If you do so, there’s plenty of time to build a substantial nest egg by your mid- to late-50s.

“The important thing,” says Hamilton, “is to get out of debt as soon as possible. Too many Canadians suffer needless anxiety because they can’t contribute to an RRSP, pay off their house and meet all their obligations simultaneously. The reality is you can’t and you don’t have to. Pay off your house first; there’s plenty of time for investing later.”

However you structure your own financial plan, it’s important to think through what you want from early retirement. Diane McCurdy, a Vancouver-based financial planner and author of a Canadian bestseller on retirement, How Much Is Enough?, advises her clients to make a list of all the things they want to do in retirement, putting the goals that require the most money and energy first. “Work your way through the list,” she urges her clients. Not only does her system help with the transition to retirement but it encourages you to follow your dreams while you’re still young and healthy enough to enjoy them.

For some of us, early retirement may mean a chance to pursue new areas of study or to work part-time in an area that interests us. For Sadownik and Robinson, it means living by the ocean, travelling and attending a rich menu of cultural events. Three years after escaping from the work world, both are glad they made the decision to retire early. “Take the leap,” advises Robinson. “It’s been a real gift.”


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