WHAT YOU NEED TO KNOW ABOUT EARLY RETIREMENT
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 per cent rule.”
According to the conventional wisdom parroted in mutual-fund ads and most financial planning books, you must replace a whopping 70 per cent 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 per cent 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 per cent 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.