Are You Considering Early Retirement?

There’s been a lot of talk lately about delaying retirement and Freedom 55 has almost become a cliché, but a lot of Canadians still dream of retiring earlier than the traditional age of 65.

You may find you have an option to take early retirement in your 50’s or early 60’s.  Some public employees can opt for retirement after a certain number of years of service.  Others have been offered an early retirement package from their company.  The package seems like a lot of money, so they’re tempted to take it.

If you have a choice of when to retire and you can afford it, consider yourself lucky.   It’s not always within your control.  Many employees are forced to retire due to poor health, getting laid off, or family responsibilities.

Retiring early is possible for many of us, but it does come at a price.  Without those extra working – and saving – years, you will need a larger retirement fund, or be creative – so be prepared.

Early retirees have hobbies or other life goals they want to pursue while they are still in good health, so some expenses can be higher in the first few years. 

Bridging the income gap

Whether it’s your choice to retire early, or you’re forced into it, if you stop working before you can start receiving your formal pension income, you’ve got an income gap to deal with. Where will that money come from?

First, consider the timeline for receiving various pensions.

  • CPP/QPP reduced benefits start at age 60 with full benefits at 65.
  • OAS starts at 65.
  • Full benefits from most employer pensions start at 60 or 65, or earlier at a reduced rate.

If you’re retiring before age 60 you may have several years to wait before you receive any pension income.

There aren’t really a lot of options for providing income during those gap years.

  • You can find a new source of employment, but this is not always workable or desirable.
  • Withdraw lump sums from your personal savings, TFSAs or RRSPs.
  • Convert your RRSP to a RRIF and take more than the required minimum until your pension income kicks in.
  • Strategic downsizing may provide you with some extra funds as well as saving money on living expenses.

Other things to consider

1.  Your debts are all paid off

If your mortgage is paid off and you don’t have any loans, lines of credit and large credit card balances or other debts, you won’t have to worry about making large payments during retirement.  This leaves your savings and retirement income available to pay your expenses and enjoy life after work instead.

2.  You can currently live on your retirement budget

Practise living on your reduced retirement budget for several months.  Retirees usually have lower monthly incomes than they did when they were working.  By “road testing” your retirement budget you will develop new habits around what you can afford.

You may find that you can live quite well on a modest income if you don’t have debts and children to support. 

3. You have retirement projects

Leaving work early to spend long days with nothing to do can lead to increased spending to fill up the time (shopping, dining out).  Think of non-work-related ways to enjoyably pass your days.  Having defined plans and projects can help you ease into early retirement.

The bottom line

You’ve planned, set a goal for retirement savings and now you’ve met or exceeded the amount you wanted to save and are sure those savings will support those extra retirement years. 

In addition, you’re debt-free and you have made plans to enjoy your time while living on your retirement budget.

These are good signs you could take early retirement.

Now you can do what’s best for you.

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