The Real Retirement by Fred Vettese

Author:Fred Vettese
Language: eng
Format: epub
Publisher: Wiley
Published: 2012-12-27T16:00:00+00:00

Retiring Early

In the previous examples, we assumed retirement occurred at 65. While earlier chapters suggest this will eventually become our reality, the average retirement age in Canada at this point is still just 62. In Table 11.4, we will recalculate the NRIT for the third-quintile couple from Table 11.1, this time assuming that retirement occurs at 62 instead of 65. We will continue to assume that the primary residence is paid for and the children are no longer dependent on their parents.

Table 11.4: Couple with House and Two Children, Average Third-Quintile Income.

Retirement at Age 65—All Amounts Rounded Before Retirement After Retirement

Total annual income before taxes $78,000 $32,800

Less RRSP contributions (3.5% of pay) ($2,700) 0

Less CPP contributions ($3,500) 0

Less child-raising costs ($10,200) 0

Less mortgage payments ($15,200) 0

Less employment expenses including EI premiums ($3,700) 0

Less income tax and provincial health premium ($10,100) 0

Income available for regular consumption $32,600 $32,800

The working career is now three years shorter, which concentrates all those pre-retirement expenses, such as mortgage payments and child-related expenditures, over a shorter period. We will spread those expenditures over just 32 years instead of 35. Since earlier retirement means fewer years to accumulate retirement savings, the required savings rate has to be higher. The final RRSP balance also has to be higher because the couple will receive payments for three years longer than if they retired at 65. Finally, they will also face greater tax liability because the age 65 credit will not apply immediately.

Their NRIT is 42 per cent, which is about 4 per cent lower than if they retired at 65. While the couple needed to put only 2.1 per cent into an RRSP each year to reach their NRIT at 65, they will now need to save 3.5 per cent of their income each year. The bad news is that their retirement income has dropped from the $35,600 they could expect when retiring at 65 to only $32,800. They also had less disposable income during their working years because they needed to contribute more to their RRSP, and had a shorter period to pay off their mortgage and amortize child-related costs. Retiring early doesn't just mean less income in retirement, it also means less disposable income throughout your working career while you make the sacrifices necessary to save enough. By planning to retire early, the couple reconciled themselves to a lower standard of living. Since they have essentially lowered the bar, the NRIT is lower.

Earlier retirement is possible if you are ready to accept a lower standard of living both throughout your working years and into retirement. Table 11.5 suggests your disposable income drops by about 3 per cent for each year that you decide to retire earlier. If you are planning to retire at 65 or later, it is a good idea to save a little more than is needed to reach your NRIT. That is because you never know when your plans might change and you are forced to retire earlier than you expected. And if you stick to your plan to retire at 65, you'll have a little extra income!

Table 11.

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