Financial independence and the ability to retire early may seem like a dream for many Canadians today. But with the right planning and dedicated effort, dreams can come true — even in these challenging times.
How to retire early in Canada is a big question, so let’s look at some of the key factors involved in getting to your retirement milestone.
What is considered early retirement age in Canada?
Ask someone what the average retirement age is in Canada and they would probably say “65”. That’s because, for many years, workplaces traditionally set compulsory retirement at 65. Government pension programs still reflect age 65 retirement, given that Old Age Security (OAS) and the Canadian Pension Plan (CPP) payments are geared to begin at that point.
However, times have changed and now the average retirement age in Canada is 63.5 years according to Statistics Canada. ‘Early retirement’ would be anything below the average — typically in a person’s 50’s instead of ’60s.
While retirement age has dropped slightly, the expected lifespan of the average Canadian has increased over time. The anticipated average lifetime is now 82.5 years, making retirement a longer part of our lives than in the past. That means planning for retirement is more important than ever.
What do you need to do to retire early?
In order to retire early you need to assess what you need your retirement savings to do and what you want your money to do. Necessary funds include those that cover your basic living expenses. What you want your money to do for you in retirement relates to personal choices and how you want to live. Ultimately you will decide what you need based on the lifestyle you plan to have during retirement.
Early retirement can be a viable option if you ensure that you earn more than you spend – consistently year over year. How to retire early will come down to how willing you are to be disciplined over time so you can save money towards retirement. Ideally, that should start as early as possible in your life to maximize savings and benefit from compound interest.
It also requires making sound decisions in line with your plan to retire early. That includes deferring spending on luxury items, keeping cars longer to avoid payments, and staying within a budget. Unless you are a big wage earner, saving for early retirement will likely require a more austere lifestyle than your peers plus aggressive saving and investing.
Take advantage of good karma
If you are fortunate enough to make career advances and get a raise or move to a better-paying job, you have the opportunity to save more. Instead of upping your lifestyle to match current earnings, put at least some of the extra funds into your retirement savings. If your company has a program to match your RRSP contributions be sure to enroll.
Setting up automated deposits into your retirement savings can make saving painless. When you have figured out what you can afford to save monthly, ‘setting and forgetting’ your contributions can keep you on track.
Prioritizing retirement savings – whether from your regular earnings, side-hustles, or even an inheritance or lottery win – means short-term pain for long-term gain.
How to retire at 50 in Canada
London Life ran an amazingly impactful ad campaign about 30 years ago that touted, “Freedom 55”. For many Canadians who resonated with the desire to retire early, it made us think that retiring at 55 was the new normal. The slogan made it sound easy to achieve financial independence.
The truth of the matter is that to retire as early as 50 takes advance planning and financial self-discipline. The least painful way to achieve the goal is to start investing early, contributing significantly to retirement funds every year. That way, the magic of compound interest will help build your nest-egg for retirement.
For example, if your money earns an average of 7 percent annually and you start setting aside $20,000 annually at the age of 25, you’ll have $1.38 million by the time you are 50 years old. Even if you start saving that $20,000 per year at 35, you will have amassed over a half-million dollars by the time you are 50.
Ultimately, being able to retire at 50 in Canada means looking at the road ahead, planning, saving, and reducing spending. By the time you are looking in the rear view mirror, it will be too late.
What are the pitfalls to early retirement?
If too ambitious saving or over-budget spending puts you behind and you accumulate consumer debt like credit card interest and car loans, that will undermine your goals. Trading in cars frequently and constantly carrying a car loan rather than driving a viable car for more years is costly. Interest paid on credit cards is often at high rates and detracts from your expendable income and possible savings.
For those striving to retire early, things given up along the way can provide for the future. Along with foregoing the new car, you may have to defer buying other consumer items like boats. It may mean giving up expensive holidays and ‘staycationing’ or enjoying local attractions. Day-to-day spending on alcohol, fancy coffees, take-out food, and other conveniences need to be within a balanced budget if you want to retire early. Sorry, Tim Horton’s and Starbucks!
How can I advance early retirement?
Ability to retire early will depend on factors such as your employment, how many dependents you have, and other obligations. You may be saving for your children’s education in tandem with saving for your own future. To stay on track, be sure to take advantage of government programs like Registered Education Savings Plans (RESPs). Use contributions to RRSPs and Tax-Free Savings Accounts (TFSAs) to build your savings and reduce your tax load. If you aren’t familiar with all your options, a financial advisor can help you take advantage of these programs.
Along with eliminating credit card and car payment debt, reducing the cost of housing also frees up more money to enable retiring at 50. With mortgage rates at super-low levels it’s a great time to refinance and leave more money in your savings account.
Including retirement savings as a regular ‘expense’ in your personal budget will ensure that you make your future a priority. You can set your target saving to get you to early retirement. But if you need to adjust along the way, it’s OK to contribute less for a period of time and make it up when you can. The key is to save something towards retirement regularly over as long a period of time as possible.
If cutting back isn’t cutting it, consider increasing your earnings with a second job or side-hustle. There are really only two ways of increasing expendable income: spending less and/or earning more. Sometimes your hobby can become a business and stay fun at the same time.
How much money do I need to retire early in Canada?
Lots of theories and formulas predict what you will need but a lot depends on you. First, you need to be realistic about what your retirement will look like. Are you planning to continue your existing lifestyle with no changes? Do you plan to continue creating income by picking your own projects or working part-time, or will you be giving up work entirely? Assessing your expectations and desires will help you shape what’s needed to retire early.
The new FIRE philosophy
FIRE or financial independence retire early – is a new slogan that perhaps now supersedes Freedom 55. The FIRE premise relies on setting aside almost all your income for several years, self-managing your investments for lucrative returns, and retiring once you’ve achieved your goals.
While this is an interesting tactic, it may not be realistic for a few reasons. First, at a time when the financial markets are impacted by world events including coronavirus, it’s tougher to make the right calls on do-it-yourself investing. It’s especially difficult not to react emotionally to market dips. As well, you may not be able to set aside earnings if your job is impacted. The increased cost of living or unexpected expenses may also hit your bottom line. However, if one could follow the FIRE philosophy successfully it would certainly create more wealth in the run-up to retirement.
That said, whether you have been saving regularly over time or you are making an all-hands-on-deck FIRE effort, there is no hard and fast rule as to how much money you need to retire early in Canada. A very general estimate is that retirees will need 50-60% of current income to sustain their lifestyle in retirement.
For a more customized view, there are resources that can help you estimate your requirements such as retirement calculators. As well, an experienced financial advisor can help assess your situation based on an informed view of trends.
Are there options for full early retirement?
If you aren’t quite able to get your early retirement over the finish line, there are options for semi-retirement. Early retirement doesn’t have to be an all-or-nothing situation given changing times.
Some people are working longer than they expected to make up for setbacks along the way. Others who want to retire early may keep a hand in consulting, part-time teaching, or working in retail for example.
Hybrid retirement is a new term that refers to those who find another job or part-time work after leaving their primary career. Working an additional 5 years is estimated to boost retirement income by 56 percent, making it well worth the effort for the long-term.
As mentioned earlier, there are tools available to help you assess what you will need to retire early. Here are some suggested sites:
Planning for retirement can be daunting especially in changeable times. You may understand financial planning conceptually but have trouble applying it to your own situation. You no doubt want to maximize returns on your investments. But you may react emotionally to downturns in the market when managing your own stock portfolio.
Financial advisors can help assess your situation and create a plan to achieve early retirement in Canada. Advisorsavvy can connect you with reputable advisors in your area to make financial independence and early retirement dreams possible.