Can You Retire Early Stuck in the Middle?

I made the comment the other day in regards to the fact that every early retirement story I’ve come across has some element of luck.  The people in question either lucked on the stock market, did well on real estate or had their own business and got bought out.  Yet that got me thinking: can you do it with no luck at all and be stuck in the middle for income?  Is it even possible to retire under 50?

So let’s try out that theory, meet my crash test case of fictitious people called Bill and Jane.  They earn between them $71,000 a year (the 2007 median salary in Canada for a two income household with kids).  So let’s break up that pay by a 60/40 split of $42,600 for one and $28, 400 for the other.  You can pick out their careers and who makes more if you want, for me I’m just assuming they get in dead end jobs and never move from this salary during their entire working career.  In actually fact they may start lower and work up, but on an inflation adjusted basis I’m assuming they are a flat line all the way.  So after tax, CPP and EI and no other deductions they clear $33,161 and $25,762 respectively, or in total $58,923 (in SK).

They are a frugal couple so they only spend $24,000/year on expenses (but not the mortgage).  On top of  that is a mortgage payment on a $250,000 home (I’m assuming they buy within their means and stick to a condo or a smaller older house in a ok location, but not a great one).  Mortgage payment for a 25 year period at 5% average rate is $690.66 twice a month assuming they bought with 5% down when they turned 22 (combination of wedding gifts and saving).  I’m assume they don’t accelerate a single payment and pay off the mortgage at 47.  I’m also assuming they pick that $28,000 as their spending rate for retirement which includes some cash for travel and fun things since the mortgage will be gone when they leave work at 47.

I’m also going to assume that having a two kids eats up any spare money until they turn 28 when they start to get serious about early retirement.  After that point, after expenses they can save at most $18,347.16 per year, but wait, who’s looking after the kids?  Let’s take off another $12,000 a year for child care, but in reality you get a tax deduction for that so let’s assume after their tax return they pay $740/month net.  So that leaves only about $789/month for saving until the kids get older, so let’s assume that lasts for 10 years.

So Bill and Jane start saving but are smart and put the money in an RRSP and reinvest the tax refund.  So that boosts their savings to about $994/month while the kids are in care.  So at 5% for 10 years that leaves them with $154,350.  Then the kids leave care and they put the extra $740 a month into savings, but let’s assume outside the RRSP.  So in total they can save $1734/month for nine more years, leaving them with $477, 741 at 47.

Now the draw that down from 47 till 65 when they get OAS and CPP at their $28,000 a year and they only get 3.5% return now.  That leaves them with only $195, 577 at 65.  So assuming a 4% safe withdrawal rate they have about $7823 from their nest egg a year, plus their CPP and OAS they should be fine in full retirement.

So in conclusion it can be done, but you have to do just everything right.  Keep you costs way down and keep your shelter costs reasonable and it can happen.  If you want to spend more than that you will need luck or hard work to make more money.

This post is now part of the 243rd edition of the Carnival of Personal Finance.

10 thoughts on “Can You Retire Early Stuck in the Middle?”

  1. I agree on the luck component.

    Although I didn’t retire until age 55, that age was still early compared to most people. I “lucked” into a job with a good gov’t pension plan. If I had only savings in RRSPs I would likely still be working.

  2. Off Topic

    For what it is worth…I fully expect the stock markets around the world to go below their March 2009 lows before this bear is over. The next big leg down may just be getting under way.

    The last time I saw “signals” this important was when I saw the peak of the bull market approaching.

  3. CM,

    I suppose I didn’t think about a good pension as ‘luck’, but really it is.

    Off topic – so what signs are you seeing? I know I’ve been getting a bit nervous about seeing a double dip here.


  4. Briefly, the stock market charts show the likely completion of the rally off the March lows. And further, that the rally was just “a pause” in a continued bear market rather than a new bull market starting.

    My analysis does not tell me how low the bear might go but it does warn me that their is the continued potential for this bear market to as severe as the 1929-1932 Bear Market.

    In the worse case scenario, as occurred after the 1929 bear market, it took the markets about 25 years to recover the entire loss. Devastating to any buy and holders at that time.

    I wish I had better news.

  5. When you are starting out,there are a lot of other things that need to be bought.
    Like wouldn’t this couple be saddled with a car loan for a few years?
    Or would that come out of the $24,000?

  6. Alex,

    True – extreme early retirement is always an option, but you have to like living on $6000/year.

    Hazy – I didn’t get that detailed in my analysis, but yes, a car would have to come out of that $24,000/yr after they are 28. So given the situation a used care would be a must.


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