It occurs to me that I have overlooked something on this site so far. My goal is to retire at 45, but what exactly does the mean to me?
Well let me first say that does not mean I plan to never work again. For me retirement is having enough money that it does not matter if I do an activity to earn an income. That leaves me the freedom and time to do what I really love to do rather than what I just get a pay cheque doing.
I personally love to write (as you can tell from this blog), but I know that in Canada it is a very competitive market place for writers and frankly I know I need to get better at writing, but that takes time and I still have a family to feed. So I do engineering, which I enjoy but I don’t love, to pay the bills.
If I reach my goal and retire at 45, it means I will most likely go to a new career of writing full time (ie: maybe 20 hours a week, after all this is suppose to be retirement!). So as one reader asked me, I’m not worried about what my then 18 year kid is going to think of having a 45 retired father, because I’m going to show him that if you work hard and plan you can set yourself up to do what you love. Which if your doing anything you really love, it really never feels like work at all.
Well now that I determined how much money I’m getting out of the government, my work pension and RRSP’s. I have one last source of cash to fund my retirement: taxable accounts (or investment accounts outside of an RRSP).
To determine how much I need to retire by 45 I just have to do a few simple calculations. First off from 45 to 55 I’m only using RRSP’s and taxable accounts. So for ten years I need to make up $20,500/year with my taxable account.
Then from 55 to 60 I’ll be using my company pension, RRSP and taxable accounts. So I will only need $9,100/year for those five years. That brings me to a total of $250,650 in my taxable account to allow me to retire at 45.
Ok, that does look like a lot, but I do have some time to save it up. So if I save $550/month at 6.5% interest for 16 years I should have $196,215.
So I’m a bit short as it stands now. I have a few options:
1) Save more. This might happen as I get older if my salary increases out pace inflation.
2) Work during early retirement and earn $5000/year from 45 to 55. That would offset about $50,000 off my quarter of a million requirement and it would only take a day or two a week to earn that kind of income. So I’ll consider that.
3) Downsize the house and pocket $50,000. That will depend on the local housing market at that time.
I have yet to decide what I’m going to do, but at least I have an idea of where I stand. As I get closer to my goal I should be able to improve these estimates with my personal rate of return on investments and pension projections.
The other day I started discussing how I plan to fund my retirement with government benefits. With CPP and OAS I determined my wife and I can fund about 88% of my retirement goal of $25,000/year after I turn 65. Today I’m going to look at other sources of funding my retirement so I can leave work at 45.
1) Company Pension
When you first started with your company you most likely received a package with details on your benefits. If your one of the lucky ones you will have some information on a pension plan.
I recently switched jobs and was told I had accumulated about $10,000 in my previous pension plan. My new pension plan starts in the New Year is defined contribution. I pay in 5% of my salary and they match another 5%. So if I’m saving 10% of my salary and I have $10K starting I should accumulate $173,531 at 5% interest when I turn 45. Then if I let that grow for another 10 years (with no contributions) until I turn 55, I should have around $285,800.
If I take that money and use the safe withdraw rate of 4% I should be able to generate $11,432/year for my retirement. Which if you have been keeping score puts me $33,539 when I pass 65, or past my goal by about $8k a year. So for all those people who worry about having enough in retirement, you can do just fine on CPP/OAS and a pension.
Registered Retirement Saving Plan (RRSP)’s have been sold to us as a great idea to fund our retirement. I disagree. I think they are a great idea to help fund your early retirement if you already have a company pension or your retirement if you have no pension. Otherwise they can be down right dangerous to a person who is over 65 with a pension. Why? You first get taxed at your normal rate and then if you are earning too much you get claw backed on your OAS and disqualify yourself from other government programs. Overall it has been estimated that your marginal tax rate with claw back is upwards of 52% . I know I do not like the idea of work hard for all that money just to give up half of it to the government in my retirement.
So for me I’m going to use my RRSP to mostly fund my early retirement. If it so happens that I have some leftover when I get to 65 that will be fine. So using a similar idea with my pension calculation, I estimate I can generate about $4500/year with my RRSP’s from age 45 to 65.
I’ll wrap up my calculations for retirement in my next post where I cover taxable accounts.