Well it appears I inspired the Canadian Capitalist to dig out his pencil and do some calculations on his early retirement. He came up needing $1.36 million to leave the working world at age 55. Which to me proves assumptions are everything when it comes to retirement calculations. So for full disclosure on my previous posts (Part I, Part II and Part III) here is what I assumed.
1) That I will collect CPP at age 60 and that I will generate no more CPP contributions after I turn 45.
2) That OAS will exist in some form or another program will take it place to ensure I don’t starve to death as a senior when I turn 65.
3) That all my calculations were done in today’s dollars.
4) Which is why you will notice my assumed rate of return was around 5% for most of my calculations. To date my RRSP has been around 8% interest, so I cut out 2% for inflation and left 1% as a buffer for things to go wrong, except for my wife’s investment account, since it is structured as being more aggressive.
5) I only used a 4% safe withdrawal rate on my work pension calculation. The reason is that the 4% rate is intended to be used for those who want to preserve most of their capital. For my early retirement, I intend to use up almost all of my capital. So for my RRSP’s I assumed a 5% withdrawal rate.
Those are all technical assumptions, which can very from person to person depending on your comfort level with the government and your investments.
The single biggest factor in determining all those numbers is: what do you want to have for an income? For me I chose a very low number compared to a lot of people’s comfort level ($25,000/year for two people). Yet that number is perfect for me. My current lifestyle is very cheap for the most part. I like to garden (which reduces food costs), cook(again reduce food costs), read books (free from the library), write (ok there is some power cost to run the computer) and watch movies (again mostly from the library, but also borrow from friends). My low number offers me something that can’t be bought otherwise: time.
So if you plan a retirement with golf every day and trips around the world every three months you will need a lot of money, but if your looking just for more time with friends, family and to develop new hobbies or revisit old ones you might want to have a look again at the high income number.
I know that if I retire at 45 that I will be taking a risk, that the markets could crash or the government cuts my benefits. Yet, the reward for that risk is another 10 years of good health to do what I want is worth it to me.
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.