Six simple steps to retiring sooner

By Don Eberley

“The question isn't at what age I want to retire,
it's at what income."

-George Foreman

Bad day at the office? Not sure you can hack this until you're sixty-five? You're not alone. Many folks dream of retiring sooner rather than later, so here are six simple steps to help make it happen.

1. Embrace your 60

If you can retire on 60% of your income instead of 80% (the financial planning gold standard), you can generally look forward to hanging up your hat at least five years sooner.

Obviously, you'll have to forget about passing your days on the deck of a yacht. Think about a simpler life, perhaps in a smaller home with only one car. That sort of thing. But what you give up in luxury you gain in extra years of freedom, while you are still young enough to enjoy it.

2. Understand your government benefits

Government benefits won't make you rich, but they can help you retire sooner by lightening the load on your investments. It helps to know how they work.

Old Age Security (OAS) begins at age 65 for low to medium-income Canadians, and pays an inflation-adjusted benefit of roughly $6,000 per year. Canada Pension Plan (CPP) benefits are paid to workers who contributed as individuals or through an employer. CPP is also indexed to inflation. It is designed to provide a 25% pension (maximum close to $11,000) at age 65, however you can retire as early as age 60 with a reduced benefit. Sometimes it is worth taking the early benefit, to spread the tax load or allow your RRSP more time to grow.

3. Be the slave driver... not the slave

Many Canadians work longer than necessary because of lazy investments. For example, while a sluggish 3% investment takes over 37 years to turn $1,000 worth of savings into $3,000 worth of retirement income, a harder-working 6% investment does the same job in under 19 years. That's an 18-year difference.

The harder your investments work, the sooner you won't have to.

4. Save more

Even the best investments don't run on empty. If you starve your account by contributing only $100 per month, it will take almost 28 years to accumulate $100,000 (assuming a 7% compounding rate of return). But if you bump up that contribution to $500 per month - ten percent of a typical $60,000 salary - it will take only 11 years.

Most people without a pension should be saving approximately 10-15% of their salary every year, starting in their early thirties. Failure to set aside enough money implies that you are living beyond your means, and will have to work longer as a result.

5. Have your cake and it eat too

This is where we get smarter. It is actually possible to save less money, retire sooner and with a larger income, and do it all with no added risk. It is truly the financial equivalent of having your cake and eating it too. You just have to know where to find the free cake.

Income splitting between spouses is one free cake. Check the tax tables, and you'll see that an Ontario couple earning $60,000 will get approximately $4,000 more after taxes if they each claim $30,000 as opposed to one partner claiming the entire $60,000. The more lopsided the split, the more the couple will pay in tax. Take advantage of income-splitting provisions for RRSPs, private pensions, and even the Canada Pension Plan, to balance your taxable income as evenly as possible.

Another free cake is to structure your retirement income in such a manner as to maximize Old Age Security benefits (or more accurately, to minimize OAS clawbacks). A person whose income exceeds $80,000 should try to avoid additional income from RRSPS, GIC or bond interest, and (worst of all thanks to the dividend gross-up) dividends from Canadian companies, because they trigger the biggest OAS clawback. The same income drawn from a Tax-Free Savings Account, or a non-registered mutual fund redemption, would result in a smaller clawback.

Finally, do yourself a favour and get used to individual mutual funds rather than those pre-packaged "asset allocation" portfolios that the banks sell. Even if the underlying investments are identical, the pre-packaged portfolios can run out of money sooner by drawing income equally from all investments during a down market. By taking control of which funds will be depleted at which times, you can potentially stretch your dollars further and make early retirement more affordable.

6. Plan for success

As the saying goes, if you don't know where you're going then you probably won't get there! You need a plan.

You can get help from various online financial calculators. But a qualified financial advisor can provide you with a more thorough analysis, integrating your investments, insurance, pensions and benefits into one simplified plan.

The way I see it, a written retirement plan is like a steering wheel for your RRSP. You wouldn't buy a car without a steering wheel, and you shouldn't buy investments that way either!