We traditionally think of 65 as the standard age for retirement. But truthfully speaking, wouldn’t it be nice to make an early exit from the workforce? If you feel that way, you’re not alone. Many people dream of an early retirement and spending more of their time with family or on other pursuits.
One of the more unexpected outcomes of the pandemic has been a growing trend of younger retirees. Many people have already decided it is time to put work aside and many more are thinking about it in the months and years to come. Could you be one of those people? If so, how can you make it happen?
Stock-market, real-estate booms drive retirement shift
It’s a 180-degree switch from where we were in March 2020, when the Toronto Stock Exchange dropped 34% from its pre-COVID peak and fears of a real-estate crash had many thinking they would have to put off retirement.
Fast-forward 18 months and the situation has transformed again: the TSX is up about 17% from its pre-pandemic high as of this writing (and nearly 76% from those depressing March 2020 lows). And no one needs to be told about the monumental rise in Vancouver real estate: according to the Real Estate Board of Greater Vancouver, the typical detached home in the region sold for $1,807,100 in August, up 20% from a year ago.
All of this is a timely setup for our five early retirement tips. Let’s delve into those now.
Your income (and expenses): Remember to account for inflation
The starting point for planning any retirement is to take stock of all of your income sources. These could include savings held in registered retirement savings plans (RRSPs), a workplace pension plan, rental-property income and/or continued income from working, if you plan to ease out of the workforce more gradually.
You’ll need to look at your expected costs, too. And in doing so, you need to make sure you account for inflation, which will play a bigger role in a longer retirement. Consider, for example, a retiree with $100,000 in cash. Assuming just a 2% yearly inflation rate, this savings would have just $83,675 of purchasing power (in today’s money) in a decade and just $68,643 in 20 years.
That’s a serious wealth erosion that clearly illustrates the dangers of sitting on uninvested cash, and Canadians do hold a lot of it: according to a 2020 Pollara survey, 32% of investors held cash in their RRSPs and it accounted for 22% of their holdings. Moreover, 62% of investors held cash in their tax-free savings accounts (TFSAs), at an average of 41% of their holdings.
Note, too, that some sources of retirement income, such as the Canada Pension Plan (CPP) and Old Age Security (OAS), are inflation-adjusted: they’re recalculated annually based on the consumer price index (CPI).
However, neither CPP nor OAS will help you right away if you retire in your mid-50s, because you can’t begin drawing CPP until at least age 60 and OAS until 65 (and there are good reasons to hold off on taking CPP, as we’ll see below).
Your portfolio: Shift to income investments, but don’t abandon growth
If you’re like many investors, your pre-retirement portfolio consists mainly of two “buckets” – cash and stocks.
As you approach retirement, however, you’ll want to add (or emphasize) a third: income. Here, you’ll want to consider target investments such as dividend-focused mutual funds*, segregated funds, annuities or possibly real estate investment trusts (REITs).
But if you’re entering retirement – particularly early retirement – you shouldn’t neglect growth, as you’ll likely need to keep expanding your nest egg for a time to ensure it’s large enough to sustain you throughout your retirement years. Your advisor can help you make sure your portfolio is properly allocated for your needs and risk tolerance.
Real estate: Sell or stay?
When it comes to real estate, most people purchase with an eye to reaping price gains when they sell. And the return on your principal residence is especially attractive, as it’s exempt from capital gains tax. That, of course, could make downsizing, or moving to a lower-cost area of the country, attractive given the rapid appreciation in Vancouver real estate (though you’ll want to bear in mind that the work-from-home trend has inflated home prices in rural parts of the province as well).
The question gets murkier with rental property. When deciding whether or not to remain a landlord, it makes sense to take a careful look at the numbers, because you may not be left with as much rental income as you think, once costs are taken out.
Your rental profits may also be getting squeezed by the BC government’s COVID-19 rent freeze, which came into effect March 30, 2020, and expires in January 2022. Even then, you’ll only be able to bring in a 1.5% increase. To put that in context, the CPI rose 3.7% in July from a year earlier, so your 1.5% hike will still trail inflation.
The bottom line? If you have enough liquid assets (stocks* and mutual funds*, for example) generating income for you, or perhaps a defined-benefit pension plan that won’t be severely cut if you retire before age 65, it might make sense to keep your rental property.
But if you’re carrying a mortgage and your property is more or less breaking even every month, you may be better off selling into the strong real estate market and putting the proceeds in investments that boost your income.
Use your RRSP as a “bridge” to CPP
You have to convert your RRSP to a registered retirement income fund (RRIF) by December 31 of the year in which you turn 71. The following year, you’ll have to begin making annual withdrawals, subject to minimums that rise each year.
But there’s no minimum age at which you must convert to a RRIF. Consider also, that if you’re younger than 71, you can convert only part of your RRSP to a RRIF, which could be a good strategy when you’re between 65 and 71, as you’ll qualify for the pension income tax credit. You can also split RRIF income with a spouse starting in the year in which you turn 65, potentially lowering your household tax bill.
So, depending on the size of your RRSP, it could make sense to withdraw more in early retirement, until the age at which you begin drawing CPP. You could then reduce your withdrawals when CPP kicks in and reduce them further when you begin collecting OAS.
Note, however, that all RRIF withdrawals are taxable as income, and you’ll have to pay withholding tax at the time of withdrawal on any amounts above the minimums. The withholding tax will then be reconciled when you file your tax return, so you may have to pay more or you could receive some back, depending on your financial situation.
Consider putting off CPP payments
This, of course, raises a key question all retirees face: when should they begin drawing CPP? You can do so as early as 60 or as late as 70; your monthly payout is based on your average earnings while you were working.
The key thing to focus on is that you receive a larger payout the longer you wait to start drawing CPP, and the differences are stark: your payment will shrink by 0.6% for each month you take CPP before you turn 65, to a maximum reduction of 36%. Similarly, monthly payouts rise by 0.7% for each month you wait after your 65th birthday, or up to 42% more if you begin receiving CPP after you turn 70.
So if your finances allow, you’d be well served to keep CPP in your back pocket and lean more into your RRSP savings – your monthly CPP payouts will be higher when you do start receiving them, and your yearly CPP inflation increases will be worth more, too.
Bonus advice: Don’t forget to dream!
Finally, remember that retirement is about more than dollars and cents. Well before leaving the workforce, sit down and visualize what your retirement might look like. How will you spend your days? Where would you like to travel? What parts of your dream retirement might you be willing to trade for the opportunity to leave the workforce earlier?
This is where a BlueShore advisor can play a key role, helping you prioritize your goals and ensuring you accomplish them with a plan based on realistic assumptions and with the flexibility to change along with your personal and financial situation.
