by Heather Camlot
The temptation to retire early may be strong. You may want to travel the world or spend more time with your grandchildren — while you can still enjoy it. But can you afford to retire early, and should you?
A Royal Trust RRSP Survey indicates that 57% of Canadians fear they may not have enough to retire by the age of 65 and 46% are concerned about outliving their retirement nest egg.
How big should that nest egg be? In order to maintain your current lifestyle, experts say your retirement income should be about 75% of your current income. The percentage needed will increase or decrease depending on whether you plan to tour the world and constantly dine out, or simply tend to family and create gourmet dishes in your kitchen.
Either way, whether you’re approaching 40 and have some catching up to do in order to retire comfortably, or are 21 and graduating from college, you have to start planning and saving now. The earlier you begin saving, the more likely it will be that you will have enough money to retire.
With the number of options and considerations, experts insist that you speak to your accountant or a financial planner. There are also many services available that can help you assess how much money you will need and whether you have set enough aside for a secure retirement.
Here are some things to think about before making an appointment with your financial planner.
Consider where the retirement income will come from. Will you be eligible for government benefits or for Canada/Quebec pension plans? Do you have a pension plan with your company? Do you have a registered retirement savings plan? If you do, how much have you put away?
You may want to consider what retirement means to you. A large number of baby boomers are not following the path their parents took, which maintained a clear division between employment and retirement.
The latest wave of retirees have decided to retire from a stressful way of life. They are beginning new careers they feel have substance, such as working at a non-profit organization or running a bed and breakfast.
The additional income doesn’t hurt. With a sideline business “you can deduct a lot of the costs, so it doesn’t cost you much to start up,” says Gena Katz, C.A., C.F.P., a senior principal with Ernst & Young’s National Tax Practice.
Business expenses can include your home and car. Maintaining a small business has another advantage. If you change your mind about retirement, not working at all can make it “harder to return to the work force after retirement,” says Katz.
Ask yourself where you would like to live. Did you stay in one city because of your job? Might you prefer to live in another country? Do you want to live in a cottage or closer to family? Deciding where you want to live will affect future expenses. The costs of such things as rent, utilities and even food may change.
If you own two homes, you’ll have to decide whether your retirement income can support both places. Experts urge people to pay down mortgages before retirement. Selling your primary home entitles you to a tax exemption, says Katz.
Consider dependents when looking into early retirement. As life expectancy increases, you may have to support your parents. Will you have enough by the time you retire to help them financially? Also, many baby boomers had children later in life than their parents. Will you still be paying tuition fees when you retire?
The best way to catch up on your savings is through RRSPs, which will probably form the bulk of your income. If you haven’t been maximizing your contributions — 18% of the previous year’s income — it’s time to start.
If you have any unused RRSP contribution room for the year, use it before the deadline — 60 days into the new year.
RRSP contributions are less painful with pre-authorized payments, says Sharlene Wiseman, a mutual fund representative at Diversifolio Financial Services Ltd. in Montreal. Your contribution is deducted automatically from your account every month. That’s easier than coming up with one huge lump sum two minutes before the deadline.
When you retire, you can transfer your RRSP holdings into a registered retirement income fund (RRIF). The holdings will continue to compound interest, but you are required to withdraw a minimum amount per year, dependent on your age, Wiseman says.
If you expect to be in a higher tax bracket than your spouse when you retire, you may want to take advantage of investing in a spousal RRSP. This allows you to make tax-free contributions to the RRSP of your spouse. This raises the level of your spouse’s retirement income and lowers yours. If you both have the same amount of taxable income, taxes will be kept to a minimum. When you draw funds from two plans rather than one, you are taxed at lower rates.
In either case, money pulled out from an RRSP before you reach the age of 69 will be taxed heavily, says Wiseman.
Other investments and debt
It’s wise to keep a portion of your money in non-registered investments such as stocks or mutual funds, which can be dipped into first. Because they aren’t tax sheltered, much of the taxes owed will be paid in stages as these funds grow.
“Every month you should have money going into an unregistered account, like GICs, mutual funds or stocks,” says Wiseman. Most experts advise contributing 10% of your monthly income to non-registered investments on top of the percentage put into your RRSP.
While your money is working for you in plans and pensions, you should be reducing your debts. Your first priority should be paying down mortgages, then credit cards and loans. Credit lines carry a much lower rate of interest than credit cards.
If your calculations still find early retirement tight on the wallet, you may have to tap a few other sources of income. A reverse mortgage lets you borrow against the value of your home. The loan money is then used for a life annuity, in which an insurance company pays you a certain amount every month. The money is repaid through your estate, usually through the sale of your home.
Similarly, you can take a leveraged loan against an asset you have, invest the money — in mutual funds, for example — and make your interest payments to the bank, says Wiseman. Just ensure that the return on the mutual fund is more than the interest you pay on your loan.
Once you’ve thrown out the suits and filo-faxes, and living the life you’ve wanted, “continually monitor where you’re at,” says Katz. “There’s nothing worse that being poor when you’re old.”
Heather Camlot is a Toronto-based freelance writer who covers a variety of topics including health, entertainment, travel and fashion.