Retiring early? Here’s what to consider before taking the leap.

Is early retirement right for you?

Although many Canadians expect to retire between the ages of 60 and 65, there’s no pre-determined age by which you have to stop working. Your timeline depends on your situation, and you’re the expert on that. Here are some factors to take into account when planning your retirement.

• Your health: Are you in good health, or have issues begun to surface? To make the most of the plans you might have for retirement, such as travelling or enjoying your hobbies, you’ll need to be in good shape. Taking care of your physical and mental health is just as important as taking care of your financial health. 
• Your professional motivation: Does your job still bring personal satisfaction? How do you feel about going to work? Assessing your level of happiness when it comes to your professional life can help determine whether early retirement is an option worth pursuing.
• Your social life: If the majority of your social activities – from sports and hobbies to spending time with colleagues turned friends – are connected to your work, ask yourself if they’re likely to continue after retirement. If not, will you miss them? A job often provides much more than a paycheque.
• Your personal situation: Unforeseen events may force you to retire earlier than anticipated. For example, you might need to stop working unexpectedly, have to care for a loved one or navigate health challenges of your own. In such cases, there are strategies that can help minimize the financial impact of early retirement.
• Your financial resources: How much should you put aside for your retirement? What kind of expenses do you anticipate having once you’ve stopped working? Are you carrying major debt, or do you have a spouse or dependent to consider? Careful financial planning with a professional can help ensure you’re ready to retire early – without compromising your long-term security.

What to weigh in before retiring early?

Government benefits

Most government pensions in Canada are available when you turn 65, but many can be taken early or deferred. 

• The Government of Canada offers Old Age Security (external link), or OAS, which is a taxable benefit. The minimum age to qualify is 65, though you can choose to wait until you’re 70. The longer you delay claiming OAS, the more your monthly payments will increase. That said, if you’re eligible for the Guaranteed Income Supplement Income (external link), or GIS, which is a non-taxable benefit from the federal government, delaying OAS is less advisable (the supplement isn’t increased if you delay it). It’s better to take both at the same time to maximize your monthly income.
• The Canada Pension Plan (CPP) (external link) retirement pension is a monthly benefit that helps replace part of your income when you retire. If you qualify, you’ll receive this pension for the rest of your life, providing you with a steady and reliable source of income. The amount you receive will depend on your individual situation, up to a maximum limit
• As an alternative to CPP, the Québec Pension Plan (external link), or QPP, provides a monthly pension to workers aged 60 and over who meet the eligibility requirements. While many people wait until they’re 65 to apply for full pension benefits, you can claim QPP as early as age 60. Though the amount you receive each month will be lower, claiming QPP early gives you immediate access to income for expenses such as housing, healthcare or travel while reducing the pressure on your personal savings. You can also choose to defer your pension until age 72: the longer you wait, the larger your monthly pension payments will be.

If, for example, you want to retire at 55, you won’t be eligible for government benefits until you turn 60 or 65, depending on your pension plan and the province in which you live. For financial support, you’ll need to rely on your personal savings, investments and rental income from any buildings you own, as well as part-time work and your employer’s retirement plan. 

Taxes

If you collect a pension while working full time, your income tax might go up. Take the time to look into how your pensions will affect your taxes. If you’re part of a couple, you might be eligible for income splitting.

Your retirement plan

The biggest financial loss associated with retirement is your annual salary, so you’ll need to take an in-depth look at where you stand before retiring early. It’s crucial to have a solid understanding of the personal savings you’ll require in retirement. Some questions to consider: 

• How is your retirement plan coming along?
• Have you reached your goals?
• Are you getting close or do you need to pick up the pace to save as much as possible?

The last thing you want is to have to go back to work a few years into retirement when you realize you don’t have sufficient personal savings. The younger you retire, the more you’ll need to rely on alternative sources of income.

Should you opt for a phased or full retirement?

You can stop working all at once, gradually slow your pace or continue working part time. That’s what’s known as phased or progressive retirement.

Thinking about a phased retirement?

Phased retirement has several advantages, but there are other things to consider too.

Advantages:

• You can, for example, go from working five days a week to four. 
• You can gently transition from working life to retirement. This shift can take place over several months or even years.
• You can stay active longer and maintain a sense of accomplishment through your work.
• You can gradually adjust to a reduced income.  
• You can keep working a little longer in the event that things do not go as planned financially.
• You can continue paying into your RRSP using income from part-time work – at least until age 71, when your RRSP matures (after 71, you must convert your RRSP into a Registered Retirement Income Fund, known as an RRIF, or another income product). You can also pay into your spouse’s RRSP if they’re under 71 or put the money into a TFSA or another non-registered savings account.

Considerations:

• You might be tempted to dip into your retirement savings to make up for your reduced job income.
• A lack of motivation at work, since you won’t be there as often.
• If you make more than $3,500 a year (the annual basic income threshold), you may be required to keep paying into the Canada Pension Plan (CPP) or Québec Pension Plan (QPP). If you’re over the age of 65 and receiving CPP or QPP payments, these contributions are optional. However, continuing to contribute will increase your retirement income down the road.
• If you have a workplace pension plan with your employer, find out how reducing your hours will affect it. For example, some plans are based on your last five years of salary, while others consider your five best consecutive years. In the first case, a phased retirement would end up reducing your monthly pension payment, but it would have no impact in the second case.

If you’re in phased retirement, you should consider delaying your claim for a government pension. Talk it over with your financial advisor to help determine what’s best for you.

Interested in working part -time after you retire?

You could also retire and find a new part-time job to earn additional income. Once again, this option has its benefits as well as a few limitations.

Advantages:

• A part-time job can help you stay active and maintain a fulfilling social life while supporting your mental and physical health.
• Your schedule can be adapted to your work.
• You can explore working in a different field, perhaps something connected to a hobby, pastime or sport that you enjoy.
• While you’ll still have to pay taxes on it, you’ll have an additional source of income.
• You can continue paying into your RRSP using income from your part-time work – at least until age 71, when your RRSP matures (after 71, you must convert your RRSP into a Registered Retirement Income Fund, known as an RRIF, or another income product). You can also pay into your spouse’s RRSP if they’are under 71 or put the money into your TFSA or another non-registered savings account.

Considerations:

• The extra income might push you into a higher tax bracket.
• If you make more than $3,500 a year (the annual basic income threshold), you may be required to keep paying into the Canada Pension Plan (CPP) or Québec Pension Plan (QPP). If you’re over the age of 65 and receiving CPP or QPP payments, these contributions are optional. However, continuing to contribute will increase your retirement income down the road.
• Your Old Age Security (OAS) benefit might be reduced or eliminated if your net individual income exceeds a certain threshold, which is determined each year. Eligibility for the Guaranteed Income Supplement (GIS) is also determined by income level. Make sure to discuss your situation with your financial advisor.

The takeaway here is that if the financial aspects of early retirement are well planned, you’ll have peace of mind. All that’s left is to enjoy the new adventures ahead of you. Meet with an advisor to discuss your plans – if you have questions, we’re here for you.