Financial freedom and the ability to call it quits at your job while young may seem unachievable for many Canadians today. But with a committed effort and the right financial strategy, even the unachievable can be doable in these challenging times.
‘How to retire early in Canada’ is one question burning on the lips of observers, and that’s why you need to read on to understand some of the critical requirements to achieve financial independence.
Why early retirement in Canada is appealing
Retiring early has many advantages, with personal and financial freedom topping the list. Many people are working jobs they hate or are stressed out by work, and for these people, retirement can’t come quickly enough.
Financial freedom at a younger age allows you to actively follow your pursuits, whether to travel the world, dedicate yourself to your hobby, or start up your own business. You also get additional work-free years that translate into longer, healthier lives.
What is the Early Retirement age in Canada?
If you could ask ten people the average Canadian retirement age, they’d probably say “65” seven times out of ten. The reason is that the standard retirement age for most workplaces was set at 65 years for such a long time. Government pension programs like the Canadian Pension Plan (CPP) and the Old Age Security (OAS) reflect 65 years of retirement age, with payments designed to start at that point.
But nothing is constant except a change in Canada’s average retirement age from 65 years to 63.5 if you believe Statistics Canada. In that sense, “early retirement” would be considered anything below the average retirement age – most likely a person in his 50s as opposed to his 60s.
Although the retirement age is slightly lower, the opposite is true for the expected lifespan of a typical Canadian, with the average climbing up to 82.5 years. The increase in lifespan emphasizes the importance of planning for retirement and makes a compelling case for annuity packages for guaranteed long-term income.
What you need to do to Retire Early
To hang up your working boots and retire early, you need to consider what to do with your retirement savings and how to make your money work for you. Essential funds include the cash flow for your necessary living costs. Making your money work for you relates to your personal and lifestyle choices.
At the end of the day, you are the one to decide your financial expenses based on your lifestyle choice after retirement. Early retirement is possible if you earn more than you spend consistently for a set period.
How to retire early boils down to your financial discipline to have money left over for retirement. To retire early, you need to start saving earlier in your working life to max out benefits and gains from compound interest.
Another thing is to make the right financial decisions congruent with your early retirement goals. Some of these decisions include abstaining from splurging on luxury goods, keeping your vehicle for longer to avoid payments, and staying within the confines of your budget.
Unless you’re earning a significant six-figure sum, saving for early retirement will most likely mean depriving yourself of some of the good things of life and doubling down on your savings and investments.
If you’re lucky enough to have a successful career and move up the corporate ladder or get a higher-paying job, it opens up the chance to save more. Instead of upgrading your lifestyle to meet your earnings, you can save more funds to retire even earlier.
If your employer has a program that matches your RRSP contributions, enroll at once. Another good idea is to set up automatic payments into your retirement savings. Doing this makes it hassle-free and enables you to stay on course with your goal.
Make your retirement savings number one, whether it’s the income from your side hustle, your salary, or you picked the lucky numbers from the lottery – you will only be hindered for a while to be comfortable in the future.
How to Retire at 50 in Canada
Years back, London Life ran a powerful ad campaign called “Freedom 55,” resonating with Canadians who desired to retire early. The slogan made it look possible to achieve financial freedom at the age of 55. However, there’s no gain without pain; it takes advanced strategic planning and tremendous financial discipline to retire at 50.
The best route towards retiring at 50 is to begin investing early and contributing much more towards your retirement fund yearly. That way, compounding interest will be more decisive toward ensuring you have a substantial sum saved up for retirement.
For instance, if your money makes you 7% annually, and you start saving C$20,000 yearly at 25, you’ll have C$1.38 million at the age of 50. Even if you start a little later at 35, you will have saved over C$500,000 by reaching the 50-year mark. Ultimately, retiring at 50 in Canada means looking beyond the road ahead, reducing spending, strategic planning, and manic saving.
Drawbacks to Early Retirement in Canada
Your goals will be severely impacted if you save reluctantly or spend beyond your budget and accrue consumer expenses like credit card debt. Switching cars constantly and consistently making car loan payments for the latest vehicle instead of driving one for a more extended period will cost you in contributing room for your retirement savings.
Credit card interest rates are typically on the high side and ensure you fall by the wayside on your journey to retiring early. If you still intend to retire on time, giving up on daily expenses like Starbucks or Netflix will pay off in the long term. Along with avoiding a new car, you may also say no to other consumer expenses like boats.
You might have to defer on expensive holidays in Greece or Hawaii and “staycation” closer to home. Frequent alcohol spending is a no-no, takeouts won’t be as regular, and other perks need to be justified on a budget if you desire to retire early.
How to advance Early Retirement in Canada
The possibility of retiring early in Canada is based on several factors, such as your employment, earnings, dependents, and other financial obligations. You may save for your future at the same time as your child’s college tuition.
To stay focused, ensure you maximize government savings programs like RESPs, RRSPs, and TFSAs, to cut back on your tax load and build on your savings. If you are still coming to terms with your options, consult a financial advisor to ensure you get the most out of these programs.
Alongside avoiding credit card debt or vehicle payments, reducing your housing cost frees up more cash to achieve your dream of retiring at 50. You can refinance your house when mortgage rates are low to retain more money in your savings account. Ensure retirement savings are a regular part of your budget expenses and prioritize your future.
Set budgeting goals that help you retire early and know that it’s okay to adjust along the way. Life happens, and sometimes you might need to contribute less for specific reasons. The goal is to continually save something towards your retirement for as long as possible.
If it isn’t cutting it to cut back, you can increase your income stream by taking a second job or learning a side hustle. The only two ways to save more money are to earn more or spend less. Who knows? Your hobby can become a cash cow that helps you generate more income.
How much money do I need to retire early in Canada?
Many formulas and theories abound on the internet on the amount of money you need to retire early in Canada, but a lot still depends on you. It would help if you were pragmatic about what your life after retirement will look like.
Do you intend to continue the same lifestyle without adjustments? Do you have plans to continue making money by choosing your work projects or working part-time, or do you want to give up work for good? You must consider your options to ensure you know what you need to retire early.
Financial Independence Retire Early (FIRE) is an early retirement plan based on saving almost all your income for many years, coupled with DIY investments for high returns and quitting your job once you’ve met your retirement goals.
Even though this tactic is interesting, it isn’t readily feasible for several reasons. The coronavirus pandemic has negatively impacted the financial markets, making it difficult to make the right calls on your investment portfolio.
It is challenging not to react emotionally to the fluctuations in the stock market. You may also be unable to save money if your job is impacted. The steady rise in living costs, including unforeseen expenses, can significantly impact your savings.
Nonetheless, strict compliance with the FIRE philosophy will leave you with more wealth on your road to retirement. Nothing loath; there isn’t a fixed amount of money you need to retire in Canada. One guesstimate is that you’d need between 50% to 60% of your current income to sustain your lifestyle post-retirement.
You can use a retirement calculator to help you figure out how much you need to save for a more personalized view. Apart from calculators, a savvy financial expert can help assess your financial situation and provide actionable steps to achieve your aims.
Lean FIRE vs. Fat FIRE
The less you make, the more money you’ll need to save. According to Listen Money Matters, there’s a difference between retiring fat and retiring lean. For instance, if you make a decent income as a software engineer, you might save as much as 50% of your income by banking C$1M in less than a decade of working.
You might even pull this off by sparingly vacationing and eating out occasionally. On the other side of the spectrum, people who make less money need to take a more measured approach to achieve FIRE. You have to be frugal, avoid eating out or vacationing, use coupons, and downsize your home.
Most critics of the FIRE philosophy disagree with the idea of giving up the perks of life to quit working long before attaining the legal retirement age. For others, investing in mutual funds and inventing new ways to save funds becomes the latest thrill.
To some extent, successful FIRE achievers replace the excitement and enthusiasm of buying new gadgets or trying new restaurants with the joy of making money and the potential of having enough cash to achieve financial freedom in a few years.
Can Index Funds help you achieve FIRE Faster?
Index funds are a species of mutual funds in a portfolio designed to monitor a market index and replicate its performance. An example of such an index is the S&P 500. They are passive investment strategies that cost fewer management fees than a regular mutual fund.
Stock market investment is typically risky because people tend to make emotional decisions, dumping their stock when they start to lose cash and buying stocks when they are hot. Although some people might hit the jackpot by buying or selling at the right time, investing in single company stock is generally considered a high-risk venture.
On the other hand, index funds allow investors to invest in the entire market instead of having a mere piece of the action. The consequence is steady gains over a set period. You’ll inevitably lose money in some years, but if you hold your investments for a long time, it is nigh on impossible to lose.
The average yearly performance of the S&P 500 over fifteen years is 12.2%. When you consider that the Big Five Banks offer less than 2% on basic savings accounts, 12.2% is quite a return on your investment.
That said, you can consider other investment strategies like real estate. This tip is particularly true if you put money in rental properties because they can provide immediate income on top of the steady increase in property value over time.
There are many dissenting opinions about the wiser investment strategy; real estate or stock. The answer is subjective, depending on the opportunities available to you, but it remains an unresolved discussion amongst FIRE achievers.
Ultimately, index funds are considered more accessible because they don’t require considerable money to invest. On the other hand, real estate requires a substantial down payment, followed by other expenses like dealing with tenants and maintenance.
Options for full Early Retirement
You might consider semi-retirement if you can’t get your early retirement race over the finish line. Achieving FIRE doesn’t have to be an all-or-nothing approach, especially considering these challenging times. Working longer than expected is okay to make up for pitfalls on the road to financial freedom.
Some people who achieve FIRE involve themselves in consulting, retail work, or part-time teaching, all in a bid to do something post-retirement. “Hybrid retirement” is a coined reference for people who find a less demanding job after retiring early. This type of work can significantly boost your retirement income, making it an effort well spent.
How to Retire Early in Canada
Know your net worth
It is essential to know where you are to understand where you’re headed. Your net worth consists of your total assets like your home, investments, savings, and vehicles. Once you add everything up, subtract debts like mortgages, credit card balances, and loans to find out what you’re worth.
Dispose of your debt
Start by whittling down your debt, tackling the highest-interest debt first. Being debt-free often means paying off your credit cards. You can replace high-interest debts with low-interest alternatives.
If you own your home, you can transfer your debt to a HELOC to access lower interest rates. You might also consider a balance transfer to enjoy lower sign-up rates, which helps you save on credit card interest for a limited time.
FIRE achievers often utilize rewards credit cards to earn cash back rewards and other benefits. However, it’s advisable to shun credit cards if you don’t have the discipline or means to pay your balance in full monthly.
Invest your savings
The road to financial independence is fraught with hardship. The journey to FIRE sometimes means you’d need to drastically reduce your spending to the bare minimum to save at least 50% of your income.
To ensure your money grows quickly enough to meet your retirement aims, you need to invest it in an investment portfolio. As discussed above, you need to decide the best investment for your money, whether ETFs, index funds, or real estate.
Track your progress
Tracking your progress is an easy way to stay motivated, which is vital to the process. You can track your progress in various ways, from keeping a logbook to using retirement calculators or budgeting apps to detail every expense, income, and savings. Tracking your progress will help determine how close you are to retiring early.
Keep your eye on the Ball
Remember that you can retire once your average annual investment portfolio returns match or surpass your living expenses. The lower your costs, the faster your journey to financial independence.
How can I retire early in Canada?
You can retire early in Canada by cutting down your expenses, getting rid of your debt, and investing your income to grow your wealth.
How much does the average Canadian need to retire early?
The average Canadian needs eleven times their final pay to retain the same standard of living post-retirement.
How much money do I need to retire at 45 in Canada?
To retire at the age of 45, you’ll need to have C$4.3M invested the day you quit your job to live on C$100,000 investment income.