MONEY MATTERS: 5 FINANCIAL CONSIDERATIONS FOR RETIREMENT
The idea of retiring early is not a new one, but typically we consider the standard retirement age to be 65 with some people retiring earlier at age 60.
Not many consider retirement as an option prior to 60, and yet many of us are looking for ways to do just that. Covid changed the way we approach work, with many of us working from home, and it also had an affect on how people approach retirement.
The proportion of people aged 55 and over who are retired has risen by two percentage points compared with before the pandemic, to 50%. Nearly half of Americans (49.9%) expect to retire before they turn 62, a two-percentage-point increase from two years ago, according to the Federal Reserve Bank of New York.
But can you actually afford to retire early?
Here are 5 things to consider before early retirement:
1. How much debt do you have? (Stay tuned for a blog on ways to pay down debt quicker!)
Sometimes you don’t realize just how many things you have coming out on a monthly basis until you start considering how you would live on a small fixed income. We all tend to live to our means and purchase whatever we want, whenever we want. But when considering retirement early, you need to look at how lean you can make your monthly expenses. It’s important to recognize how much debt you carry and start aggressively paying it down.
2. How much money will you have to work within retirement?
This could be a little tricky to figure out depending on how many sources of income you may have. You could be working with multiple investments, RRSPs, pension plans, equity from the sale of your home. Start making a list of all your income sources and here’s where I strongly suggest finding a reputable financial advisor. Ask friends and family members for referrals and make sure you are completely comfortable with the person handling your hard-earned retirement.
3. How much will my investments earn?
This one is a biggy! The ideal situation when retiring early would be if you have enough money to invest and that investment earns enough to pay for your monthly expenses without actually reducing the investment amount. A girl can dream….
That’s why you need to find a reputable financial advisor. They should be able to map out for you just how much you can pull yearly from your investments, which in turn will help you set your budget for the year.
4. How is the Canada Pension Plan (CPP) affected by early retirement?
Essentially your CPP amount is calculated by averaging your contributions and “pensionable earnings” from age 18 until the point you start taking CPP. So, if you retire at age 55 and can’t start collecting your CPP until age 60 then you essentially add more zero-income years to the calculation, which brings the average payment amount down. There is just SO much to take into account when talking about CPP so here’s a link to help you navigate through this: https://www.canada.ca/en/services/benefits/publicpensions/cpp/cpp-benefit/amount.html
Note: I think I may find an expert on CPP and interview them to get a better explanation on contributions and payouts!
5. Will I have access to money in case of emergencies?
I write about our lives being a constant rollercoaster and I think it’s fair to anticipate that retired life might be full of eventful ups and downs as well. So, what kind of impact will the “downs” have on a set budget? If the need arises, can you access your money or is it locked in? If you haven’t figured it out yet, I love lists, so take the time to make a list of all the things that might go wrong in retirement. Consider health costs, emergency travel and repairs, family emergencies, etc., and factor unexpected costs into your financial planning. And once again, share this with your financial planner so they set up your money in the best way for you.
As much as I’d love to retire now, I think having the next 5 years to really get our lives in order and plan things out financially will give us the peace of mind we need to truly enjoy the next chapter of our lives.
Are you thinking of retiring early? What are your financial worries about retiring early? I’d love to hear from you!