Keisha Blair
Dreaming of moving to Florida for your retirement? How about Hawaii? What if you could do this by the age of 40? It may just be well in reach if you start putting measures in place early and have laser-like focus toward that goal.
Early Retirement By the Numbers
According to Statistics Canada, since 2009 the average retirement age has risen slowly but steadily, reaching 62.3 in 2011. In the United States, the average adult retires at 61, according to a Gallup poll. In Australia, men retiring within the last five years were 61.5 to 63.3, on average, and women were 59.6, according to the Australian Bureau of Statistics. Whereas in Japan, the average worker retires at 69.1, and in Luxembourg, the average retirement age is 57.6, according to the Paris-based Organisation for Economic Co-operation and Development.
Based on those averages, financial experts consider an early retirement age to be under 55, and typically between the ages of 50 and 55. But in some countries, like India, for instance, where two-thirds of the population is 35 or younger, this, more youthful working population has its goal set to retire even earlier. Here are some tips on making it happen:
What will you need to do: Dropping out of the workforce years before everyone else, means you have to be completely debt free, and have a solid foundation, with savings equal to about 25 times the income you wish to achieve in retirement, taking any government pensions or payments into account.
Most people will need 70 percent to 80 percent of their pre-retirement income in order to maintain their standard of living during retirement, by which time they will have ideally paid off home mortgages and any other major debt, according to advisors.
1. Pay Off Significant Debt
Most financial experts agree that paying down debt like mortgages, car loans and other significant obligations is key for early retirement.
The latest mortgage market survey from the Canadian Association of Accredited Mortgage Professionals shows that 15 per cent of homeowners have been increasing the amount of their payments in recent years, down from 19 per cent in the 1990s and early 2000s. Instead, owners are increasingly paying down their mortgages with lump-sum amounts. Sixteen per cent of owners did this in recent years, a rate that has crept higher since the 1990s.
However striking a balance with paying down debt and saving for retirement is just as important. Just as you get the biggest benefit from mortgage prepayment in your early years of home ownership, so do your retirement savings profit from contributions made when you’re young. So if retirement by 40 is your goal – then striking a balance between paying down debt and savings for retirement is necessary.
3. The 4% Rule
A basic financial rule of thumb maintains that you can withdraw about 4% from a retirement portfolio per year — or 1/25th of the balance. That means you should be able to safely withdraw about $40,000 per year from a $1,000,000 retirement portfolio — added to whatever you might be receiving (or expecting to receive later) from the government. Earnings and interest will presumably make up the difference annually, making it possible to withdraw 4% a year indefinitely. (Market fluctuations may affect this, of course.)
However this rule is based on the assumption that the retirement fund will need to last only three decades. For those who want to retire by 40 – Most advisors now advice withdrawing with a 3% rule instead. By withdrawing 1% less each year early retirees should have enough funds to last four decades.
3. Use Tax-Free Savings and Investment Instruments to Help you with Retirement Goals
In a recent article on Aspire-Canada, we explored how Tax Free Savings Accounts (TFSA’s) could make you a millionaire. Part of the reason is the tax free benefits and the ability to build up a significant retirement fund. Asset allocation will be key is this strategy as a limited savings account yielding 2% will not be sufficient to get you moving towards this goal.
Tax free accounts are even more important as anticipated rates of return and inflation are wild cards. Taxes are also a big consideration for early retirees, given that many people save most of their money in retirement accounts that are taxable, which levy penalties for withdrawals before a certain age.
Living for an additional 50 years in retirement puts an onerous amount of pressure any portfolio to keep pace with inflation. This means that a comprehensive approach that works in tax strategy to save an investment is key for those who want to retire early.
4. Retirement Doesn’t Mean You need to completely stop working
You can still earn a solid income from working from home on the projects you enjoy. Ideally, at this young age its important to stay active and occupied. Many people use this time to work on hobbies and still get paid to do the things they love. Whether its doing additional consulting work, tutoring or renting out extra space, having an additional cash boost every month can help keep you afloat in early retirement. Put this extra income boost as one of your early retirement goals to protect you from swings in investment income and rising inflation.
Some Concerns:
Those who retire in their 40s will have to wait decades, until at least 60, before they are eligible for benefits like the Canada Pension Plan, Old Age Security, or the Guaranteed Income Supplement (GIS) and they are likely to collect less in benefits than Canadians who pay into the system for a longer time. They may also need their money to last for an additional 40 to 50 years.
Many people underestimate how much money they will need, because spending on leisure activities, such as travel, often increases immediately after retirement. For those who retire in their 60s, spending on leisure activities tends to trail off after a decade or so, but that is when health-care costs generally pick up. In addition to good government-based healthcare plans additional health coverage to cover any gaps that may exist is also a good idea.
A solid approach is key towards building up a sizeable fund for early retirement. Think you are on track? Send us your comments.