Investing and saving for when you retire is a common theme for all financial planning. But have you given any thought as to when you’ll retire? Retiring early in Canada is possible, but here’s what you need to know.
It’s ingrained in us from the time we start work that retirement comes at age 65. As time passes, sometimes it seems as though we’ll be working well after 65; retiring early seems like nothing more than a fever dream.
The truth is, retiring early is possible. But how can you do it?
First, let’s understand the CPP (Canadian Pension Plan). Simply put, the CPP is a system you and all other workers pay into between ages 18 and 65, and receive payments from it once you’ve retired. (You can find a quick chart of maximum payments here.) The system calculates payouts assuming you retire at 65. If you work until you’re 70, you earn more money per month after you retire; alternately, you can start taking pension money at 60, but at a reduced rate.
As of 2016, the rate of reduction was .6% per month for every month before age 65 that you start receiving CPP payments. If you start at exactly age 60, that means payments 36% smaller than you would otherwise earn. Once people hear that, the idea of retiring early goes right out the window—they don’t want to make less money.
What many people don’t think about is how the money they’ll receive overall adds up.
If you begin collecting CPP payments at age 60, they’ll be smaller than if you start at 65, but you’ll collect them for an extra five years. It takes time for those larger payments to catch up. In fact, if you receive the maximum possible payment, the larger payments don’t catch up until you’re 74. Most of us expect to live at least that long, if you wait a bit longer than your 60th birthday to retire, it takes even longer.
One other thing to keep in mind: you no longer have to completely retire from work to collect CPP. If you want to switch from full-time to part-time work, for example, but can’t due to income concerns, the age-60 CPP payments could make up the shortfall. It’s not a complete retirement, but it’s a way for your retirement funds to help make your life easier and more enjoyable earlier than if you stayed on the grind until 65 or 70. And the CPP payments you make while you continue working after age 60 improve the size of your future cheques.
In short, early retirement is a more viable option to earn money now than most people realize. If you’re in need of cash right away, but can’t retire just yet, contact us to see how we can help.