Dave's retirement journey

Early retirement: A financial nightmare?

By Dave Dineen, BrighterLife.ca

Early retirement: A financial nightmare?

Retiring early sounds like a dream, right? But be prepared: That dream comes at a price.

Despite all the talk about delayed and phased retirement, a lot of Canadians still dream of retiring earlier than the traditional age of 65 (or 67, which has been talked about a lot lately), as I did. And many are forced to retire early, due to poor health or their job situation.

Mind the gap(s)

Whether it’s your dream to retire early or you’re forced into it, if you stop work before you can start receiving your formal retirement income, you’ve got an income gap to deal with. In my case, I retired at 55, so I faced an unusually wide gap. Actually, it will be a series of gaps of several different durations, before all my retirement income sources kick in.

As a reminder, the “normal” start times for different types of retirement income are:

  • Age 65 for Canada Pension Plan (CPP). But I’ll be choosing to start drawing CPP at age 60, with reduced payments. I’ve got a five-year gap here.
  • Age 65 to 67 (depending on your current age) for Old Age Security (OAS). There’s no chance to start receiving OAS earlier. I’ve got a 10-year gap here.
  • Age 65 for most employer pensions, if you’re lucky enough to have one. Most pension plans let you choose to start drawing income earlier, at a reduced rate. I had several employers in my working career, so I’ve got a combination of both defined-contribution and defined-benefit plans. I haven’t started receiving income from any of them, but will probably experience five- to 10-year gaps here.
  • For registered retirement income funds (RRIFs) or annuities, it’s harder to peg a “normal” start time. After converting your RRSP savings, you can start drawing income as early as age 55 or as late as the year you turn 72. I haven’t converted my (or my wife’s) RRSPs to RRIFs/annuities yet, so we’ve got a gap here, too.

How to bridge the retirement income gap

There really aren’t a lot of options for providing income during the gap years of early retirement. But here’s what I’ve found. (Warning: Don’t try this without expert financial advice. These are important, complicated decisions!)

  • Find a new source of employment income. But that’s not always either workable or attractive.
  • Withdraw a lump sum from personal savings, tax-free savings accounts (TFSAs) or RRSPs. But this is not so great if you had other plans for that money.
  • Convert some RRSP money to a RRIF account and start receiving income. While you’re in the income gap, you could choose to receive more than the minimum payments. Then, when other income sources kick in, you can take only the minimum RRIF payments. Think carefully about when to do this, because the minimum withdrawal is mandatory.

How the Dineens are filling the gap

So, what’s putting food on the Dineen family table during our gap years? My wife had the wisdom (and assets) to buy income-producing investments in a non-registered account at the very depths of the 2008-09 financial market crash. Everyone remembers how terrible the markets were back then. But some people also recognized that there were incredible bargains in quality investments to be found. It was like a Boxing Day sale for income-producing investments, so — with financial advice — she stocked up.

We’re living off that income now. It’s not nearly as much as I made while employed, but our household income will climb again when our income gap ends, when CPP and those other retirement income sources kick in.

So, the Dineen retirement income gap may be really wide, but it’s not as deep as it could have been.

More on early retirement:

Retirement savings Get more bright ideas on saving for retirement.

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Feb 24: Best from the blogosphere | Save with SPP on

[…] Many of you may be aiming for early retirement as early as age 55. However Dave Dineen on Brighter Life reminds readers that some sources of retirement income don’t kick in for another five years or more so you need to have a plan to bridge the gap or early retirement could be a financial nightmare. […]

Leslie Tayne on

Great article on how to mind the income gap in retirement! Retirement is a time to reap the fruits of your hard earned labor over the course of your working career. In this day and age people retiring in their mid sixties may not have all the financial support they need in retirement if they are not able to retire on their own terms. More retirees are also pursuing part time work to supplement either their 401(K) / IRA or pension, if they are fortunate enough to have the latter. This is a great way to stay sharp and earn extra money!

david r casavant on

Dave , not working between 55 and 60 will not reduce cpp as long as you have sufficient years worked. Their is a dropout provision of 17 % of total years worked so in my case I worked 38 years for CN retired last year at 55 so I have roughly 7 years I can drop out which will be the next 5 till I turn 60..

gerry on

solution ……work for the government ,full pension at around 50 .

james ross on

Dave, Im 55 and would love to retire early. My question to you though is if you are not contibuting to CPP from 55 to 60yrs old wont CPP penalize you with averaged down benefits? Can you contribute to CPP during these 5 years to avoid this penalty?

    davedineen on

    Thanks, James. Yes, unfortunately, my Canada Pension Plan (CPP) payout will be reduced because I retired so early. I don’t have employment income, so my only opportunity to continue to contribute to CPP would be if I were self-employed and had sufficient net business income (meaning, after deducting business expenses). I’m not currently in that position, though.

Pete on

I’m 53 and figure I have enough saved up to retire with a $100K+ income now. But couple of things scare me – 1) what if there is another financial meltdown or if I convert to an annuity inflation goes through the roof 2) the realization that work is a big part of my social and intellectual life. What will I do if I do not go to work? I have realized I am not a good homebody and don’t like travelling very much. I really enjoy what I do and plan to keep on working as long as possible.

    Elsie Wollaston on

    Understanding that you feel a need to work — probably in a way that’s meaningful to you — but acknowledging that, for now, you can also do without the income you’ve been used to: why not use your energy and background to find something significant that needs doing? Treat it like a job search, and be flexible enough to consider linking up with an existing group or, if necessary, identify a community need and begin the groundwork so more can be done by you and possibly others who lack your drive but would
    join up with someone willing to take the first steps.
    Start locally, but think what you could do to make things better than you currently find them. I believe you will not only work off that energy in a fulfilling way, but meet likeminded people and — if worst comes tto worst — end up with a meaningful addition to your C.V. should you ever have to look for paid employment to supplement your retirement income.

    davedineen on

    Pete — your last sentence tells me you’re really happy doing what you’re already doing. I always advise working people that if they can’t think of anything better, keep at whatever you’re doing right now! I guess that advice also applies to retirees, eh?

chanoine groulx on

You’re much better off to blow it all at the beginning when you are healthy enough to “do it all” Never mind trying to retire and live off your cpp,,ddt, kfc, sore bum disability,tax refund etc..What you need to do is relearn things, like how to dumpster dive and steal petfood–hell you can even make a jim dandy cane out of a broken hockey stick–take turns using the shoelaces,there’s no rule you all have to be out at the same time.

    davedineen on

    Thanks for the belly laugh, Chanoine!

Joe Blow on

heres how i retired at age 45.75 with NO CPP or WCB disability handouts etc.(no freebes) I started working part time at age 14.At 23 years old I purchased a shell service station business .At age 27 I sold the SS business and started my own auto repair business.At age 30 I bought the building I was leasing and paid it off in 7 years.I worked 7 days a week 18 hours a day for many many years.I bought my first house at age 21 and bulit my own 2nd house at age 30 and was mortgage free at age 34.I sold the business 15 years ago and financed it to the new owner and 5 years ago sold him the building and also financed it to him.Along the way I bought other commercial propertys etc etc and now at age 61 +I make 200K per year and with no freebees from the government and no fat cat company pension . If I can do it so can you.U just have to be willing to give up a little in the begining to gain a lot in the end.I still had fun and did things with the kids and wife etc.We never ever went without but were never extravagent neither

    davedineen on

    Wow, Joe Blow, you’re an inspiration! You’ve obviously got a strong entrepreneurial streak, supported by smarts and a good attitude about hard work and life in general. You’re justifiably proud of what you’ve accomplished! Glad to hear you’re enjoying life!

Mike Boileau on

How long does it generally take from applying for the CPP and OAS Benefits until you are approved and there is a cheque in the mail?
Also, I am 59 years old and have been collecting a “Disability Benefit” from CPP for the past five years. I will not get better so by the time I reach 65 I will have been on the Disability for 11 years. Will I receive a “Reduced Benefit” compared to the Disability Benefit I receive presently?

    davedineen on

    Hi, Mike.
    I’m not an expert on this stuff, but here’s what I’ve been able to find out. Though Service Canada suggests that you apply for CPP pension benefits six months before you become eligible (i.e. apply six months before you expect the first payment), their published service standard is faster than that. Their service standard — which they don’t guarantee to meet 100% of the time — is to make the first CPP pension payment within one month of your submitting a completed application, along with supporting documents. You can find their service standards here: http://www.servicecanada.gc.ca/eng/about/reports/corp/pdf/oss-2012.pdf
    As for how the Disability Benefit you’ve been receiving might affect the Pension Benefit you’ll be applying for, that’s definitely a question for Service Canada. You can call Service Canada’s national service line at: 1-800-277-9914 from 8:30 to 4:30 on weekdays (half an hour later in Newfoundland). Service is also available in Service Canada offices across the country.
    Good luck with your application.

      Sean on

      The disability benefit should not affect the cpp pension.

    John on

    Mike
    I also am on CPP disability. When you turn 65 it will automatically roll over to normal CPP. Note that you still have to apply for OAS though. The combined rate of CPP and OAS should be about the same as the disability pension you are receiving from CPP now. At least mine will be. Being on the cpp disability pension should not reduce the regular cpp. They take those years off the averaging.

    Brian Poncelet, CFP on

    Hello Dave,

    Congratulations for your smart wife. One problem with income producing equities taxes is taxes have to be paid out-of-pocket.

    So your real returns are much less than you think. Over time your tax burden gets higher and higher.

    One concept you could look at is an insured annuity. If you’re not 65 yet you may want to consider getting permanent insurance. At 65 for a male an annuity 6.6% guaranteed for life. Your taxes may be reduced by at least 19%.

      davedineen on

      Brian – thanks for the suggestion. I agree that annuities are far too often overlooked as a way to provide secure income for life. In my case, I’m not yet ready to lock into an irreversible method of providing my retirement income. And I haven’t decided how much I want to/can afford to leave to the kids, which is another good reason not to go with an annuity just yet.

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