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According to Statistics Canada, the average retirement age for Canadians in 2021 was 64.4 years old. Retirement has been delayed by almost three years since 2001, when the average was just 61.5 years of age. For some, those extra few years of work can seem like an eternity.
There are, however, strategies that those who are approaching retirement can consider to shave time off their financial independence date so they can afford to retire earlier.
For this exercise, we will consider a notional 55-year-old Canadian couple living in Ottawa, owning their home with no mortgage, with assumptions inspired by the Canadian Real Estate Association and Statistics Canada data.
The median sale price for a single-detached home in Ottawa during the first quarter of 2022 was $818,000. The median after-tax income of a Canadian two-parent family with children in 2020 was $110,700. Average household expenditures in 2019 in Ontario excluding rent, mortgage, tax, pension and personal insurance was $56,407. Finally, average private pension assets for Ontario families with the primary income earner aged 55 to 65 was $400,919 in 2019.
So, we will assume an $800,000 mortgage-free home owned by a 55-year-old couple planning to retire at 60, earning $75,000 each, spending $60,000 per year on basic living expenses, and with $300,000 in RRSP savings invested in conservative mutual funds.
Some employers are open to having a full-time employee transition to a part-time role. Some employees are able to provide consulting services and work part-time as a self-employed contractor in their field. Other workers might be open to a second career doing something completely different at a lower income.
For our couple, if they work from 55 to 60, they will earn about $120,000 of annual after-tax income for five years — roughly $600,000 in total. If they work at half that income and earn $37,500 each instead of $75,000, working for 10 years from 55 to 65, they would earn about $65,000 after-tax each year. This would cover their $60,000 of annual expenses and they would earn about $650,000 after-tax over those 10 years. This is about the same as their expected after-tax earnings over the final 5 years of their career ($600,000), albeit over 10 years.
The point? There are different ways to get to the finish line. Financially, the two income scenarios have similar present value and may result in comparable retirement funding and future estate value. Using conservative assumptions about CPP and OAS pensions, inflation and investment returns, they can afford to pursue either option.
The benefit is they may have grandkids that need child care, a desire to have more free time to work on their tennis game, or another reason to consider a staggered retirement rather than going full tilt until age 60 and retiring cold turkey.
Higher investment returns
Taking on more risk with your investments should lead to higher returns over a long enough time horizon. That is, by having more exposure to stocks, your long-run returns should increase at the expense of short-run stock market volatility.
Lower investment fees may also increase returns net of fees. Morningstar’s Global Investor Experience Study pegged Canada’s average allocation mutual fund fee at 1.94 per cent.
If our notional couple sold their conservative mutual funds and went all-in on equity mutual funds instead, they may be able to boost their returns by two per cent per year. Likewise, if they decided to ditch their mutual funds and build an investment portfolio on their own with a discount brokerage, where they may be able to boost their returns by reducing their fees by two per cent per year.
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A two per cent increase in their net investment returns, assuming an age 95 life expectancy, might mean they can retire a little over a year earlier than their age 60 retirement target, holding other factors constant and conservative.
The point? Higher investment returns might help, and retiring one year earlier is meaningful, but it may not be a game changer for most retirees. On the other hand, an overly aggressive asset allocation or a do-it-yourself approach for a less experienced investor could lead to an investment mistake. For example, panicking and selling stocks at a market bottom. Investors should invest based on their risk tolerance and DIY investing is not for everyone despite the potential cost savings.
The less you spend, the less you need to have for retirement. If our notional couple could find a way to reduce their spending by 10 per cent from $60,000 to $54,000 per year — a decrease of $500 per month — they could afford to retire earlier. In fact, they may be able to afford to retire more than a year and a half sooner using conservative assumptions.
That said, retirees need to be careful about assuming they can spend less in retirement if they have not been able to cut costs already because doing so may provide them with artificial optimism. Aging also comes with other spending risks such as the potential cost of funding long-term care needs.
The average condo apartment sale in Ottawa in Q1 2022 was $420,000. If our couple could sell their detached home for $800,000 and net $760,000 after selling costs, buying for $420,000 plus $10,000 in closing costs, they could net about $330,000. That is equivalent to about three years of after-tax salary for them and the downsize may also lower their monthly spending on housing costs.
This could accelerate their financial independence by about three years, other things being equal. A move to a lower-cost city or province could be even more meaningful, and that much more so for someone approaching retirement and living in a more expensive city or property than an $800,000 detached home in Ottawa.
Those who are willing to be a little flexible with their retirement planning may be able to consider changes to their job, investments, expenses, or real estate that can impact their ability to retire. Everyone has different goals for retirement and some people work well past the point that they need to work, choosing to work rather than working because they cannot afford to retire.
Some changes might help someone to retire earlier, spend more in retirement, or give more money to their kids or to charity. Financial independence can be immensely powerful, and some who think that power is beyond their control may be surprised when they consider choices that are in fact available.
Jason Heath is a fee-only, advice-only certified financial planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.