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Retirement savings

February 13, 2014

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.

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