I felt stunned when I walked out of my financial plannerâ€™s office in June. I had just learned that, if I acted quickly, I could afford to retire right away, years earlier than I had thought possible. I should have been ecstatic. Instead, I felt queasy. I had dreamed about early retirement for a long time and the planner had called my bluff. â€œWhat are you going to do now?â€ I thought.
I had been mulling that question in one form or another since February, when I handed my annual RRSP contribution over the desk to my bank adviser. â€œWill I ever be able to quit work?â€ I sighed. I didnâ€™t mean it seriously. But my adviser looked at the numbers on her computer screen and said, â€œOh, I think so. Let me put you in touch with one of our retirement planners.â€
I was only 54. I had worked as a copy editor at the same newspaper in London, Ont., for almost 33 years. I had always assumed I would have to continue working there until I was at least 60 to make ends meet in retirement. But when I met with the bankâ€™s planner, she went over the numbers and assured me I could quit work almost immediately. I was single, I had no dependents, and I had a paid-off house. If I took the money that had built up in my pension plan, invested it wisely, and lived modestly, I could say goodbye forever to the office. There was only one catch: my pension plan allowed me to take the commuted value of my pension only if I acted before my 55th birthday. That was a mere eight weeks away and I had to give at least two weeksâ€™ notice. I had to make a decision right away.
Was I ready to make the leap into sudden retirement? As I wrestled with that question, I began to realize that retirement is a psychological and social issue, as well as a financial decision. If youâ€™re pondering early retirement, let me tell you about what Iâ€™ve learned as Iâ€™ve struggled to make sense of my own situation.
The first question I had to deal with was whether I really wanted to retire. Most people say they would jump at the chance to walk away from work, but the reality is more complicated than that. Work provides us with a sense of self-worth. It also offers a sense of belonging and of contributing to the world.
As I contemplated my own retirement decision, I felt torn. I could list good reasons for continuing to work. I could also list reasons for taking early retirement. On the â€œcontinue to workâ€ side of the ledger, I felt proud of my work and I felt appreciated in the newsroom. I also liked knowing that I was building up my pension and enjoyed a benefit plan and all the perks that go with employment. On the â€œretire right nowâ€ side of things, I detested my schedule, which required me to work evenings and two weekends a month. I resented how my evening-and-weekend working life isolated me from friends and family.
What finally tilted the decision toward â€œretire right nowâ€ was the memory of a colleague who had died suddenly a few months earlier. He was 61 and had been eagerly waiting for retirement. He had been holding on at work simply to build up his pension. I didnâ€™t want his fate to be mine.
The question, of course, was whether I could afford to retire. Under the terms of my pension plan, I would lose 5% of my pension payout for each year I retired before 65. I had always assumed that the penalty ruled out early retirement for me, but the bank planner pointed out that if I acted quickly and withdrew the commuted value of my pension before turning 55, I would have a decent-sized nest egg that I could invest myself.
Would that nest egg be enough? I had listed my annual expenses before meeting with the planner. I had added in my projected spending for home improvements and a new computer. I had also considered areas where I could cut back and budget more effectively. I had concluded I could get by on an income of about half of what I was making in my job.
Was that realistic? To be honest, I didnâ€™t know. The conventional wisdom, propounded by the Canadian Bankers Association and many others, says you need 60% to 80% of your working income to maintain your lifestyle in retirement. But that figure depends upon how you want to live after work. If you want to maintain both a house and a cottage, or if you want to travel extensively in retirement, youâ€™ll need at least 80% or more of your pre-retirement income.
For most peopleâ€”including meâ€”80% is probably overkill. Malcolm Hamilton, a consulting actuary with Mercer, a Toronto human resource consulting firm, says Canadians who merely want to maintain their current lifestyles will need retirement incomes that are only 50% to 60% of their working incomes. We can live on a lot less in retirement because our expenses are a lot less. We no longer have mortgage payments to make or kidsâ€™ tuitions to pay. We pay less tax because our incomes are lower. And we no longer have to save for retirement because we are already retired.
But even if I could live on 50% of my working income, could I count on my nest egg to generate that amount? Stock markets go up and down. So do bond prices. As I researched the matter, I was surprised to discover that the amount I could withdraw each year from my portfolio was smaller than I would have thought. Most experts agree that if you want to make your money last for decades, you should withdraw no more than 4% a year of your starting principal, adjusted for inflation. (That means if you start with $100,000 and inflation is running at 2% a year, you should withdraw $4,000 the first year, $4,080 the second year, and so on.)
Hamilton says a 4% withdrawal rate is a very safe figure if your objective is to live a modest lifestyle and leave a large estate. But he says he doesnâ€™t think a 5% or even 6% withdrawal rate is out of line in the early years of retirement. â€œThe truly elderly donâ€™t spend much even if they have it,â€ he says. â€œSo the idea that you should spend frugally early in retirement so you have lots of money later on is not necessary for most people.â€
Based on my list of expenses, I figured I could generate about 50% of my take-home pay by withdrawing about 4% of my savings a year. That looked very encouraging. And I thought I could supplement my income by doing freelance writing and editing jobs, not only to make money, but because I like the work. When my financial planner assured me I had enough money to pay my basic living expenses for 30 years, I decided to walk out of the newsroom for the last time as a fulltime employee on the day before I turned 55.
The jury is still out on whether retiring at the age of 54 years, 364 days was the smartest financial move I ever made. I now realize that my initial list of expenses missed several items, including health care costs that had previously been covered by my employer, Christmas gifts and charitable donations. I also underestimated the amount I would want to spend on entertainment. Rather than living on 50% of my pre-retirement income, Iâ€™m getting by on more like 60%. And that means Iâ€™m withdrawing 5% of my savings every year, rather than the 4% I had hoped for.
I budget more stringently than I did when I was working and Iâ€™m still getting accustomed to the fact that I canâ€™t spend as freely as I used to. Itâ€™s not so much a question of cutting back as planning when I should buy something I want or need â€“ making sure I donâ€™t schedule a major service on my car the same month my property taxes are due, for example; occasionally using my credit card in a tight month so that I wonâ€™t have to pay it off until the following month, when I know there will be fewer bills coming in; not automatically buying the most extravagant gifts when Iâ€™m Christmas shopping, as I had been inclined to do. I havenâ€™t had to deprive myself of anything significant, but each month necessitates its own spending strategy and I think it will take a couple of years to ascertain my financial comfort zone.
I have been surprised by how much Iâ€™m enjoying my part-time writing and editing work. Unlike my full-time job, my new duties are done on my own schedule, in my own house, and that makes all the difference. I find that my feelings are shared by many of my retired acquaintances. Among them are a former circulation manager who delivers prescriptions for a drug store, a newspaper production technician who organizes and scrapbooks family photos for clients, and a bank manager who works part time in a high-end kitchenware store. While they all enjoy the extra moneyâ€”in some cases, the cash is essentialâ€”they also like being active and feeling fulfilled.
In terms of improved health and social life my retirement is an unqualified winner. Every time I hear about the latest crisis at the office where I used to work, Iâ€™m thankful I no longer have to deal with the stress and anxiety such events used to cause me. I have renewed my interest in cooking healthy meals and I particularly enjoy eating them at regular times. After being restricted by evening and weekend work, I find the freedom to go out for dinner with friends or see a movieâ€”any time I wantâ€”is still a heady sensation. Iâ€™m especially looking forward to a year of gardening without having to compress all the work into a limited time. These may be modest pursuits, but they contribute disproportionately to my quality of life. In a nutshell, my retirement so far has not been life-altering as much as life-affirming.