Can you retire early on a lower income?

By Mark Seed, My Own Advisor

Special to the Financial Independence Hub

It’s not easy, it will likely take more work, but you can retire early on a lower income.

Following a few early retirement case studies posted and linked to on my site in recent months, I got a few great email replies from readers. I’ve captured a couple of their comments below verbatim:

“Mark, let’s be honest. Not every 30-something has a 6-figure job like your Kingston engineer here.”

Post: these millennials want to FIRE at age 50.

“Mark, can you link to that post on your site where the 60-year-old wants to retire on a lower income? That seems far more representative for many Canadians.”

Post: Age 60, retirement on a lower income – can I do it?

…and you know what, these readers are right.

A lot of people like the idea of early retirement but facing facts, few folks have the means to pull it off.

You can only comparison-shop so much. You might not have the time to take on side-hustles. You tried to save as early as possible, as often as possible, but life got in the way.

I’ve argued people really don’t need any more financial advice. There are 80,000 books saying the same things.

Read on: why you don’t need any more money advice.

But people do appreciate good coaching when they see it and feel it. People tend to appreciate the lessons learned shared by others – to tailor their own path. They genuinely want to be better over time.

At least my readership feels that way … which is very inspirational …

So, for today’s post, I thought I would act on one reader’s email to me in particular and highlight how she can still retire, maybe not earlier than most, but retire all the same without some of the financial stressors she is feeling today.

How to retire on a lower income – case study

Read on for information below from a reader I’ll call “Kat” for privacy reasons, and where I’ve changed some of the information to be tailored for our case study:

Hi Mark,

First off, love, love, love your blog and look forward to reading your weekend roundups every Saturday.

You mentioned that you will be featuring a case study of a millennial couple soon and wondered if you are in the need of any more case studies?

I feel my situation is dire and I would love to hear your feedback (I know you can’t give direct advice) on what I could do better for me…

Quick background – I’m 43, separated, 2 kids (one is 19 and in university now, the other is 14). I work full-time making less than $45,000 per year. I’ve had financial issues in the past. I have around $30,000 invested, in mostly my RRSP. I am way behind at my age (for retirement planning). I don’t have a lot of disposable income, so I’m trying to put aside $300/month now.

I have lots of questions for you but thoughts on the best route for me (meaning, TFSA over RRSP I have now?). What can I do with my $300 per month? What might that give me in terms of the next 25 years of saving and investing? Could I retire at age 65 or 67?

I currently have ETFs in the Canadian versions of S&P (VFV), international (VEE) and high dividend XEI. I am torn with sticking with this route of buying ETFs or also diversifying to include Canadian stocks with good dividends. I have a few of these stocks already, but not much.

I was thinking that if I don’t have a larger enough amount to live off at retirement, at least if I could have a small dividend income stream (say $5,000 would be ideal), that will help me bump up my monthly income with my OAS and CPP payments …

So, some questions:

At my current income level, say $42,000 per year, saving $300 per month, is it better to focus on building up ETFs and get as much growth as possible? Or, do half and half (50% ETFs and 50% stocks)?
What income might I be able to expect at ages 65-67, in addition to my OAS and CPP? I know I won’t retire with a million dollars, but trying to figure out what that might be – assuming growth or dividends or both helps.

Please let me know if you are interested in doing a case study! I’m not sure how many of your readers are in similar positions to me …

Thanks so much for your amazing blog and all your articles. I read them constantly and have them bookmarked!

Signed,

Kat.

How to retire on a lower income – results

Kat, happy to run some inputs and assumptions for you. Here’s what the projections say and assume since so much can change over the coming decades. On that note, we encourage you to annually monitor your progress to any personal plans!

1. Salary – we have assumed that you will maintain your employment role, for the coming years, with salary increases aligned with inflation at about 2%.

2. Investing – given your salary, and because we also believe in tax-free investing (i.e., using the TFSA for wealth building), we have assumed you will contribute at least $300 per month on average inside this account; contributions will increase over time aligned to inflation (2%) per year, and finally because you have a few decades to invest, you will be in mostly equities (instead of bonds) and earn annualized 6.5% over the coming decades.

3. Government benefits – assuming you will continue to work, and therefore contribute to Canada Pension Plan (CPP), we have assumed it might make sense to delay these CPP benefits until age 70. We leveraged your desired, latest retirement age date of 67 to start taking Old Age Security (OAS) – so that’s when that income stream will kick-in.

The math says you can essentially continue your current after-tax spending in retirement Kat!

Retirement on a lower income - Kat Case Study

The other good news is, we see your taxation in retirement being sustained quite low while you draw down tax efficient income from primarily your TFSA starting at age 67.

The combination of your income sources will last you to age 100, adjusted for inflation throughout.

Retirement on a lower income - Kat Sources of Income

The short answer is – yes.

The long answer is, for all readers, it depends.

While I’ve written that pursuing financial Independence is a choice, depending on your income level, there will be more sacrifices to be made on a lower income. Those retirement plans can however be realized, even if your path is not as financially fortunate as others. Don’t despair. Don’t give up. Embrace your journey. This site hopefully provides that motivation.

I want to thank Kat for sharing her story and I hope this information was valuable to her.

Further Reading:

You can check out dozens of case studies, financial independence stories, retirement essays from readers and much more on my dedicated Retirement page here.

Here is one proven path to retirement ignoring any 4% rule.

Mike and Julie want to spend $50,000 per yearin retirement starting in their 50s…how much do they need?

This 50-something couple wants to FIRE at 52. How much can they spend?

Mark Seed is a passionate DIY investor who lives in Ottawa. He invests in Canadian and U.S. dividend paying stocks and low-cost Exchange Traded Funds on his quest to own a $1 million portfolio for an early retirement. You can follow Mark’s insights and perspectives on investing, and much more, by visiting My Own Advisor. This blog originally appeared on his site on May 20, 2021 and is republished on the Hub with his permission.