By Scott Evans
Special to the Financial Independence Hub
We traditionally think of 65 years old as the standard age for retirement, but wouldn’t it be nice to make an earlier exit from the workplace? Many of us dream of an early retirement to be able to spend more of our valuable time with family, on hobbies, volunteering or on other pursuits.
One of the more unexpected outcomes of the pandemic has been a growing trend of younger retirees. Many Canadians have taken time over the past 18 months to think about and re-evaluate their priorities. Have you been thinking about your retirement goals and whether it is possible to retire earlier than you originally planned? If you are one of those people, read through for some tips on how to get closer to your goal.
1 .) Spend less to save more
The easiest way to increase savings is to cut back on your spending. The earlier you can start saving, the more you benefit from compounding returns over the long-term. Your future self will thank you! Cutting back on impulsive or discretionary purchases now, may be the trade-off for the financial independence you are seeking. It will also create better spending habits for your retirement years, and may in fact lead to a more fulfilling life.
2.) Start Planning
Saving early only helps if you are generating a return on your savings. Keeping money under a mattress or in a savings account will result in you losing purchasing power to inflation each year. You will want to make sure you are not only investing using appropriate financial instruments for your goals, but also holding those investments in the appropriate accounts to maximize growth and to avoid losing money to taxes. To connect your savings with your early retirement goal, it’s essential to plan for how much you’ll need in order to retire and to have a plan on how to draw down those assets tax efficiently.
3.) Play defense
Saving and investing are strategies that will help you grow your wealth; you will also want to consider strategies that can help protect your income and your savings. Insurance can protect you from unexpected health events that may otherwise cause a loss of income or significant expenses. Having an emergency fund set up is essential to help you get through job loss or another unexpected event that could derail your planning.
4.) Be tax efficient
Investing inside a TFSA (Tax Free Savings Account) will allow your contributions to grow tax-free and be withdrawn without any tax consequences. This works differently than an RRSP (Registered Retirement Savings Plan) contribution, which is tax-deductible in the year you make the contribution but will be taxed on withdrawal (hopefully at a lower tax rate if you have planned well). Taking advantage of both of these plans with appropriate investments will play a big part in your success, as it will reduce the amount of tax you pay each year and allow your returns to grow tax sheltered. Be aware of your contribution limits for both of these plans and make your contributions early.
5.) Confidence comes with knowledge
Having a plan is not enough if you don’t have the confidence to see it through. Taking steps to improve your financial literacy will allow you to make more informed decisions and will give you the confidence to stick to your plan when things get challenging. Knowing how your government benefits work along with any company pensions and retirement accounts will give you a better understanding of how to maximize your retirement income and minimize your tax bill. Getting advice from a professional can be a great way to pull all these pieces together and provide confidence that you will be prepared for your early retirement dreams.
6.) Grow your portfolio
As you approach retirement, you may want to consider investments such as dividend-focused stocks, funds or ETFs as well as guaranteed investments such as annuities and term deposits. Keep in mind that in order to keep up with inflation, you will likely still need some exposure to growth investments to ensure you don’t outlive your money. Make it a habit to review your asset allocation on a regular basis and rebalance your portfolio accordingly.
7.) Consider your priorities
Remember that while the financial element is very important, retirement is about more than dollars and cents. Before leaving the workforce, sit down and imagine what you’d like your retirement years to look like. How will you spend your days? Will you work part-time? Take up new hobbies? Do you plan to downsize? Are there parts of your dream retirement that you would be willing to trade for the opportunity to leave the workforce earlier? Clearly lay out your priorities to determine how much you will really need to sustain the retirement lifestyle that you want.
Retiring before the age of 65 could be a realistic option for you if you take action early, and make planning a priority now. This is where an advisor can play an important role, as he/she can help you manage your goals and ensure you accomplish them with a plan based on realistic assumptions, and on a timeline that works best for you.
Scott Evans is a Financial Advisor at BlueShore Financial in Vancouver. Click here for full bio.