So you made the bold decision to retire sooner than you had originally planned. Congratulations! You are counting down the minutes until you pack up the office and head for the door. But before you turn out the lights for the last time you might want to touch base with your financial advisor to ensure there are not any miscalculations in your new retirement plan.
Yes, retiring early may be ideal but only if you can financially make it work! Here are a few common blunders people tend to make with retirement planning when deciding to take an early exit.
- You originally planned for your savings to cover 20 years of retirement living but you have recently decided to retire five years earlier.
Are you confident you have enough monies put aside to cover those five extra non-income earning years? Let’s say you need an extra $20,000 annually from your savings to make up the shortfall in your retirement needs that your pension income doesn’t fully cover. If you add say 3% to keep with the cost of living you will need an extra $107,000 in savings to be able to achieve your early retirement goal. That’s no small change.
- Can you take your pension early and without penalties?
If your new retirement calculations still reflect your old pension income, you need to get to your financial advisor before the sun sets and recalculate what your annual income will look like reflecting any penalties or years of no pension income. Take a look at your pension documents for the earliest age of retirement allowed and what penalties, if any, apply. If you plan on retiring at 57 but you only qualify for an unreduced pension at age 60 or later, then you need to ensure that you can still make it on the reduce amount.
If you have a defined contribution plan you might want to look into transferring it to your financial advisor instead of taking a fixed pension. This allows more freedom to take higher amounts of income in your active retirement years. LRIF (locked in retirement accounts) allow for a range of payment based on a minimum & maximum payment calculation. Your financial advisor can help with this. In addition, new legislation allows for some pension plans to unlock half the funds – which basically makes them more of an RRSP than a LRSP (locked in RSP). Again, this will provide you with more flexibility in how much and when to take income.
- Are you aware of the penalties for taking CPP early?
Under the current rules, your CPP is reduced by 0.5% a month up to 30% when you take it before age 65. The new rules, which will be phased in over the next five years starting in 2012, will reduce your pension by 0.6% a month up to 36% when you take it before 65. That is a HUGE reduction if you decide to take your pension at age 60. Let’s say at age 65, you’re qualified for $800 month pension. If you instead decide to take it at age 60, under the new rules your pension income will now be $512. That is $3,600 less a year. Can you afford that?
- Moving most or all your retirement savings into bonds and cash.
There is a misconception out there that when you enter into retirement all your monies should be completely liquid and risk free. This is a good strategy if you need the money today or tomorrow or even if you need it in a year or two from now but it’s not so wise if it’s to provide income for the next 20 years time. You need to ensure your investing strategy provides safety and liquidity for your short term needs, but also is invested to protect you against rising costs in years to come. Good quality dividend paying stocks are essential for most portfolios. The percentage you hold depends on your unique needs. Your advisor can help you determine the asset mix right for you
- Failing to plan or asking for help.
It’s important to crunch out the number regardless of what age you plan on retiring. Don’t just assume your company pension and CPP/OAS will cover all your retirement needs. You need to know the numbers. How much income do you need to come in to cover the basics, how much to cover the extra’s or lifestyle costs and the unplanned expenses? What do you actually have coming in? Does it have an inflation hedge? If the costs are higher than the income coming in, then what is your plan B? This is serious stuff and can’t be left to chance. You need a real tangible and meaningful financial plan in place. You should search out a financial advisor who not only will help develop your financial plan but can invest your money to reflect your goals.
Image credit – S. Yume