Key considerations when contemplating early retirement

Whether early retirement is right for you is only something you can determine. If you aren’t sure, reflect carefully about what kind of lifestyle you envision

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Q: The company my partner works for has been sold and the new owners have offered him a generous package to retire early. We have been considering our options for a few weeks and would like to seize the opportunity to retire about 12 years earlier than we had planned. We figure that as long as interest rates come down in a year or two, we should be OK with our savings and his pension. The high cost of living will make it hard for now, but if push comes to shove, we could downsize our home. What else do we need to consider before finalizing our decision? ~Miriam 

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A: Even if you love what you do, dreaming of the day you no longer need to work is only natural. Some people dream of having more time to spend on hobbies and travelling. Others seek out new activities, expand their friendship circle, or spend extra time with loved ones. Retiring means saying goodbye to office politics, colleagues pressing you with deadlines, and tedious commutes. However, the reality of early retirement can be much different than the fantasy.

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The right time to leave your working life is different for everyone. For some people, it comes at an early age and occurs when they have enough savings or passive income to support themselves without relying on others. This is normally called financial independence, rather than retirement, and those who are financially independent may still choose to work. Retirement, on the other hand, is the end of your active working life and is often due to age, health reasons, or ultimately a desire to enjoy the well-earned freedom that comes with no longer working. Some people choose to semi-retire by reducing either their hours or their workload. The advantage with this approach is being able to earn an income while you are able, and slowly adjusting to more free time on your hands.  For your employer, retaining the experience you bring to the role, even with reduced hours, allows them time to hire and train new talent.

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Here are key considerations as you weigh your options for retiring early.

Many expenses don’t retire when you do

A lot of people set a goal to pay off their mortgage before they retire. While retiring without a monthly housing payment makes it easier to face a reduction in your income, other expenses will continue. Property taxes, insurance, strata fees if you have them, maintenance, repairs, and utilities will still require a significant chunk of your income.

To help decide if you can afford your current home when you retire, outline a careful housing budget. Determine how much future repairs and maintenance will cost you by looking over the past five years of housing bills and expenses, and project this out over the next five, 10, and 15 years. For instance, if you bought all of your large household appliances at the same time, you’ll likely face replacing them all around the same time as well. Check when your hot water heater, furnace, and roof are due for replacement and estimate what any necessary home repairs or in-progress renovation projects will cost to complete. If you’re handy, you can save on the cost of some of the repairs, but as your single biggest asset, you don’t want to risk letting your home fall into disrepair due to a lack of funds or the ability to do the work yourself.

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After your home, you next largest expense is often your vehicle. In the years before retirement, you may want to either replace your vehicle or pay off the vehicle you have, with a goal to reduce your costs once your stop working. Many couples who retire together choose to become a one-car household to save on vehicle payments, repair costs, maintenance expenses, insurance, fuel, and parking. If sharing a car or no longer owing any vehicles fits your retirement lifestyle goals, eliminating those expenses will create a lot of breathing room in your budget.

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Your savings will suffer

When you retire early you sacrifice the benefits of compounding interest. Saving $200 a month from the time you’re 25 until you’re 55 years old, assuming an average annual interest rate of five per cent and interest compounded annually, comes to $91,075.18 in addition to your investment of $72,000 — $2,400 per year for 30 years — for a total value of $163,075.18.

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However, if you continue saving $200 a month for another 10 years until you’re 65, your savings will be worth $296,504.92. The magic in the nearly double balance isn’t the additional $24,000 you added over the latter 10-year period. The real benefit is from another decade of compounded interest. Retiring early typically means no longer having the funds to contribute toward long-term savings, in addition to tapping into what you have saved to supplement the lower pension payments that come with receiving payments before the age of 65.

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You’ll likely spend more money than you think

Retirement isn’t as cheap as many people think. While some expenses go down and you stop saving monthly toward retirement, lifestyle spending in the early years of retirement, when you’re younger and healthier, tends to remain high. In addition, most of your friend circle will likely not be in a position to retire early with you. While you may enjoy freedom that others can only dream about, this could leave you with time on your hands and feelings of loneliness that are countered in the form of added spending. Meals out, recreation and entertainment, travel, and hobbies heavily dependent on spending, are difficult on a fixed income budget.

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Questions to ask yourself about early retirement

Whether early retirement is right for you is only something you can determine. If you aren’t sure, reflect carefully about what kind of lifestyle you envision during your golden years; how do you want to spend your time and money? Be realistic and think about a typical week — how would you socialize and remain active? Would you have a companion? Would you have enough income to cover your monthly expenses, and could you afford additional health-related expenses if needed, especially without extended benefits from your employer? Where would you live as you age, and would you be satisfied with low-cost activities if your budget is tighter than you anticipated?

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The bottom line on deciding whether or not early retirement is right for you

Retirement — early, late, or on time — is a significant time of transition. However, before arriving at a final decision around when to take the leap, think about the pros and cons carefully. Seek professional advice regarding your pensions, investments, debts, and overall financial situation. If your goal is to be an entrepreneur or consultant to bridge an income gap, reach out to an accountant and business adviser for guidance. Once you leave your job it could be difficult to return. Freedom and fun aside, treat assessing when to retire as the financial decision that it needs to be.

Related reading: 

How to Decide If Downsizing Your Home When You’re in Debt is Worth It 

What Happens When You Can’t Afford Your Mortgage Payments? 

Is a Reverse Mortgage Worth the True Cost? 

Peta Wales is President and CEO of the Credit Counselling Society, a non-profit organization. For more information about managing your money or debt, contact Peta by email, check or call 1-888-527-8999.  

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