park, bike, senior

Finally the fun part of personal finance, the part where you get to quit working. Retirement is a very personal choice with some people trying to accomplish it as fast as possible while others try to stretch out their working years as long as they can. While there is no right or wrong choice, there are two things you have to think about when planning for retirement: when am I going to retire and how much money do I need?

When do I want to retire?

If your answer is “as soon as I can”, you are looking for FI/RE. FI/RE is a movement with an emphasis on retiring early and how you can accomplish it. It suits anyone looking to retire before the age of 60. If you plan on retiring after age 60, Canadian Pension Plan (CPP) and Old Age Security (OAS) start to become a factor. How much individuals qualify under those plans depend on various things. CPP varies with your contributions throughout your working career and the age you retire. There are fairly substantial penalties retiring at age 60 for CPP compared to 65 or higher. OAS varies with things like how long you have lived in Canada, if you are a widow and if you are classified as low or high income. Relying on these supplemental incomes to retire definitely complicates the calculations and makes planning a little more difficult, but it is still possible to do! It is a bit complicated, but the first step is estimating how much you will be compensated for CPP and OAS.

How much money do I need?

The short answer is 25x the annual income you want to live on in retirement. If you want to retire after 60, you will need far smaller investments because of supplemental income from CPP and OAS. Basic planning for retirement is to follow the 4% rule, meaning you can live on the income from only withdrawing 4% or less of your investment portfolio annually(There is more depth on this topic in the FI/RE page). CPP and OAS are not portfolio withdrawals, so the income you receive from them is subtracted from the total income you require and does not go against the 4% (allowing you to retire with a smaller portfolio). The maximum you can receive from CPP is just over $1,100 a month, and OAS is just over $600 a month. You can receive extra from OAS if you are classified as low income.

John Smith has just turned 65, his CPP contributions throughout his life have given him an annual payout of $9900 and his annual OAS payment is $7200. Combined they equal $17,100 in income. John figures he needs at least $30,000 a year of income to live on. $30,000 – $17,100 = $12,900. Following the 4% rule, John will need an investment portfolio of 25x the remaining income he needs, in this case $12,900. $12,900 x 25 = $322,500. John will need an investment portfolio of $322,500 to retire with an annual income of $30,000 and have a low risk of running out of money.