Many people dream of an early retirement. Some want to travel while they’re still healthy enough to enjoy it. Others are just running out of the physical or mental steam needed to keep working.
Whatever the reason, the allure of leaving your job behind to start the next chapter of your life can be strong. However, Professor Laurence Kotlikoff, an economics expert from Boston University, warns that retiring early may be one of the worst financial decisions you can make.
The financial reality
Choosing to retire before 65 can have a big impact on your government benefits.
While the standard age to start receiving the Canadian Pension plan is 65, you can as early as 60 or as late as 70. But it’s important to realize that retiring early means missing out on the higher payouts that come with waiting. If you start collecting the CPP before age 65, payments will decrease by 7.2% per year. If you wait until after you turn 65, payments will increase by 8.4% per year.
Retiring early also reduces the contributions you’re able to make to your retirement accounts. That means you now have to fund your lifestyle for just as many years with less money.
The risk of outliving your money
One of the biggest risks of retiring early is running out of money. And that risk is getting bigger as people are living longer.
Kotlikoff emphasizes that retirement planning should be based on your maximum potential lifespan. If you base your plan on the average life expectancy and end up living longer, you can end up in a very tough spot financially.
Should you work longer?
The reality is that most people can’t afford to retire before 65. Even those who have considerable wealth saved may find that retiring early could mean they have to compromise on their lifestyle.
According to research from Boston College Center for Retirement Research, half of working families in the United States risk a significant decline in their standard of living in retirement. That risk could be cut in half if workers delayed retirement by just two years.
Working longer not only allows you to save more, but it also delays the need to tap into those savings giving them more time to grow and reducing your chances of outliving your money.
Building a realistic retirement plan
There is no universally right or wrong time to retire.
The best way to determine the right time for you is with a realistic retirement plan.
A realistic plan is not based on wishful thinking or best case scenarios, but on solid economic principles. It creates a full financial picture that folds in your goals, historical data, and the mathematical probability of success.
An important step in ensuring your plan is realistic is the stress test. Sit down with your advisor and run your retirement plan through best and worst case scenarios. Evaluate if your plan can work in a range of conditions.
No matter when you choose to retire, a realistic retirement plan will give you the confidence you need to enjoy your newfound freedom and flexibility.
Want to learn more about planning for a financially stable retirement? Register for our upcoming seminar by clicking here.
David Popowich and Faisal Karmali are Investment Advisors with CIBC Wood Gundy in Calgary. The views of David Popowich and Faisal Karmali do not necessarily reflect those of CIBC World Markets Inc.
This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change.
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