The Financial Truth Behind Retirement
By Jonathan Chevreau

Planning a comfortable retirement is the chief preoccupation of millions of Canadian savers and financial planners. But the real "holy grail" is early retirement, a goal that seems achievable only by business owners, lottery winners and public servants.

While the average government worker retires at the relatively early age of 55, those in the public sector usually keep slogging to 65, says pension expert Malcolm Hamilton at William M. Mercer.

I recently shared the stage with Hamilton on a panel about retirement. My presentation summarized several books published this year which take quite different approaches on when you can retire early.

6 retirement secrets

Hamilton himself has not written a book, despite being the country's pre-eminent authority on retirement. He told the panel everything he knows about what affluent Canadians need to know about retirement:

1. Affluent Canadians should be able to get by on between 30% and 50% of what they grossed during their working years.

2. They should maximize contributions to pensions, RRSPs, and RESPs for their kids.

3. They should avoid non-registered savings and instead acquire vacation properties or other enjoyable acquisitions the government hasn't figured out how to tax yet.

4. They should minimize debt, including mortgage debt.

5. They should avoid fixed-income investments outside tax shelters.

6. They should leave money to their children when they are young adults.

Those people who retire tend to have no debt, no dependent children, some savings, inexpensive hobbies and modest expectations, he said. Those who retire early usually work for government, are savers and are homeowners, have peaked in their careers, have a life away from work and have friends who have retired or are about to do so.

Despite the traditional advice that retired Canadians need between 70 and 100% of the income they enjoyed while working, Hamilton says a 45% replacement should be more than enough, assuming that mortgages, children and retirement savings are out of the picture.

Vancouver-based financial planner and author, Diane McCurdy believes in replacing 100% of working income in retirement. Her book, "How Much is Enough?", suggests $500,000 is a rock-bottom nest egg to provide a modest retirement income.

The $500,000 target would be for a frugal individual who has retired all debts and can live comfortably on $30,000 a year. But for the rest of us, a flat $1 million proposed by many advisors and writers is likely a better target. Based on conservative returns of 6% a year, $1 million would yield only a modest $60,000 a year, less than the $68,000 the average working Canadian household lives on. Dual-income couples accustomed to the good life may need $2-million or even $3-million to finance a comfortable retirement.

Dianne Nahirny, 41-year-old author of "Stop Working ...Start Living," describes how she retired five years ago. Even though she never earned more than $25,000 in any one year, Nahirny retired at age 36. Because she has no debts, she has stripped her needs to a bare minimum and lives on $800 a month. She lives in a paid-for house in Hamilton and has a modest net worth of $300,000. She intends to take advantage of government pensions such as Canada Pension Plan, at age 60, and Old Age Security, at age 65. In the meantime, she uses her RRSP as a tax-eliminating vehicle. When her income exceeds the basic personal amount, she reduces taxable income to zero by making enough RRSP contributions to fall below the tax-exemption line. The rest of her contributions she carries forward to use in years when her taxable income rises. The key step in her plan was to buy a house and pay off the mortgage as fast as possible. Then, with all debts cleared, build up RRSP and non-registered savings to the point where one can live off the proceeds without employment income.

When it came to deciding on the precise moment of liberation, Nahirny dispensed with financial projections and simply plunged into retirement to find out first hand what it really costs.

A similar philosophy is espoused in "Free Parking," a book by former financial planner, Alan Dickson. The 49-year-old B.C. native works about 20 hours a week.

His philosophy is summarized on the book's bright yellow cover: "Earn less -- Live More. An RRSP can kill your financial plan!" The fact that those RRSPs will eventually be taxed is Dickson's assurance that government programs like the Canada Pension Plan or Old Age Security will indeed be around in old age. Like Nahirny, he plans to collect reduced CPP benefits at age 60. He says those waiting until 65 for full CPP benefits won't be able to make up for the five deferred years until age 83.

As a planner working with retirees and those saving for retirement, Dickson began to question the prevailing wisdom of toiling until you reach 65 to put aside a few million in an RRSP. However, that doesn't mean he eschews the whole notion of planning for the future. "It takes planning to work less, pay less tax, take more vacations and retire early."