Thinking about taking early retirement? Then you’ll also need to think about this…
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When you’re an education member working towards retirement, collecting your full pension is typically the ideal plan for your golden years.
But you know what they say about the best-laid plans. Life intervenes. Priorities shift. Plans change. Suddenly your 85 (for OTPP) or 90 (for OMERS) factor (or age 65) might seem too far away.
You’re ready for retirement, now.
Yet there is so much to consider before taking early retirement—like whether you can actually afford to.
Because the financial reality of living in retirement is that you’ll likely be doing it on less income.
How much less naturally depends on how early you retire before reaching your qualifying factor.
For example, let’s say you’re 53 years old with 28 years of service/credit. OTPP will reduce your pension amount by 2.5% for each point you’re away from your 85 factor; or by 5% for each year you’re under the age of 65 (whichever is less).
According to OTPP’s calculations, here’s the reduced pension amount you’d be looking at based on the example above:
53 years old (age at retirement) + 28 (qualifying years) = 81 (qualifying factor)
Since you’d be 4 points away from reaching your 85 factor, your pension would be reduced by 10% (2.5% x 4).
If your annual basic OTPP amount is $58,800, your reduced pension (in this early retirement example) would be $52,920.
That gap will of course widen or lessen depending on how early you decide to retire.
Assuming you plan on maintaining your current lifestyle, keep in mind that you’ll also have to cover many of the same monthly expenses, but on a tighter budget.
This is where you’ll need to carefully go over every dollar you currently spend.
Do you still have a mortgage and/or other debt? What about your everyday needs such as groceries, utilities, and lifestyle expenses (I.e. Internet/streaming services, travel, clothing, etc.)? Along with all of the other things you regularly spend money on, but don’t even think about or keep track of. Plus with more time on your hands to travel and take up new hobbies, it could potentially mean even more (or unforeseen) expenses.
Will your reduced pension combined with your other sources of retirement income be enough to live on once you’ve factored in all of your financial needs?
If you’re unsure, contemplate taking early retirement for a ‘test spin’ before doing it for real.
This involves living and spending according to the reduced pension amount you’d be bringing in (to see if it’s financially feasible). Would you be able to make it work for a month? How about two? You could even scale back your spending gradually in order to give yourself a smoother transition into what will eventually become your regular retirement cash flow. While this may seem like an unnecessary exercise, the leap from working income to pension income can be quite an adjustment—especially if you’re not prepared for it. The more you can approach retirement as a journey that requires planning, the better position you’ll be in to financially sustain yourself for the long haul.
Something else you’ll need to consider is when to take CPP/OAS.
While you can take your CPP as early as age 60 and as late as 70, there are financial incentives to delaying it. That being said, everyone’s situation is different and you might feel that it would be better to take it early. Keep in mind, however, that taking CPP at age 60 when you’re still working (and in a higher tax bracket) is something you’d probably want to avoid. So, be sure to connect with a financial advisor to determine the best time for you to take CPP and how to maximize other government benefits, like OAS.
Ultimately, your best course of action when it comes to early retirement is to reach out to Educators Financial Group, first.
We fully understand the different levels of income you will get during your after school years. This means our financial specialists can draw you an income map to give you a better idea on whether your reduced pension as well as any other sources of income will be enough. If not, we can work with you to create strategies to minimize any possible gap in income to ensure your cash flow continues to run smoothly, whenever you do officially decide to retire.
Can you afford to take early retirement? Contact us to find out.
Plus learn more about how to financially prepare for retirement by checking out our upcoming webinars.