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Does it Make Sense to Retire Early?

Retiring Before or After Age 55
Many people will retire before age 55 for various reasons. They have the choice of leaving their money in their pension plan and taking their pension at normal retirement age or transferring the amount that they have to a locked in retirement account, (LIRA).

Why would a person want to do that? Well there are several reasons:

With a LIRA, it is you who has complete control over the investments.

At age 65 and upon receipt of QPP/CPP, your private pension plan may be reduced according to a formula if it is coordinated with QPP/CPP. This is not so with a LIRA - you keep all of your QPP/CPP.

In the event of death, a percentage of the deceased's pensions would go to his/her spouse (normally 50%), not the full amount. With a LIRA, upon death, the entire amount can be rolled into the spouse's RRSP and the amount is no longer locked in.

Some people feel more secure controlling their investments should they move to another province or another country. You get the administrative and bureaucratic hassle over with earlier in life rather than at a later date where the future is uncertain.

Assuming that a person transfers $50,000 from private pension plan to a LIRA at age 45 at 10% per year it grows to $336,375 at age 65. Money may be removed from a LIRA via a Life Income Fund (LIF).

After age 55 you are not permitted to transfer money into a LIRA. You must take a pension.

Sources of Retirement Income

Many people ask themselves the question "Can I afford to retire on XX% of my salary?" We have to look at the sources of retirement income, projected expenses, and compare the two. We also have to take into consideration those expenses that you will no longer incur such as payments into a private pension plan, RRSP contributions, QPP/CPP payments, union dues etc. So we really don't need to make as much retired as we did while employed. On the other hand, we have to consider the negative effect that inflation could have on a fixed income.


How to Set up a Comparative Spreadsheet

The following table lays out a sample spreadsheet that should help you to organize your projected cash inflows and outflows. You would repeat this exercise for each scenario i.e.: retire today, retire in 5 years, etc.

I have actually had it work out where the employee was working for about $25 more per week than if she were to retire.

Sometimes the opposite happens and retirement is simply not possible at this time. There are not enough retirement resources accumulated and continuing to work and accumulate is the only realistic option.

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