Early retirement: 55 and clout

I felt stunned when I walked out of my financial planner’s office in June. I had just learned that, if I acted quickly, I could afford to retire right away, years earlier than I had thought possible. I should have been ecstatic. Instead, I felt queasy. I had dreamed about early retirement for a long time and the planner had called my bluff. “What are you going to do now?” I thought.

I had been mulling that question in one form or another since February, when I handed my annual RRSP contribution over the desk to my bank adviser. “Will I ever be able to quit work?” I sighed. I didn’t mean it seriously. But my adviser looked at the numbers on her computer screen and said, “Oh, I think so. Let me put you in touch with one of our retirement planners.”

I was only 54. I had worked as a copy editor at the same newspaper in London, Ont., for almost 33 years. I had always assumed I would have to continue working there until I was at least 60 to make ends meet in retirement. But when I met with the bank’s planner, she went over the numbers and assured me I could quit work almost immediately. I was single, I had no dependents, and I had a paid-off house. If I took the money that had built up in my pension plan, invested it wisely, and lived modestly, I could say goodbye forever to the office. There was only one catch: my pension plan allowed me to take the commuted value of my pension only if I acted before my 55th birthday. That was a mere eight weeks away and I had to give at least two weeks’ notice. I had to make a decision right away.

Was I ready to make the leap into sudden retirement? As I wrestled with that question, I began to realize that retirement is a psychological and social issue, as well as a financial decision. If you’re pondering early retirement, let me tell you about what I’ve learned as I’ve struggled to make sense of my own situation.

The first question I had to deal with was whether I really wanted to retire. Most people say they would jump at the chance to walk away from work, but the reality is more complicated than that. Work provides us with a sense of self-worth. It also offers a sense of belonging and of contributing to the world.

As I contemplated my own retirement decision, I felt torn. I could list good reasons for continuing to work. I could also list reasons for taking early retirement. On the “continue to work” side of the ledger, I felt proud of my work and I felt appreciated in the newsroom. I also liked knowing that I was building up my pension and enjoyed a benefit plan and all the perks that go with employment. On the “retire right now” side of things, I detested my schedule, which required me to work evenings and two weekends a month. I resented how my evening-and-weekend working life isolated me from friends and family.

What finally tilted the decision toward “retire right now” was the memory of a colleague who had died suddenly a few months earlier. He was 61 and had been eagerly waiting for retirement. He had been holding on at work simply to build up his pension. I didn’t want his fate to be mine.

The question, of course, was whether I could afford to retire. Under the terms of my pension plan, I would lose 5% of my pension payout for each year I retired before 65. I had always assumed that the penalty ruled out early retirement for me, but the bank planner pointed out that if I acted quickly and withdrew the commuted value of my pension before turning 55, I would have a decent-sized nest egg that I could invest myself.

Would that nest egg be enough? I had listed my annual expenses before meeting with the planner. I had added in my projected spending for home improvements and a new computer. I had also considered areas where I could cut back and budget more effectively. I had concluded I could get by on an income of about half of what I was making in my job.

Was that realistic? To be honest, I didn’t know. The conventional wisdom, propounded by the Canadian Bankers Association and many others, says you need 60% to 80% of your working income to maintain your lifestyle in retirement. But that figure depends upon how you want to live after work. If you want to maintain both a house and a cottage, or if you want to travel extensively in retirement, you’ll need at least 80% or more of your pre-retirement income.

For most people—including me—80% is probably overkill. Malcolm Hamilton, a consulting actuary with Mercer, a Toronto human resource consulting firm, says Canadians who merely want to maintain their current lifestyles will need retirement incomes that are only 50% to 60% of their working incomes. We can live on a lot less in retirement because our expenses are a lot less. We no longer have mortgage payments to make or kids’ tuitions to pay. We pay less tax because our incomes are lower. And we no longer have to save for retirement because we are already retired.

But even if I could live on 50% of my working income, could I count on my nest egg to generate that amount? Stock markets go up and down. So do bond prices. As I researched the matter, I was surprised to discover that the amount I could withdraw each year from my portfolio was smaller than I would have thought. Most experts agree that if you want to make your money last for decades, you should withdraw no more than 4% a year of your starting principal, adjusted for inflation. (That means if you start with $100,000 and inflation is running at 2% a year, you should withdraw $4,000 the first year, $4,080 the second year, and so on.)

Hamilton says a 4% withdrawal rate is a very safe figure if your objective is to live a modest lifestyle and leave a large estate. But he says he doesn’t think a 5% or even 6% withdrawal rate is out of line in the early years of retirement. “The truly elderly don’t spend much even if they have it,” he says. “So the idea that you should spend frugally early in retirement so you have lots of money later on is not necessary for most people.”

Based on my list of expenses, I figured I could generate about 50% of my take-home pay by withdrawing about 4% of my savings a year. That looked very encouraging. And I thought I could supplement my income by doing freelance writing and editing jobs, not only to make money, but because I like the work. When my financial planner assured me I had enough money to pay my basic living expenses for 30 years, I decided to walk out of the newsroom for the last time as a fulltime employee on the day before I turned 55.

The jury is still out on whether retiring at the age of 54 years, 364 days was the smartest financial move I ever made. I now realize that my initial list of expenses missed several items, including health care costs that had previously been covered by my employer, Christmas gifts and charitable donations. I also underestimated the amount I would want to spend on entertainment. Rather than living on 50% of my pre-retirement income, I’m getting by on more like 60%. And that means I’m withdrawing 5% of my savings every year, rather than the 4% I had hoped for.

I budget more stringently than I did when I was working and I’m still getting accustomed to the fact that I can’t spend as freely as I used to. It’s not so much a question of cutting back as planning when I should buy something I want or need – making sure I don’t schedule a major service on my car the same month my property taxes are due, for example; occasionally using my credit card in a tight month so that I won’t have to pay it off until the following month, when I know there will be fewer bills coming in; not automatically buying the most extravagant gifts when I’m Christmas shopping, as I had been inclined to do. I haven’t had to deprive myself of anything significant, but each month necessitates its own spending strategy and I think it will take a couple of years to ascertain my financial comfort zone.

I have been surprised by how much I’m enjoying my part-time writing and editing work. Unlike my full-time job, my new duties are done on my own schedule, in my own house, and that makes all the difference. I find that my feelings are shared by many of my retired acquaintances. Among them are a former circulation manager who delivers prescriptions for a drug store, a newspaper production technician who organizes and scrapbooks family photos for clients, and a bank manager who works part time in a high-end kitchenware store. While they all enjoy the extra money—in some cases, the cash is essential—they also like being active and feeling fulfilled.

In terms of improved health and social life my retirement is an unqualified winner. Every time I hear about the latest crisis at the office where I used to work, I’m thankful I no longer have to deal with the stress and anxiety such events used to cause me. I have renewed my interest in cooking healthy meals and I particularly enjoy eating them at regular times. After being restricted by evening and weekend work, I find the freedom to go out for dinner with friends or see a movie—any time I want—is still a heady sensation. I’m especially looking forward to a year of gardening without having to compress all the work into a limited time. These may be modest pursuits, but they contribute disproportionately to my quality of life. In a nutshell, my retirement so far has not been life-altering as much as life-affirming.