Retirement Calculations 2011 – Part III

Now some important consideration to my plan is having a mortgage free house.  Right now the plan is to pay off the mortgage in approximately one year (actually the date would be Dec 2012, so that is off from my calendar year in these calculations, but I’m going to ignore the four month difference).

Now a question I’ve previously been asked “am I depending on downsizing my home to retire early?”  The answer is no. Using any equity in the house would strictly be used as a backup plan in case the main plan ran into problems.  So that’s a nice $350,000 emergency fund should this plan go to hell on me.

So what happens now with the taxable account?  Well the reason this account is still in the plan is I literally won’t have enough contribution room in our RRSP’s or TFSA’s to shelter all the money.  Actually so far in these calculations I’ve left a some contribution room out of the calculations to keep things simple.  So the idea is to keep dividend paying stocks in the taxable account as much as possible to keep the tax liability low, but towards the end I might also have to accept paying some tax in my plan.  I’m again combining my wife’s account and mine to make this simple and not adding to this account for one year until the mortgage is gone.

Starting at $18,700
Adding $0/month at 5%
In one years I will have:$19,656

Then once the mortgage is dead we will kick into high savings gear

Starting at $19,656
Adding $2057/month at 5%
In 8 years (I’m 42) I will have:$271,491

Tomorrow I will get into the specific math of estimating do I have enough to retire at 42, but for now we need to review two other sources of income that will come up when I hit the more ‘traditional’ retirement age of my 60’s.

First up is the Old Age Security (OAS) Pension, which my wife and I should both qualify for the full amount see here for details.  The current payment rate is $533.70/month per person.  So in total that is $6,404/year per person ( and it is indexed for inflation).  Now this program is out of general government revenue so there is the risk it could be cut or reduced.  So depending on your personal feelings on the idea you might want to reduce the benefit in your own calculations.  I like to hedge my bets and assume we only get half.  That way we can handle either a pension cut or the sudden death of one of us and the other one should be fine.

Next is the Canada Pension Plan (CPP), which is paid for with our contributions and is held in an arm’s length fund from the government (see here for more info).  So it doesn’t face the same risk as OAS, there is more than enough money in that fund to cover pensions until I’m likely dead.  Now your CPP benefit is calculated in a complex manner so if possible request an estimate of your pension.  It at least gives you a baseline to work with.  Something to keep in mind if you retire early is you are going to reduce your CPP pension by doing it.  You see when they calculate your benefit they drop out 16% of your lowest earning years from 18 till 65 (plus drop out years if you were raising young kids).  Keep in mind you also can take CPP early at 60, but doing so reduces your pension by 0.6% per month permanently (check out the changes to CPP that kick in from 2011 onwards).

So what does this all mean to me?  Well I’m expecting a low pension amount.  You see there are 42 years between 18 and 60, and I’m going to have zero incomes for 18 years (age 42 to 60) when that 16% drop out will only cover 6.7 of those.   Then I could get a 36% reduction for taking the pension at 60, to offset this a little I will take it at 62 instead.  In the end I’ll have a low number.  So the best way to get an estimate of your pension is to plug your data into this calculator and adjust your income level down later on to simulate your early retirement.  It takes some work but it does give you a number (see this post for detailed instructions).

I plugged in all of my values and get an estimate of $5556/year for me and $1200/year for my wife. Therefore in grand total I expect these two programs will provide $13,160 of income after age 65.

Tomorrow I will pull together all this income and savings estimates to figure out if I have enough to retire at 42.