When Can You Retire?

It probably goes without saying, but retirement age can have a huge impact on your financial stability during retirement. So it's wise to ask yourself, When can you retire?

Traditionally, the normal retirement age has been 65. Some have opted to retire earlier, after long careers with the same employer. Retiring at 55 and 60 has not been uncommon. But recently retirement after the age of 65 has been on the increase. And polls indicate that many Canadians expect to work—at least in some capacity—after the age of 65.

There Are Two Critical Components To Determine the Ideal Retirement Age:

1. The length of time you will require retirement income
   If you retire early, you have a longer retirement. If you retire at 55, you need to save for ten more years of retirement than if you retired at 65. Conversely, if you retire at 70, you can save for five years less. While no one knows for certain how long their retirement will last, retiring early almost certainly means it will be longer.
2. The impact on retirement income amounts
   For many, retiring early means reducing their retirement income potential. Many private and public pensions are designed to reward those who work longer and therefore contribute more into the pension program. (Read more on the topic of making sure your money lasts as long as you do.)

Why Do These Two Issues Matter?

Let’s start with the prospect of adding ten years to your retirement. Sure, it’s ten more years to reward yourself for your years of hard work. But for people without a defined benefit pension plan, it creates a big demand on your savings.

Let’s assume you need a retirement income of $36,000 per year. If you plan to retire at age 65, and assume you’ll live to 85 and receive an average 5% annual rate of return, this means you need to have $450,000 saved by the time you retire. But if you choose a retirement age of 55, you’ll need to save $560,000 by the time you retire to cover those 10 extra years of retirement income requirements.

Saving an additional $110,000 is hard enough for most people, but consider that this avenue also means you need to save that amount by the time you’re 55. This means ten years less time to save more money—a very tricky prospect for the average person. (See this example in the chart at the end of this article.)

Getting back to item #2, the biggest impact for most people without a defined benefit pension is the reduced amount of benefits from the Canada Pension Plan and Old Age Security plans. The CPP, which most Canadians are eligible to receive, creates great incentives for people to delay their retirement past the age of 65. As of 2016, a person who delays receiving CPP until the age of 70 will receive 42% more in their monthly benefits than if they had retired at age 65.

Conversely, the CPP benefits are greatly reduced when taken before age 65. By 2016, a person who begins receiving the CPP at age 60 will receive monthly benefits that are 36% less than if they had waited to start their benefits at age 65.

For OAS, a similar system is in place to encourage Canadians to defer their benefits to a later age. Someone who starts receiving OAS benefits at age 70 will receive 36% more in average monthly benefits than if they had started at age 65.

Can You Retire Early?

The following compares the savings needs of someone planning to retire at 55 vs 65.

(Assumptions: We’ll assume a life expectancy of 85 and a 5% average annual rate of return on your investments.
This example does not take into account inflation or the difference in CPP and OAS benefits.)

The bottom line is there are many factors that should determine when you can retire. It's important to consider all the facts before you make this critical financial decision.