The Secret Math Behind Early Retirement

Rob Berger, US News & World Report, 24 Dec, 2013

Early retirement often seems impossible. It's difficult enough these days to retire at age 65, so the thought of retiring early is a pipe dream for most people. Yet somehow this dream has become a reality for some diligent savers. In extreme cases, a few people have retired at an age when most of us are just getting started.

One well-known example is the man behind MrMoneyMustache.com, who retired at age 30 after just nine years of working. While he is the exception to the rule, he thinks that should change. He views early retirement as something most people can attain.

To understand how it works, let's take a look at the math behind early retirement. These numbers have implications for all retirees, not just those looking for an early exit. So even if you think you're too late for early retirement, these strategies will still improve your retirement finances.

The math. How quickly you can retire depends on how much you can save. If you are able to save the often-recommended 15 percent of your take home pay, it will take about 45 years to retire. This conclusion assumes investments earn a real return (after inflation) of 5 percent, and that you live off of 4 percent of your nest egg once you do retire.

Now let's say you are a frugal and committed saver. If you are able to save 30 percent of your take home pay, your working years fall to about 30. At 40 percent the necessary work years before retirement falls further to about 20. And if you are able to save 50 percent of your take home pay, you'll begin enjoying your golden years in less than 20 years. As my mom would say, now we're cooking with gas.

The magic behind this math is the result of three related factors. First, as the saving rate increases, the amount saved increases more quickly. Second, with the passage of time, the nest egg benefits from compounding of investment returns. Finally, as the savings rate rises, the amount of money needed for living expenses goes down.

Let's get real. I know what you're thinking. The math may be accurate, but saving 30 percent or more of take home pay is impossible. Don't tell Mr. Money Mustache or the bloggers at "Early Retirement Extreme" and "Can I Retire Yet?". The fact is that early retirement is a reality for many people, including those who earned an average income during their working years.

While each early retirement story is unique, many share several common themes. Early retirees shun certain expenses many of us take for granted, such as expensive cable and cell phone packages. They tend to spend less on cars and transportation, often living close enough to work to either bike or walk. They also spend less on food, eating out less frequently than most. Finally, they are often more self-sufficient, choosing to handle home and car maintenance and repairs on their own, rather than paying others for these services.

Implications for baby boomers. For those already approaching retirement, stories of early retirement may at first blush seem unhelpful. After all, baby boomers are long past retiring at age 30. However, study after study reveals that many older Americans are not prepared financially to retire. The principles behind extreme early retirement may be the answer. If extreme saving can enable some people to retire at age 30, the same methods can help prepare those in their fifties toretire by age 65.

Rob Berger is an attorney and founder of the popular personal finance and investing blog,doughroller.net. He is also the editor of the Dough Roller Weekly Newsletter, a free newsletter covering all aspects of personal finance and investing, and a weekly podcast.

This Is How Your Pension Will Probably Change

Kevin Press, BrighterLife.ca

The debate about Canada’s pension system comes down to four key ideas. Here’s what you need to know about each of them.

A report on the National Summit on Pension Reform landed Friday. Organized by Canada’s Public Policy Forum, the event provided an opportunity for industry leaders to assemble and talk about what comes next for Canada’s pension system. (The Province of New Brunswick, Sun Life Financial and Morneau Shepell contributed to the event as Summit Partners.)

Two things stand out from the report:

First, despite what you may have read, our national pension system is not in crisis. It could be better, certainly. But Canadians can rest easy knowing that a basic level of retirement income is provided for by the very well-managed Canada Pension Plan (CPP) and Old Age Security (OAS) program. Our system is admired around the world.

Second, there is political momentum behind efforts to improve the pension system. This is driven largely by recognition that Canada’s baby boom generation, as it enters retirement, will place a heavy burden on the system. This (along with volatile capital markets and low interest rates) has contributed to fears of a looming disaster.

Leaders at the summit discussed four big ideas. The event’s report provides a useful summary of how pensions across Canada — those provided by government, employers and via personal savings — are likely to change.

1. Risk is going to be shared differently

The goal is sustainability of the system, according to the report. That means you and I are going to be required to take on greater risk (we will have to save and invest more), and our employers and governments will lessen their exposure. This probably doesn’t mean lower CPP and OAS payments. But it will mean that both private and public sector employees will get less from their workplace plans than previous generations have. Many of us will retire later.

2. Pension plan design changes will grow more common

Pensions have not been known for flexibility in the past. Expect plan design changes on a more frequent basis as boomers move through the retirement income system. And watch for greater transparency in that process. For this to be successful there will have to be real balance between the interests of management and labour. Brush up on your financial literacy skills so that you understand what these changes mean to you and your family.

3. There will be more ways to save at work

This aspect of Canada’s system was headed in the wrong direction. According to the report, about 39% of the country’s paid workforce has an employer-sponsored pension plan. And that national average overstates the reality among private sector workers by a wide margin. “Overall saving rates in Canada are low, and there is a definite need to facilitate growth in Canadians’ workplace savings if we are to sustain an acceptable standard of living for the growing ranks of retirees,” reads the report. The recently introduced Pooled Registered Pension Plan is designed to address this. Ottawa created a regulatory framework for the new plans, and has left it to the provinces to decide how (and if) they want to implement. Quebec was the first to step forward with what that province calls the Voluntary Retirement Savings Plan.

4. CPP coverage could expand

We could see higher CPP payments and/or a new way for Canadians to top up their payout with individual contributions. There’s considerable debate on expanding CPP. Those for it point to the strength of CPP and ask why we wouldn’t want to rely on it more heavily. Those against it say it’ll increase taxes for consumers and businesses (because the money has to come from somewhere). Could go either way.

I would call it a safe bet that Canadians will have to save more personally if they hope to see the kind of retirement income previous generations have earned thanks to government- and employer-sponsored plans. The question for policy makers will be how to cushion that blow in the form of creative plan design and saver-friendly tax incentives.

I’m optimistic.

OECD warns poverty among seniors rising in Canada, points to public pensions gap

By Julian Beltrame, The Canadian Press | The Canadian Press – Tue, 26 Nov, 2013 

OTTAWA - An international think-tank warns that poverty among Canadian seniors is on the rise and that current pension safety nets may be inadequate to address the problem.

The comprehensive study on global pensions by the Organization for Economic Co-operation and Development showed that Canadians over 65 years of age are relatively well off when compared with most others in the 34-country group of advanced economies.

For example, the average poverty rate for the group in Canada was 7.2 per cent during the study period, among the 10 lowest in the OECD and better than the 12.8 per cent average.

But the report also points to gaps in the Canadian situation.

For instance, as poverty rates were falling in many OECD countries between 2007 and 2010, in Canada they rose about two percentage points.

As well, the report notes that public (government) transfers to seniors in Canada account for less than 39 per cent of the gross income of Canadian seniors, compared with the OECD average of 59 per cent, meaning more Canadians depend on workplace pensions to bridge the gap.

Meanwhile, public spending on pensions in Canada represents 4.5 per cent of the country's economic output, compared with and OECD average of 7.8 per cent.

Canadian seniors depend on income from private pensions and other capital for about 42 per cent of their total.

"As private pensions are mainly concentrated among workers with higher earnings, the growing importance of private provision in the next decades may lead to higher income inequality among the elderly," the report warns.

"Those facing job insecurity and interrupted careers are also more exposed to the risk of poverty because of the lower amounts they can devote to retirement savings."

The report notes that rising poverty among Canadian seniors, although still relatively low, is most acute among elderly women, especially those who are divorced or separated.

"Higher poverty among older women reflects lower wages, more part-time work and careers gaps during women's working lives," the report said while also noting "the effect of longer female life expectancy ... for which many women have not been able to save enough."

The OECD says Canada's current pension support, both private and public, replaces only about 45 per cent of average pre-retirement gross income, well below the two-thirds that may experts recommend.

Among lower income Canadians, however, the replacement rate is 80 per cent.

Some provinces, particularly Ontario and Prince Edward Island, have been putting pressure on the federal government to move ahead with expanding the Canada Pension Plan which, along with Old Age Security, represents the main source of public transfers to seniors in the country.

But federal Finance Minister Jim Flaherty has so far rejected the approach, saying the economy is not strong enough to withstand the added premiums on firms and individuals expansion would entail.

Last year, the federal government also cut back on the OAS program by raising the age of eligibility to 67 from 65 effective in 2023.

Canada's approach is not unusual, however. The report notes that following the 2008-09 crisis, pension reform has been widespread throughout the OECD, with many moving to a higher retirement age of 67.

"Some countries have gone even further, moving to 68 or 69 years, though no other country has gone as far as the Czech Republic, which decided on an open-ended increase of the pension age by two months per year," the OECD adds.

Another innovation being adopted by some countries is tying future benefits with demographic and economic growth projections.

The OECD notes that many if not all countries are facing challenges with aging population, slow economic growth and governmental fiscal concerns.

Why CPP Matters: Deconstructing Pension Reform - Blog from Susan Eng

This is a blog from Susan Eng on Huff Post Canada on November 22, 2013.
I usually place such article in reference but this time due to the popular content of the article I would like to post it entirely here:

If you believe that Canadians are not saving enough for their own retirement and many face a much lower standard of living when the paycheques stop, then you would be in good company with senior economists, pension experts and even most politicians.

Canadians are not using RRSPs enough, and those that do are in the higher income brackets. The people who need help saving for retirement are those earning under $100,000 -- i.e. most Canadians.

So the goal is to ensure that any change has broad effect and target the reasons why people are not saving.

Some say they don't earn enough to set anything aside. Ensuring that there are enough good-paying jobs so that people can afford to save is a top priority. It isn't an excuse to do nothing to secure their future. But how much are we talking about?

One proposal to increase the Canada Pension Plan will require additional contributions -- about $20 a month more for someone earning $40,000, matched by the employer. Those with higher incomes pay more to get more. Dollar for dollar, the CPP is the most cost-effective way to purchase a lifetime pension and arguably, at these rates, eminently affordable.

The key is that the employers match these contributions. Matched contributions makes the savings more productive for the employees but have also become the main talking point of employer lobby groups who call these modest amounts "job killers." Presumably, employers would rather forego hiring a needed worker than pay $20 or $60 a month more in CPP premiums. Despite evidence to the contrary, government believes them and thinks that stance is good public policy.

There is a myriad of ways to invest savings, maybe too many -- another reason people shy away -- but leading experts say that the best and most cost-effective for the average person is to put money into a large fund like the CPP managed by professionals who have access to better investments, keep costs low and maximize benefits.

Most important, a large fund stands the best chance of guaranteeing that benefits will be there when needed. The problem is that most employers don't offer pension plans and the CPP provides a maximum of $12,000 a year, the average is closer to $7,000.

So if an increase to CPP is good for Canadians why isn't it good for the economy? The just released Economic Statement paints a rosy picture but the finance minister still says that economic growth is too slow to allow any increase to CPP premiums. But presumably, the projected balanced budget in 2015 will allow for his promised tax cuts and income splitting. At least we can use the tax savings to contribute to a secure pension plan if we have the option.

Pension contributions are not taken out of the economy; they are immediately reinvested, creating jobs and bolstering business growth. The pension benefits paid out are taxed and spent in the economy. Most important for government coffers is that not only are these pensions not government payouts -- they're bought and paid for by the pensioners -- they actually offset Old Age Security and Guaranteed Income Supplements that government would otherwise pay.

And it bears repeating that only the younger generation will benefit from any improvements to the CPP which has enough to pay out benefits for the next 75 years. Everyone pays their own way.

So what's holding things up? For all the political posturing since the finance ministers first offered a modest CPP enhancement in 2010, there has been little to show for it.

To amend the CPP, two-thirds of the provinces with two-thirds of the population must agree together with the federal government. At last count, Quebec was in along with Ontario, PEI and enough others to achieve the necessary provincial consensus -- confirmed in their recent declaration that any pension reform must include CPP enhancement. That leaves the federal government as the major holdout.

Minister Flaherty is due to meet his provincial counterparts in mid December -- another chance for Canadians to find out if political rhetoric will prevail or if we will take the first step to improving Canada's retirement security for a generation.

Saving Strategy and The Retirement

The Generation X live in a period which can be seen as not favorable compared to the baby boomer generation. In Canada, the housing prices are high and keep going up. The huge mortgage will take away most of the disposable income if you plan to buy a house. That will trigger everybody to think about a strategy how to accommodate the daily need, the retirement and the mortgage wrapped around your earning which will not be easy increased in today's economy.   


The sluggish economy, the public debt, the high unemployment and the higher cost of borrowing, even in today low interest  environment, are factors affecting younger generation in achieving wealth and comfort for retirement in later years of life. The higher cost of housing will cut down the saving significantly. The consequence is more and more people think about working beyond 65 or even until 70 because they think the saving is not enough for the retirement. Some people are even worry that the pension system will not be there for them when they retire. The basic government benefits could be collapsed due to high public debt and sluggish economy. The employer sponsored pension plan is trending toward smaller or eliminated entirely. Thus, the personal saving will become more important than ever.

For many years the pie of disposable income was divided in three: one for every day need, one for the housing and one for the saving, specially for the retirement. In the current economy, the cost for housing is getting bigger than one third, in some situation it even takes up one half of the monthly income, and the savings get smaller. For some people, savings in the early years seem to be impossible. Balancing out between the expenses and the savings therefore makes more sense and cutting cost for housing may be better for the long run. Saving for the retirement, saving for child education and life insurance are good investments for the family. Saving with registered retirement saving plan and use the tax refund to pay down the mortgage is considered a double saving. When the saving in registered retirement saving plan is large enough to cover the mortgage, you can set up a self-directed plan with the bank and lend the money to mortgage as an investment. This way, you pay the interest to yourself instead to the bank. The saving is threefold when saving with this strategy. 

Keep in mind, a bigger house has more expenses than a smaller house: larger bill for heating in winter, larger bill for electricity to keep the house cool in summer, more property tax etc,. It is also less liquid than other investment type such as stock or mutual fund. The house is a good investment but will suck more money into it. The trending of real state price could be reversed, the same reaction as the other investment in bad market condition. If you are limited in earning, the balance between investments in housing and the retirement is important.

Car is actually a money burning machine. Be cautious about buying and selecting car for your need. Car is the mean for transportation from one point to the another. Car value is decreased very fast. No matter what kind of car, value could be only fifty percent after a few years of use. Putting car in context of saving strategy is important. In the long term, car could be a very big expense in your budget. There are many expenses for car: car insurance cost, car maintenance cost, gas cost, parking fees...

The boomerang kid is a clear indicator of today sluggish and jittery economy. Number of adult children returning home and look for support from parents are on the rise. You may need to factor in this reality into your retirement planning as well. Everybody is facing a tough economic uncertainty in a saturated material world. A bumpy ride ahead is certainly for most people in the thirties or forties when job for life is not a standard as half century ago. Just hold it tight and take a deep breath. 

Canada Can Do More for The Retirement of Its Citizens

Canadian pension system can be improved a lot more to help preparing for the retirement of its people. We must have a positive view toward the future retirement in Canada. Retirement should not be viewed as burden of the society but rather as a way of paving a new road for better contributing to the society, a new force of itself when the percentage of aging Canadian population is increased in the general public.

The pension system in Canada rely on four components:

1. The Canada Pension Plan (CPP) pension benefit is a benefit depending upon the time and the amount of contributing during employment time. The amount of contributing to the plan is set by government and tend to increase to accommodate the aging population. The retirement age will be raised to 67 in 2023. It is a government measure to deal with the increased aging population and it is understandable, but the government could commit to do more for this concern. Extension of pension at the provincial level is worth to consider. Other tax incentives similar to RRSP for mortgage payment also help.

2. The Old Age Security (OAS) is a benefit depending upon residence time in Canada, that includes the Guaranteed Income Supplement (GIS), another benefit received if the income of retiree is below certain threshold. If the spouse is between 60 and 64 and the other received GIS, she or he also eligible to receive Allowance, a benefit to raise the family income to a certain level determined by government. 

3. Employer Pension Plan: many large companies used to have retirement pension program set up for employees. This type of pension is still strong with government sponsored plan but diminishing with companies of the private sector in the recent years. The government can engage in conversation with companies to find way that encourage companies to keep the pension plan or even increase the contribution to the plan through tax incentive etc...

4. Individual registered retirement saving plan (RRSP) is a governmental tax incentive saving. Individual can make yearly contribution up to a limit and get the personal income tax reduced, depending on the tax bracket the tax payer will get the tax refund more or less. In the current law this retirement saving will be converted to a Retirement Income Plan such as Registered Retirement Income Fund (RRIF)at the age of 71. RRSP withdrawal will be added to other income and will be taxed at that tax bracket. Withdrawal after 65 or when your income is low will be taxed much lower. At 71 you must withdraw money from RRIF according to a schedule determined by government, the first year is usually about 10% of the fund and diminished afterward.

Recent polls suggested that people are planning to work past age 65, some are until 70. The economic condition was not favorable for many decades due to globalization and global recession. The employment was uncertain. The stock market is jittery. Still with some saving discipline and commitment of Canada government, Canadians still can be able to retire at 65. The pension system of Canada is one of the strongest in the world according to 2013 Mercer Global Pension Index. Although the housing price in the last twenty years had caused some saving problem for Canadians but with some good budget balancing there is still good saving in the long term for this purpose.

Retirement in Canada

Currently we can apply for Canada Pension at the age of 60 for a permanent reduced amount (for 2012 is 0.52% per month; for 2013 is 0.54%; for 2014 is 0.56%; for 2015 is 0.58% and for 2016 is 0.60%). From 2012 to 2016, the government will gradually change this early pension reduction from 0.5% to 0.6% per month. This means that, by 2016, if you start receiving your CPP pension at the age of 60, your pension amount will be 36% less than it would have been if you had taken it at 65.  If you were born in 1956 (you are now 57 in 2013) and want to retire at 60 (in the year 2016), your pension will be reduced 0.6% per month prior to 65. (http://www.servicecanada.gc.ca/eng/services/pensions/cpp/pdf/ISPB-348-11-10_E.pdf)

The Old Age Security (OAS) is the basic benefit that can only be applied at 65 and if you are not in Canada for 40 years, the amount will be prorated, based on the number of years you have lived in Canada. The full benefit for 2013 is $550.99 per month. If you had worked for the same long period of time and your contribution made to CPP at an average earning, your CPP could be at the maximum or about $1012.50 for 2013 rate.

When applying for OAS you also apply for the Guaranteed Income Supplement (GIS) at the same time in the same application form. It depends on your personal income of prior year (issued by Canada Revenue Agency on your income tax return) your GIS amount will be determined accordingly, this monthly non-taxable benefit can be added to your AOS pension. If you receive GIS and your spouse or your common-law partner is between 60 to 64, he or she also can receive Allowance benefit as well.

http://www.servicecanada.gc.ca/eng/services/pensions/oas/pension/index.shtml

So, if you lived your whole life and worked the same number of years with an average earning in Canada, your pension will be in good shape. The basic benefit that you and your spouse receive from Canada pension system plus some extra saving will make your living standard not far off from the living prior to retirement - it will be in the range from 50 to 70% of it. If you retire early, you only rely on pension income (including company pension benefit if you have one), so you have to use your saving until you are 65. Planning for early retirement that includes the plan for saving is the key. Again your life style will play a big role in your retirement strategy. But the possibility is real to achieve an early retirement in Canada.