How Does Quitting Your Job Before 65 Affect Your Retirement

Lots of people dream of being able to retire before age 65. Not only can working be stressful, it may not be that much fun. It definitely can’t compare with your vacation time, which for many people, if how they imagine retirement will be.

If you are convinced that early retirement is for you then you will need to save more money while you are working to make sure you have enough money for the rest of your life. Not only will you have less time to save money, you’ll also spend a longer time depleting your savings.

In The Real Retirement by Fred Vetesse and Bill Morneau (Fred is an actuary and Bill is now the Minister of Finance for the Government of Canada), the authors spelled out the extra costs of retiring early. Their conclusion is: It’s quite expensive to leave the work force before age 65. Here’s why:

You will receive a smaller Canada Pension Plan payment because you don’t have as many qualifying years. Remember C.P.P. is guaranteed for life and indexed for inflation so this will affect your retirement income for the rest of your life.

You will need to significantly increase your savings rate while you are working and raising your family to pay for your decision to retire before age 65. Remember according to our experts, you need to save 6-10% of your family income for 40 years to have as much money in retirement as during your working years (minus fixed costs like mortgages and child rearing expenses).

So how much extra will you need to save for those 40 years? Vetesse and Morneau concluded you would need to increase your savings rate by 3% for every year you want to retire early. See the chart below for some examples.

If you want to retire at age:                          Your yearly savings rate will be:
65                                                                        10%
62                                                                        19% (10% + 3 years x 3%)
60                                                                        25% (10% + 5 years x 3%)

Remember, this calculation is to balance the amount of money you have to spend while retired with the amount of money you have to spend while working. So if you want out by age 60, plan to save 25% of your family income for 35 years.

People who plan to retire by age 50 or earlier really have to dramatically increase their savings during their working years. On some “Retire at 40” sites I’ve visited, people are saving 50 or 60% of their incomes in order to get out at a young age. Many of these folks don’t have children or have 1 child. I’ve already mentioned, let’s hope not everyone follows their life plans, or we won’t have much of a country in 50 or 60 years.