Saturday, November 06, 2004

Determine a date on which you plan to retire

How many years before you retire?
So you’ve decided to take the leap. You plan to retire early. First, I think you should set a date for this. Setting a date for your retirement plan will have you adjust budget, savings, investments, etc., in order to be able to get retired by that date. If you don’t do it, you might be tempted to procrastinate. For your plan to succeed, you need to stick to it.

Be conservative; add an additional year of work to your plan. If things go as planned, you will be able to retire even sooner, giving you satisfaction and reward. If things go wrong, this extra-year will allow you to make some adjustments by adding up to a year of savings instead of a year of withdrawal, which is why one year make such a large difference in a retirement plan.

Stick to your plan
It is important to stick to your plan. It is possible that the stock markets are going to skyrocket two or three years before you retirement date and that you would be tempted to retire sooner. Don’t. Many of those who retired sooner when the market was high in 2000 had the bad surprise of seeing the value of their nest-egg decrease much (if they held stocks or stock-like investments) in 2001. Don’t forget that the investment return estimates are based over a long period of time, so don’t feel too rich if for some years your portfolio gets higher than expected. First rule: retire at the date you planned, if you can. Second rule: if you don’t apply first rule, retire when the market is low. Thus, you are more likely to really have enough money to retire and there are some chances the market will get back on track when you will start withdrawing money from your portfolio.

Choosing the best part of the year for you to retire
Now that you’ve decided in how many years you want to retire, you have to choose a date. Is it better to retire in December or in June? My suggestion: retire at the beginning of the summer, say June 1st.

First, retiring during the summer will have you enjoy summer days as your first retirement days. This might have an important benefit on your moral, since retiring will be a major change in your life. It can be very stressful for many people. Retiring in the summer will also allow you to have time to be with your relatives (who will have job vacations). Take some good time, thinking about your projects to come, enjoying your new life, etc. Reward yourself for the frugal lifestyle that led you to this achievement.

Many projects you might have will likely begin at the end of the summer / beginning of fall: going back to school, getting a part-time job, volunteering, etc. Retiring during the summer will let you with time to prepare these projects and to decide what you want to do.

There may be a fiscal benefit by retiring June 1st. In the US, Canada and many other countries, tax rates are progressive: the more you gain, the more you pay as a percentage of your personal income. Each progressive step in the tax rate system is named a bracket. For instance, the first $0-$20k you earn might be taxed at 20%, while the part over $100k could be at 35%. The actual value depends where you live (country and state or province).

If you retire in December, you’ll have worked the full fiscal year, thus your personal income for that fiscal year will be that of your salary, say $60k (plus investments returns not tax-protected). However, if you retire in June and don’t withdraw from your IRA or RRSP, your income for the year will be less than $30k. Instead of being taxed at the higher bracket, you will be taxed at a lower bracket. Thus, instead of working for the government, you will have worked a little bit more for yourself. Instead of earning a net $20/hour after taxes, for instance, you will earn a net $30/hour that year.

In Quebec (Canada), people get an additional benefit if they retire halfway during the year. This might also apply to you if you have an employer plan (401k). In Quebec, RRQ is a public Pension Plan. All workers must contribute to the plan if they earn more than $3500. The contribution is set as a percentage of income, up to a maximum. This year, the maximum is $40k. How much you will get from the Pension Plan depends upon the number of years you have contributed to the plan and your average income. But for any year, the income calculated in the average cannot be over $40k. That is, if you earn $80k in a given year, only $40k will be used in the average. Thus, if you retire in June, you’ll add almost a full year of contribution to the plan (depending upon your annual wages), increasing the amount you will obtain when you reach 65, even if you work only a few months that year.

15 Comments:

Blogger Viajera said...

Great plan! I have a tentative date for 2019 at age 45, but I may be able to do it sooner. Now my date will be June 1, 2019. Hopefully Mr. Bush won't blow up the world by then.

12:44 PM  
Anonymous Anonymous said...

How much do you plan to have saved at 37 and what is your annual budget and inflation factor?

8:39 PM  
Blogger Jack said...

Anonymous,

My budget is here:
http://retireat37.blogspot.com/2004/10/my-15k-budget.html

I did use Firecalc http://retireat37.blogspot.com/2004/09/firecalc.html to determine what is the probability of having enough money, which I think is better than using inflation estimates (inflation is not that bad if, at the same time, your investiments yields are high. What is bad is stagflation, that is, when inflation is high and the stock market isn't increasing. Japan has been in this situation for more than a decade now).

You can also look at this post:
http://retireat37.blogspot.com/2004/11/inflation-is-early-retirees-biggest.html where I discuss about the distinction between inflation as measured by CPI and your personal inflation (how your own expenses increase or decrease with time). I think the latter is much more reliable and, the good news is that you have some control on it while you don't have any control on CPI.

Regards,

Jack

6:20 AM  
Anonymous Anonymous said...

The link shows your current budget but not your target retirement nestegg at 37. What rate of return are you forecasting after age 37? I have developed an excel sheet that indexes CPP,OAS including your spouse as well as a personal inflation rate. Email me at martik@telus.net if you want a copy.

7:33 PM  
Blogger Jack said...

Hi again "Martik".

I plan a nestegg of about $350k (2012's dollar). I expect an average return of 4% over inflation (currently, in the 6-7% range).

I'll contact you to get your spreadsheet, since I'm quite interested by it.

- Jack

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