Retiring Soon? Why You Might Need Less Than You Think

If you’re planning on retiring soon, don’t sweat the suddenly smaller numbers in your brokerage account. Here’s why your golden years may still be safe.

Senior couple at the lake having a picnic

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If you listen to your financial advisor or most talking heads on television, they’ll say you’d better not think of retiring soon unless you’ve got a cool million in assets. Some even recommend you accumulate upwards of $2 million for a comfortable middle class retirement.

Many people had that lofty goal squarely in their sights… up until a couple of months ago at least. With the TSX Composite collapsing some 30% from its recent 52-week high, retirement dreams have been put on hold for many Canadians. Losing a third of your capital certainly isn’t going to help, that’s for sure.

But this doesn’t necessarily mean your retirement dreams need to be delayed by 5 or 10 years. In fact, you might be closer to retirement than you think. Here’s an optimist’s view of the situation.

You need less than you think

According to the best minds in the industry, you’ll need between 70% and 80% of your current income from passive sources if you plan on retiring soon.

I couldn’t disagree more. Many people find their expenses plunge during retirement. Think about it; you no longer have to commute to work, spend money on office attire, or put cash aside for retirement. The mortgage is likely paid off, and your kids hopefully don’t need much financial support.

Some argue expenses like travel and pricey hobbies will cost a bundle in retirement, but most retired folks I know don’t travel nearly as much as they envisioned. Besides, if you’re hoping on retiring soon, there isn’t much travel going on right now anyway.

Fewer taxes

Another advantage to folks who are retiring soon is they’ll pay fewer taxes than they do now. Especially if they focus on dividend income. In fact, a married couple can easily make $100,000 per year in tax-free income if they collect their cash solely from dividends.

Depending on your province, you’re looking at between $20,000 and $30,000 in taxes if you make $100,000 per year from a regular job.

The beauty part of focusing on the dividends today is it’s a great time to lock in some terrific yields. Stocks that were paying 4% dividends a few months ago now pay investors anywhere from 6% to as high as 8%.

CPP and OAS

Canada’s national pension plan is solid, and the government isn’t about to cut Old Age Security payments anytime soon either. Together, these can easily add up to $1,000 each per month for both you and your spouse, even if you had periods of unemployment during your working career.

In fact, I’ve argued before it’s very possible for folks retiring soon to do so completely on CPP and OAS. It won’t be a glamorous retirement, but sometimes your freedom is more important.

Other options

Canadians who plan on retiring soon also have a couple of other options to maximize their financial future.

The first is to sell the family home and move into something smaller, like a condo. It’s a solid plan, and not just for the financial benefits, either. Who wants to spend their golden years taking care of a yard and making sure the roof doesn’t leak?

The other thing folks can do is get a part-time job. Working 10 to 20 hours per week can easily add five figures to your annual salary. It’ll also get you out of the house, force you to socialize, and help keep your skills sharp. Or, you could do what many other people do and use your retirement as an excuse to start a new career.

The bottom line

There are plenty of options for investors who might be retiring soon with a suddenly diminished nest egg. Between selling the family home, paying reduced taxes because of the new nature of their income, or getting a part-time job, there are plenty of reasons why you might not need as much as you first thought.

And remember, waiting a couple of years is a viable option too. This violent downturn could rebound just as quickly once it’s obvious the economy will return to normal.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith has no position in any stocks mentioned. 

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