Have you ever considered retiring early? Those words may seem like a pipedream to many Canadians, but early retirement can still be possible, even in periods of high inflation and down markets. The key to retiring early is to have a plan.

In this article, I share the key strategies you’ll need to follow to retire early in Canada.

What Is the FIRE Movement?

If you enjoy reading personal finance content, including financial blogs, there’s a good chance you’ve heard of the FIRE movement. FIRE is an acronym for Financial Independence Retire Early, and it’s been ascribed to an increasingly large group of people who aspire to retire much earlier than the traditional retirement age of 60 or 65.

To achieve financial independence and retire from traditional work in your 30s or 40s, you need to save money at a much faster rate than financial advisors usually recommend.

For example, many FIRE adherents embrace extreme frugality and save 50% to 70% of their annual income, investing it in low-cost index funds to achieve stock market returns. The idea is that by following this pattern, you may be able to retire from active work after only 10 or 15 years.

It’s an extreme lifestyle that certainly is not for everyone, but the promise of financial independence is an appealing one.

What Is the 4% Rule?

The 4% rule was popularized by financial adviser William Bengen in 1994. After researching historical stock market behavior, he predicted that retirees could ensure that their investments outlive them by withdrawing 4.2% in the first year of retirement, followed by an inflation-adjusted 4% withdrawal in subsequent years. His general rule of thumb assumed that the money is invested in a stock market-based portfolio.

Proponents of the FIRE movement often point to the “4% rule” to determine whether you have enough money saved to live on for the rest of your life.

The amount you need to save depends on how much you need to live on after you retire early. That’s your 4%. For example, if you think you’ll need $50,000 annually when you retire, you’ll need to save 25X that amount to follow the 4% rule. $50,000 is 4% of $1,250,000.

Here’s how the calculation works:

1. Start with your target income after retirement.
2. Multiple that amount by 25.
3. That’s how much you need to save to achieve the Safe Withdrawal Rate of 4%.

Example A: $50,000 X 25 = $1,250,000.

If you need to earn a higher income, you’ll need to save more:

Example B: $75,000 X 25 = $1,875,000.

Over the years, people have debated whether 4% is realistic. After all, it assumes that your spending patterns won’t change during retirement. But that may not be the case. You may incur additional healthcare expenses as you age, need to help a family member cover a financial emergency, or decide that you want to travel more often. With that in mind, it’s best to use the 4% figure as a rule of thumb. 

How Much Will I Need to Retire?

The amount needed to reach financial independence and retire early differs for everyone. It depends on many factors, such as your retirement age, where you plan to live, your desired lifestyle, the number of dependents you may or may not have, etc.

For example, if you are single and reside in a low-cost-of-living area, housing will be more affordable, and you only have yourself to look after.

If you are married or still have children living at home, your living expenses will undoubtedly be higher, at least for some time.

Of course, you’ll need more income if you plan to travel extensively when you retire or own multiple properties.

Remember that most people require less income after they retire, especially if you’ve paid off your mortgage, your children’s education is paid for, etc.

Can CPP and OAS Help Me Retire Early?

For generations, Canadian workers have been able to rely on the Canada Pension Plan (CPP) as a way to supplement their retirement income. And Old Age Security (OAS) is another income-tested benefit that kicks in at age 65.

Canada Pension Plan and Old Age Security could help you retire early if you include the benefits in your retirement income calculations. While you can’t receive CPP until age 60, you may not need to draw as much income from your investments after age 60 or 65 if you can use CPP and OAS as a supplement.

Strategies that Will Help You Retire Early in Canada

If you can follow these tried and true financial principles consistently for many years, you can be in a position to retire early.

Open an RRSP Account

If you’re not contributing to a Registered Retirement Savings Plan (RRSP), you’re missing out on one of the best wealth-building tools in Canada. RRSP contributions are tax-deductible; you can save between $200 and $500 for every $1000 you contribute to an RRSP, depending on your marginal tax rate.

In addition, RRSPs provide tax-sheltered growth, you won’t pay any tax on the income earned in your RRSP until you begin withdrawing the funds in retirement. For more information, check out our RRSP guide.

Contribute to a TFSA

In 2009, the Canadian government introduced a new tax-sheltered savings plan called a Tax Free Savings Account, or TFSA. While the Tax-Free Savings Account is not a dedicated retirement savings plan (you can use it for any savings), thousands of Canadians have included their TFSA in their retirement plan.

Unlike an RRSP, TFSA contributions are not tax-deductible; however, the funds in your account are tax-sheltered. But the best part about a TFSA is that the withdrawals are not taxed, and you get to keep every dollar you earn in your TFSA.

If you plan to retire early, maximize a TFSA’s flexibility.

Pay off Your Debt

An excessive amount of debt will derail your early retirement plans. The obvious culprits are high-interest consumer loans, like credit cards or unsecured lines of credit. If you owe money on one or more credit cards, make paying them off a top priority. Once done, ensure you consistently pay your credit card balance monthly to avoid paying the high-interest rates.

But credit cards aren’t the only problem. Big car loans have become a wealth killer. Twenty years ago, the most popular cars in Canada were compact sedans like the Honda Civic and Toyota Corolla. You could purchase one new for around $18,000 with a $300 monthly payment. Today, the most popular vehicles are pickup trucks priced well above $50,000. The average car loan payment has swelled to over $700/month.

If you need to accelerate your investment contributions to retire early, a $700 car payment over 84 months doesn’t help.

Avoid Lifestyle Inflation

Expensive pickup trucks and SUVs are just one example of lifestyle inflation, another trap that could prevent you from retiring early. Lifestyle inflation occurs when you gradually increase your spending as your income rises. Examples include selling your house and moving to a nicer neighbourhood, increasing the frequency of expensive vacations, or buying a cottage property. Even smaller ticket items, like sporting events or dining out often, can be examples of lifestyle inflation.

If you can maintain the same lifestyle as your income increases, the gap between your income and your expenses will grow, and you’ll have more cash flow you can use towards saving for early retirement. Lifestyle inflation is a trap; avoiding it can become your superpower.

Reduce Your Monthly Expenses

This may sound obvious, but if you’re looking for ways to increase your cash flow, start by looking at what you’re currently spending, and fund ways to reduce your monthly expenses. Check your bank account and credit card statements for the past three months and add up how much money is going to discretionary expenses. You may be shocked to learn how much you spend on certain items. From there, create a budget so that you have a plan for your money in the future.

Increase Your Income

You can only cut your expenses so far. At some point, to increase your cash flow, you’ll need to increase your income. The good news is that making more money has never been easier. The gig economy has opened up opportunities that didn’t exist a few years ago. Take stock of your current situation, and assess your skills and opportunities. Is there a side hustle you could start that could help you earn a few hundred or thousands of dollars more per month? You might be surprised when you find out what’s possible.

Track Your Net Worth

Your net worth is the difference between your total assets and liabilities. Assets include the value of your home and vehicles, your investments (like RRSPs and TFSAs), cash savings, and more. Liabilities include the mortgage on your home, car loans, credit card balances, or outstanding debt. You can calculate your net worth by subtracting your total liabilities from your total assets.

For example, if your total assets were $600,000 and your liabilities were $250,000, your net worth would be $350,000. By tracking your net worth from month to month, you’ll be able to stay on top of the upward or downward trend. The more in tune you are with your net worth, you’ll identify ways to grow your net worth more quickly.

Remember that net worth can be tricky and not a perfect indicator of wealth. For example, many Canadians show a high net worth, but most of it is home equity due to the sharp increase in the prices of homes over the past decade. You could show a high net worth while having little income-producing assets, like stocks and bonds or rental real estate.

Don’t Rely on Your Workplace Pension Plan

According to Benefits Canada, more than 30% of Canadians rely on their workplace pension as their primary source of income at retirement. But maximizing a workplace pension will require most people to work into their 60s.

If you want to retire early, you can’t rely on a workplace pension as a main source of income. If you are fortunate to have one, maximize its value as much as possible during your working life, but also focus on your RRSP and TFSA contributions and other income vehicles, such as income-producing real estate properties.

Reduce Your Tax Burden

I don’t mind paying income taxes because I live in a country where I know those taxes provide services that improve the quality of life for my family and all Canadians. You could argue that our taxes aren’t always spent as efficiently as we would like, but that’s another conversation.

While you may happily pay your fair share of income tax, you may be paying more than you should. If your goal is early retirement, look for ways to (legally) reduce the income tax you pay to help you reach your goal faster.

One obvious way to pay less income tax is to maximize your RRSP and TFSA contributions, but you can employ many other strategies. Depending on your situation, there may be ways to income split, qualify for additional tax credits, make your investments more tax efficient, etc.

I recommend that you consult an accountant who understands your situation and can advise you on other ways to reduce the amount of income tax you pay.

Final Thoughts on Early Retirement

Retirement planning is critical, regardless of when you plan to stop working. To figure out when you can retire, you need to consider your desired lifestyle, personal savings, government pensions, life expectancy, and more.

But don’t assume that early retirement isn’t a possibility. Even if you waited until your 30s or 40s, it’s never too late to start planning your retirement. Run the numbers on a retirement calculator (there are plenty of calculators online) to gauge your financial health and see where you stand today.