How To Retire Early in Canada – Say Goodbye To Your 9-5

Posted on December 5, 2023 by Dan Kent

Many Canadians dream of retiring early and enjoying their golden years without worrying about financial stability.

With proper planning and smart choices, retirement in Canada is not only attainable; it can be a reality. This article will explore strategies and considerations that can pave the way to early retirement.

One of the primary factors to consider is ensuring a stable financial foundation, which involves building a substantial nest egg that will last through retirement.

By adopting a disciplined investment approach, incorporating well-thought-out strategies, and utilizing tax-advantaged options, people can maximize their retirement income and lay the groundwork for a comfortable lifestyle.

When planning for early retirement, it is also crucial to consider healthcare coverage, housing costs, loans or mortgages, and potential unexpected expenses. By understanding how these factors can impact retirement plans, individuals can achieve their goal of retiring early while maintaining financial security and peace of mind.

How to retire early in Canada

  • Develop a strong financial plan
  • Try to maximize your current salary
  • Minimize debt at all costs
  • Save aggressively according to your plan
  • Invest according to your risk tolerance
  • Utilize your tax sheltered accounts like RRSPs and TFSAs to build your nest egg quicker
  • Be realistic about your early retirement goals

Develop a strong financial plan

To retire early in Canada, starting with a solid financial plan is crucial. This involves assessing one's current financial situation, setting realistic retirement goals, and creating a budget to achieve those goals. Calculating how much money will be needed for retirement is essential, and determining the best strategies to save and invest that money.

When I first decided to develop a financial plan, I was overwhelmed by the myriad of thoughts racing through my mind. Where should I begin? What goals should I prioritize? The enormity of it all made me wonder if I was even up for the task. Of course, I was twenty years old at the time and relatively inexperienced. But taking the time to do it then has paid off.

I quickly realized the importance of understanding my income and expenditures. For a month, I tracked every penny I spent, categorizing expenses into necessities, luxuries, and savings. I discovered how much money was being lost on impulsive buys and non-essential items.

Minimize debt at all costs

High-interest debt, such as credit card debt, can hinder savings goals and delay early retirement plans. Strategies for managing debt include consolidating loans, negotiating lower interest rates, and prioritizing paying off high-interest debt first.

It's important to be mindful of lifestyle inflation, as it can erode the potential for savings and delay early retirement. As income increases, it's natural to want to upgrade one's lifestyle, but this can lead to increased expenses and debt that offset potential savings.

To counter this tendency, maintain a frugal mindset and focus on long-term financial goals rather than short-term material gains.

Save aggressively according to your plan

Prudent saving is an integral part of the financial planning process. Start by analyzing your expenses and identifying areas where you can cut back. Implementing a budget can help you save money.

Just as with my earlier financial planning journey, I tracked every expense. I was surprised to find out how small purchases, like daily coffee runs or unnecessary meals out could significantly dent my finances over time.

Once I had a grasp on where my money was going, I began to look for smart ways to save. 

I prioritized paying off high-interest debt first, and automated my savings by setting up automatic contributions to my retirement savings accounts like my Registered Retirement Savings Plan (RRSPs) or TFSA. In fact, early contributions to my RRSP allowed me to buy my first home at 22.

There is no "standard age." It is best to start as early as possible, say, in our 20s. But it does not matter if you are in your 30s, 40s, 50s, 60s, or whatever. We can always make a shift to allow for change in our lives. 

Invest according to your risk tolerance

After establishing a solid foundation of smart saving, it's time to focus on investing for retirement.

I started with books. Classics like "One Up on Wall Street" and "A Random Walk Down Wall Street" became my guides. Alongside this, I messed around with play accounts that my brokerage offered.

I made my first TFSA contribution in early 2009, at just 19 years of age. Starting early is key.

Investing is a necessity for those who wish to retire early. Utilize the power of compound interest by investing as early as possible and continually reinvest the returns for maximum growth. Be sure to diversify your investments and adjust your strategy as needed to achieve your retirement goals.

Investing does not have to be only stocks and bonds as well. People can invest in their own business plan that will maintain cash flow in retirement or an investment in a skill that will improve their employment eligibility.

Understanding your own early retirement situation

Having more freedom over our day-to-day lives to pursue our passions is a goal many people strive for as they work towards financial independence.

The concept, often associated with the "Financial Independence, Retire Early" (FIRE) movement, involves accumulating enough assets and savings to support a comfortable lifestyle without depending on a regular salary. 

To retire early in Canada, individuals must be aware of various factors that can impact their financial independence. These include understanding their expenses, considering the cost of living, and exploring investment strategies that will generate sufficient passive income.

Canada is a vast country, with many different regions. Depending on where you're at in Canada, many things can change. For example, with me being from Alberta, although our cost of housing is still high, it is much lower than British Columbia or Ontario.

If you need help, we can go over some of the best retirement calculators out there to give you a hand.

Develop a plan with popular Canadian retirement calculators

Canadian retirement calculators are tools used to help individuals plan for retiring in Canada.

Make a plan

These calculators provide estimates for retirement income needs that consider factors such as your current age, expected retirement age, the amount you have saved, and your desired standard of living during retirement.

The Canadian Retirement Income Calculator is a valuable resource that enables users to estimate their retirement income from various sources, including personal savings or investments. This calculator is user-friendly and provides a comprehensive forecast that allows them to make well-informed decisions regarding their retirement planning.

Several other retirement calculators are available to Canadian residents catering to specific requirements. Some of these calculators include:

  • CPP and OAS pension calculators: These focus primarily on estimating the income from the Canada Pension Plan and Old Age Security while keeping in mind the eligibility criteria and contribution requirements. You can find one here.
  • Employer pension calculators: Evaluate the potential retirement income from employer-sponsored pension plans.
  • RRSP and TFSA calculators: Simulate the growth of your Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account by factoring in your contributions and expected rates of return. Here is a great example.
  • Retirement fund withdrawal calculators: Project the duration of your retirement savings given a set withdrawal rate upon retirement and expected returns from investments.

Despite being helpful, it is crucial to remember that retirement calculators only provide estimates and make many assumptions.

People should always consider all of the factors in their own lives when deciding on how much income will be needed, timing, etc.

Factors to consider in developing your own early retirement plan

How much do you need in retirement?

One critical aspect of retiring early is knowing how much it will cost to upkeep our desired lifestyle. This calculation should consider essential expenses such as housing, food, healthcare, transportation, and discretionary spending on hobbies and entertainment.

Remember that inflation can also erode the purchasing power of savings over time, so be sure to factor this into the projections. Although inflation is highly unlikely to be where it's at today, it's certainly something you need to account for at least in relation to historical levels of inflation.

Cost of living in your area

Cost of living

Another important consideration is the cost of living in various regions across Canada.

As mentioned, given the vast cost differences between cities like Vancouver, Toronto, or more rural areas, prospective retirees should figure out if they're willing to relocate to a less expensive region or if they're comfortable for working a bit longer to accumulate enough wealth to retire early in a more expensive area.

How aggressive you are with your investments

Furthermore, achieving financial independence often involves incorporating robust investment strategies focusing on long-term growth and consistent returns. Passive income streams from well-diversified investments can significantly contribute to reaching one's early retirement goals.

The difference between a percent or two annual on an investment portfolio can mean years shaved off your working years. However, if you invest too aggressively for what you're comfortable with, you could end up panicking and making mistakes that cost you money.

So, it's very important to pick a strategy within your overall risk tolerance.

Understanding the concepts of early retirement in Canada requires a firm grasp of personal finance and a commitment to regularly evaluating and adjusting one's financial strategies as needed.

This involves careful planning and a willingness to adapt to changing economic circumstances to ensure a successful transition into financial independence.

Importance of sustaining income in retirement

A sustainable income stream is crucial for the average Canadian looking to retire early in Canada. It ensures that retirees can maintain their desired lifestyle without worrying about running out of money.

One option is to create a diversified investment portfolio that generates a steady income. This can be achieved by investing in a mix of stocks, bonds, index funds, and other income-producing assets.

Another option is contributing regularly in your working years to a Registered Retirement Savings Plan (RRSP) or a TFSA. These accounts allow for tax-advantaged growth and can be structured to provide a consistent income during retirement, income that is tax free in the situation of the TFSA.

Additionally, Canadians can receive government benefits, such as the Canada Pension Plan (CPP) and Old Age Security (OAS), which should be factored into their retirement income strategy. We'll talk about next.

Canada Pension Plan and Old Age Security

The Canada Pension Plan (CPP) is a public retirement pension plan designed to provide working folks with a monthly income during retirement. For most people, they will contribute to it throughout their working years.

CPP benefits are calculated based on the amount contributed and the time the individual has been making contributions. Generally, the more CPP payments made and the longer the participation in the plan, the higher the benefit amount received during retirement.

Old Age Security is another important component of Canada's retirement income system. Unlike CPP, it is a non-contributory social security program that provides a basic level of income to Canadian residents aged 65 and over. 

These benefits are funded through general tax revenues and are available regardless of an individual's employment history. The amount of benefits is determined by the number of years a person has lived in Canada after turning 18.

If you're looking to retire early, these benefits will likely not come into play immediately for you. This is because as we go over below, they are not available to you until around normal retirement age.

It is also important to consider the fact that if you do retire early, you will contribute less to these plans, and will earn less when you do get to the age where you can claim them.

  • Eligibility: To be eligible for CPP benefits, individuals must have contributed to the plan and be at least 60 years old. For OAS benefits, a person must be at least 65 years old and meet certain residency requirements.
  • Payment Amounts: The average monthly CPP benefit for new beneficiaries, as of April 2023, is $760.07. However, the maximum CPP monthly benefit for 2023 is $1,306.57. For OAS, the maximum monthly benefit is $698.60, subject to factors like income, residency, and age. If you're older than 75, your payment goes up.
  • Flexibility: Both CPP and OAS benefits can be deferred until age 70.
  • Income Tax: CPP and OAS benefits are considered taxable income and are subject to federal and provincial income taxes.

People must carefully consider the role and timing of all potential income sources in their overall retirement plan.

Remember that these public pension plans are designed to supplement, not entirely replace, income from other sources such as personal savings, investments, and employer pension plans.

Leveraging Registered Retirement Savings Plans

RRSP contributions

A Registered Retirement Savings Plan (RRSP) is a tax-advantaged account designed to help Canadians save for retirement. Contributing to an RRSP can be a powerful strategy for individuals aiming to retire early, especially those with higher salaries. 

When you make RRSP contributions, the amount is tax-deductible, reducing your taxable income and potentially lowering your overall tax burden. In turn, this allows you to save more money for your future retirement.

To maximize the benefits of RRSP, consider:

  • Contribute early and regularly: Start contributing as soon as possible and maintain a consistent schedule. The longer your money is invested, the more it will benefit from compounding, which can significantly increase your retirement savings.
  • Take advantage of employer matching: This can be extremely helpful. Some employers offer to match a portion of their employees' RRSP contributions. This money can significantly boost your retirement savings. Be sure to take full advantage of this opportunity if it is available. As I mentioned earlier in the article, I used employer matching plus my own RRSP contributions to by my first home via the First Time Homebuyer option with the RRSP.

RRSP withdrawal

One important aspect of leveraging your RRSP for more financial flexibility is understanding the rules surrounding RRSP withdrawals.

Generally, funds withdrawn from an RRSP are treated as taxable income. There are strategies to minimize the taxes you pay on these withdrawals:

  • Carefully plan your withdrawals: A lower withdrawal rate may result in less taxes owed. Withdraw only what you need to, and consider supplementing your retirement income with other sources, such as a Tax-Free Savings Account (TFSA) or non-registered investments.
  • Utilize the Home Buyers' Plan (HBP) and Lifelong Learning Plan (LLP): These programs allow you to withdraw funds from your RRSP tax-free for specific purposes (buying a home or paying for education), provided you repay the amount within a specified period. These withdrawals can happen before retirement and can help you achieve key financial milestones on your path to early retirement.

Remember, a strategic approach to RRSP transactions can significantly improve your chances of retiring early in Canada while minimizing your tax burden.

Utilizing the Tax-Free Savings Account (TFSA)

A Tax-Free Savings Account (TFSA) is  an amazing investment account that allows Canadians to earn tax-free income and save for their future needs. In fact, I think it is the number one investing tool in the country for Canadians to build their wealth.

By effectively utilizing a TFSA, one can make significant strides towards retiring early in Canada.

The primary advantage of TFSAs is that nearly all earnings, including interest, dividends, and capital gains, are tax-free. This means that when individuals withdraw funds from their TFSA, they do not have to pay tax on the amount, even if their investments have appreciated in value.

This is in contrast to the RRSP, in which investment earnings are not taxed while in the account, but are taxed as income when they're pulled out.

Maximizing annual contributions is essential to make the most of a TFSA. As of 2023, the yearly contribution limit is $6,500, and the total cumulative contribution room since 2009 amounts to $88,000 for those who were at least 18 in 2009. With the current rate of inflation, I have zero doubt that the limits will be going up in 2024.

If an individual hasn't contributed to a TFSA before or still has unused contribution room, it's crucial to make regular and consistent contributions.

It's important to understand that if individuals are planning to retire early, they will need a strong foundation of savings outside of their TFSA, such as RRSPs or other investment accounts.

By incorporating a strategic mix of resources and maximizing the benefits offered through TFSA, people can gradually build their wealth and work towards achieving financial independence and retiring early.

Financial Independence Retire Early (FIRE) approach

The Financial Independence Retire Early (FIRE) approach is a popular strategy among Canadians who wish to achieve financial freedom and retire early. The main principle of the FIRE movement, which is covered by many blogs these days, is to save and invest as much as possible while maintaining a frugal lifestyle. Individuals can eventually accumulate a significant enough nest egg to cover their living expenses indefinitely.

One of the key components of the FIRE approach is the 4% rule, also known as the safe withdrawal rate. This rule states that if an individual withdraws 4% of their investment portfolio annually, the portfolio should last for at least 30 years. The 4% rule was established based on historical data, taking into account factors such as inflation and market fluctuations.

In order to achieve financial independence using the FIRE approach, individuals need to determine their target retirement amount. This amount is calculated by multiplying one's annual expenses by 25, which takes into account the 4% rule.

For example, if someone's yearly expenses are $40,000, their target retirement amount would be $1,000,000 ($40,000 x 25). This is the amount of money they would need to accumulate in their portfolio to safely retire early.

Achieving FIRE requires dedication and discipline in terms of saving, investing, and minimizing expenses. Some ways to achieve this include:

  • Reducing housing costs by living in a smaller home or sharing with roommates
  • Cutting transportation expenses by using public transit, carpooling, or biking
  • Cooking at home instead of eating out and implementing meal planning
  • Eliminating unnecessary expenses such as subscriptions and impulse purchases

Remember that the FIRE approach may not be suitable for everyone. It certainly isn't for me. It involves making significant lifestyle changes and sacrifices.

It's important to weigh the benefits and drawbacks of pursuing this path before fully committing.

Health considerations

When planning for early retirement in Canada, it's essential to consider the health-related factors that may impact your plans. Inevitably, we all become seniors.

Health Considerations

Ensuring realistic access to quality healthcare and factoring in potential healthcare expenses are critical aspects of a comprehensive early retirement strategy.

In Canada, the publicly-funded healthcare system covers many medical services but does not cover all healthcare costs. Prescription medications, dental care, and vision care are typically not included in public coverage.

When you retire, you may lose access to employer-sponsored health benefits, which can cover or subsidize these expenses. Therefore, evaluating alternative options, such as private health insurance or setting aside a portion of your retirement savings explicitly for future medical expenses, is important.

Another essential health consideration is the potential for long-term care needs. As you age, the likelihood of requiring additional assistance with daily living activities increases. In Canada, long-term care facilities, home care services, and assisted living accommodations are often expensive.

 By preparing for these potential expenses in your early retirement planning, you can better ensure financial stability and peace of mind.

Remaining active and maintaining a healthy lifestyle can also influence the success of an early retirement plan. Regular exercise, nutritious eating habits, and stress reduction techniques can improve overall health, reducing the likelihood of chronic illness or disability later in life.

Taking care of your physical and mental well-being can enhance the enjoyment of your early retirement years and decrease the financial strain of healthcare expenses.

Early retirement planning in Canada must include a thorough understanding of the health considerations that could impact your financial and personal well-being. Addressing potential healthcare costs, evaluating insurance options, and maintaining a healthy lifestyle can increase the likelihood of a successful early retirement.

Disclaimer: The writer of this article or employees of Stocktrades Ltd may have positions in securities listed in this article. Stocktrades Ltd may also be compensated via affiliate links in this post. Stocktrades Ltd will run advertisements on our posts. These advertisements do not represent an endorsement by us.

Dan Kent

About the author

An active dividend and growth investor, Dan has been involved with the website since its inception. He is primarily a researcher and writer here at Stocktrades.ca, and his pieces have numerous mentions on the Globe and Mail, Forbes, Winnipeg Free Press, and other high authority financial websites. He has become an authority figure in the Canadian finance niche, primarily due to his attention to detail and overall dedication to achieving the highest returns on his investments. Investing on his own since he was 19 years old, Dan has compiled the experience and knowledge needed to be successful in the world of self-directed investing, and is always happy to bring that knowledge to Stocktrades.ca readers and any other publications that give him the opportunity to write. He has completed the Canadian Securities Course, manages his TFSA, RRSPs and a LIRA at Qtrade, and has compiled a real estate portfolio of his primary residence and 2 rental properties, all before his 30th birthday.