Some of the posts made by Canadian Dream on early retirement got me thinking about how much of an nest egg Gen-Xers (and younger people) would need to retire early. I just turned thirty-three myself and I have a vague notion of retiring some time after I turn fifty but to be honest I haven’t given it much thought.
In calculating my retirement number, I would not count on receiving any benefits from Old Age Security. OAS is paid out of general government revenues and who knows in what form the program will survive (if at all) three decades from now.
It is a fairly good bet that the Canada Pension Plan will pay out some benefits, but again I would prefer not to count on it. First, early retirees are unlikely to get full CPP benefit. Second, it is possible that some future government will raid the CPP to the detriment of beneficiaries.
Many financial planners recommend a 4% withdrawal rate for people who retire at the traditional age of 65. For early retirees, this rate would be far too optimistic, as their capital should withstand the ravages of inflation for up to 40 years.
Let’s assume that retirees need a capital of 25 times annual expenses for the traditional retirement at 65. Early retirees need to bridge the gap between their retirement age and 65 and let’s conservatively estimate that living expenses are paid by consuming capital (assuming no growth). Under these assumptions, if my annual expenses is $x and my average tax rate is ATR, a rough stab at the nest egg required would be (assuming a 3% actual rate of return over inflation and discounting 25 by 10 years):
Nest Egg Required = (18 + [65 – early retirement age])*x / (1 – ATR)
Let’s say I want to retire at 55 and my average annual expenses in retirement would be $40,000 (in future dollars) and my average tax rate is 15%, then I would need a nest egg of $1.36 million. Of course, it is a big number but it is probably a bit on the conservative side. Note that you might need less if you plan to work a little bit during retirement or if you are more confident than I am that government benefits are ironclad.
