FIRE at 52, how to draw down what we’ve worked so hard for
To FIRE or not to FIRE.
Is that really the question?
Whether you agree with the “movement” or not, many investors strive for Financial Independence (so they can Retire Early (FIRE)).
That said, I have full respect for folks that have financial goals and who work damn hard at them, sometimes obsessively, to achieve them – if that’s what they really, really want.
A reader of the site emailed me many moons ago about his early retirement dreams – wondering if they’ve reached their enough number to achieve FIRE at age 52.
Let’s look at their case study and find out!
Hi Mark – love the blog! Lurker here since I don’t comment on your site.
I know my wife and I are in a fortunate position: we live frugally, we’ve saved, we’ve invested and now we’re ready to leave the workforce around age 52. FIRE at 52!
Our only child is entering university soon (this fall) and we figure we’ll have enough assets to pay for part of her education for the next four years. After that, she’s on her own like we were in younger days!
Do you think we’re ready for FIRE? Here is our assets and some details so you can run some numbers and give us a take!
- Ontario based, up north of Toronto.
- $800k combined invested (such as $142,000 combined TFSAs; $510,000 combined RRSPs; $148,000 in a combined/joint non-registered account).
- Paid off home worth out $450,000, with no plans to move in next 10 years.
- Paid off x2 vehicles, no plans to buy a newer, used car for at least 5 years.
- Zero debt – yeah!
- I’ll have a military pension that will pay me with $40,000 per year (pre-tax) at age 55, indexed, for life. (The pension increases by Consumer Price Index (CPI) each year which is great.)
- My wife has no pension plan.
- I will probably putter-away with various side-jobs to keep me busy – so I expect to earn about $10,000 net per year from that until age 65 or so. We’ll see!
Given we only spend $4,000 per month, on average, including travel – I’d done my own math and I think we’re good to retire early at age 52 later this year.
Thanks very much for any insights…
Sam and Margaret
Thanks for your email.
Given the fact you have zero debt, and don’t intend to take on any, I suspect you’ll be more than fine with your existing assets to retire.
I say that based on various case studies related to retirement, what I’ve learned from folks on this Retirement page here and some quick, back-of-the-napkin calculations.
Assuming you draw down your RRSPs via lump sum withdrawals or using a RRIF (Registered Retirement Income Fund (RRIF), that $510k inside your RRSPs should last a number of years even without needing your military pension. I would think that’s the best route to take myself.
Image courtesy of using TaxTips.ca RRSP-RRIF withdrawal calculator.
Without withdrawing all RRSP assets right away; leaving some ($100k+) for growth, you could withdraw $40,000 (or more) per year starting at age 52 and not deplete the RRSP/RRIF until almost 15 years later.
In making other assumptions, my own assumptions:
- You’ll both get full Old Age Security (OAS) later on, at age 65, around $7k per year ($14k combined).
- I’ll assume there are about 25 or so years of Canada Pension Plan (CPP) contributions for you Sam, and some CPP “drop out” years for Margaret. Combined, that should give you roughly $10k at age 60 to spend.
Lastly, I’ll assume you’ve ditched some very expensive mutual funds by now and you’re investing in low-cost, diversified ETFs for a stress-free portfolio.
In doing so (and not losing your assets to high fee products) when I quickly add up your $40k per year from your RRSPs/RRIFs, plus your $10k per year (net) from your odd jobs; along with a few thousand per year in distribution income from your non-registered account, you’ll meet your $4,000 per month in spending needs even without starting your inflation-protected pension, CPP or OAS benefits.
But…these are only my assumptions without any formal calculations nor insights into your tax situation.
For details, I enlisted the help of Owen Winkelmolen, a fee-for-service financial planner (FPSC Level 1) and founder of PlanEasy.ca. I thought Owen could provide a more professional take on your situation.
Owen has provided other readers with some similar professional insights in these posts here:
Well Mark, you’re not far off. Sam and Margaret are in a great financial position thanks to some significant savings, no debt, and a generous pension plan in their financial future.
Here are more assumptions and details I’ll use to help us figure things out:
- CPP: I will assume there are 27 years of full CPP contributions (age 25-52) plus child rearing drop outs for Margaret; which means she will have 69% of max CPP at age 60 = $6,118/year x2
- OAS: Yes Mark, let’s assume full OAS at age 65 = $7,217/year x2
- In addition Mark, we’ll assume for the couple that Sam is going to lose a bridge benefit associated with his pension, so it will actually drop to $31,000 per year at age 65 (not uncommon for workplace pension plans).
- Assume ETF portfolio with average fees 0.16% – low cost is a better cost!
- Assume no available TFSA contribution room
- Assume no available RRSP contribution room
- Assume both birthdates July 1, 1967
- Assume assertive risk profiles – given Sam has a pension.
I’ve also made some additional lifestyle assumptions…
Added spending for infrequent expenses: another $912/month
This type of spending is something that many people forget when creating their retirement spending plans – but as a fee-only-planner I want to include this. Because infrequent expenses are typically short-term spending (within the next 1-7 years after retirement) the best way to plan for this spending is to include it in monthly expenses. The income for this spending can be placed in a high-interest savings account and drawn upon as these expenses arise. Here is what I’ve included:
- Vehicle upgrades: $538/month (2 vehicles, purchase price $30,000, trade-in value $10,000, upgrade every 7-years)
- Vehicle repairs and licensing: $103/month (2 vehicles, $240 annual license, 20,000km per year at $0.05/km avg. maintenance costs)
- Home repairs: $188/month ($225,000 structure value, age of home 30-60 years, 1% per year)
- Electronics upgrades: $83/month ($1,000 per year for computers/TV/newer cell phones, etc.)
So Sam and Margaret, I’ve assumed your total new expenses will be $4,912 per month or $58,944 per year.
Do they have enough for FIRE? $800k invested and a workplace pension?
Sam and Margaret are in a great position for retirement but they’ll have a very high withdrawal rate their first few years. With $800,000 in combined investment assets their target spending of $58,944 per year is equivalent to a 7.4% withdrawal rate (and that’s even before we’ve calculated tax on those withdrawals). That’s rather high on the surface. The good news is that their pension is only a few years away which will drop their withdrawal rate considerably. They can start with a higher withdrawal rate and then decrease withdrawals as the pension, CPP, and OAS start to kick in.
Because of their high withdrawal rate in the first few years Sam and Margaret will see their portfolio value drop between age 52 and 55. This isn’t a problem per se, but it could be hard to manage psychologically given most investors are so used to seeing their portfolio value increase year over year, so it’s good to highlight now and prepare for it mentally.
After the pension, CPP, and OAS kick in they will begin to see their portfolio value increase again.
Here is what their net worth looks like over time:
Once Sam and Margaret reach age 55 their defined benefit pension will begin and their withdrawal rate will drop considerably. Pension income will be taxed at their marginal tax rate, and will trigger additional income tax, but Sam and Margaret will be able to split their pension income.
In a few years, at age 55, they begin to pay more income tax however they will have more than enough to meet their expenses. In fact, immediately from age 52 we want to make sure we maximize TFSA contribution room each year.
You can see below how their sources of income will change over time, quite substantially, thanks to a great mix of assets to a healthy retirement income:
Maximizing TFSA contribution room can be done using Sam and Margaret’s non-registered investments – in the early years of retirement. When those non-registered assets are depleted, they can make extra RRSP withdrawals.
The benefits of early RRSP withdrawals
Making RRSP withdrawals early, in their 50’s, and shifting those investments into their TFSA will help Sam and Margaret stay in the 20% tax bracket for their entire retirement. If we wait to draw on their RRSPs, the conversion to RRIFs at age 72 will trigger mandatory minimum withdrawals and these withdrawals will push them into higher tax brackets. By melting down their RRSPs, slowly over time, we avoid these higher tax brackets. The added benefit of this strategy is that most of their assets end up in their TFSAs towards the end of their retirement. This increases income flexibility and decreases tax on their estate.
Due to their income level and sources of income Sam and Margaret can expect a few hundred dollars per year in government benefits in the form of Ontario’s Energy and Property Tax credit but the effect on their overall retirement plan will be minimal.
Sequence of returns and withdrawal rate concerns?
Everything looks great so far but we’ve created a plan using a constant rate of return, which isn’t very realistic, so we need to look at how their plan fares using variable rates of return each year. We can look at the success rate of their plan by taking their current investment assets and planned withdrawals and projecting them over historical periods of stock, bond, and inflation rates.
When we do this projection, we see that the success rate of Sam and Margaret’s plan is 100%, which is fantastic, but there are historical periods where Sam and Margaret’s investment balance drops by a bundle – up to 2/3rds. Although still successful, such drops and scenarios could be difficult to stomach. This means it will be important to have some flexibility within their retirement spending during long periods of below average investment returns. Taking action during extended periods of low or negative investment returns may not be necessary but it will feel good to have a plan in place.
Overall Sam and Margaret have a great retirement plan. They don’t need to worry about their retirement income and can start enjoying their extra free time! FIRE at 52 is here!
As always, we recommend updating your financial plan regularly to take into account changes in personal goals, investment returns, tax rates, government programs, and much more.
Sam and Margaret have done very well for themselves, thanks to strong savings and investments, no debt, and a generous pension plan to draw down. Thanks very much to Owen for sharing his insights and expertise!
Owen Winkelmolen (no affiliation) is a fee-for-service financial planner (FPSC Level 1) and founder of PlanEasy.ca. He specializes in budgeting, cashflow, taxes & benefits, and retirement planning. He works with individuals and young families in their 30’s, 40’s and 50’s to create comprehensive financial plans from today to age 100.
Disclosure: My Own Advisor, and Owen, have provided this information for illustrative purposes. This is not direct investing advice nor should it be taken as such. Assumptions above are for case study purposes only. If you have specific needs, please consider consulting a fee-only financial planner to discuss any major financial decisions.