How to Retire Early in Canada

Early retirement is a dream shared by many Canadians, regardless of age, income, or lifestyle.

Being financially free at a younger age allows you to spend more time pursuing your goals and passions.

It could mean travelling the world, focusing on hobbies, starting a business, spending more time with family, or simply lounging on a beach sipping cocktails and watching the sunset.

Escaping the 9-5 grind, years or decades ahead of schedule is certainly an alluring prospect, which is why early retirement is such a prevalent topic in personal financial planning.

The enduring appeal of early retirement has spawned movements like Financial Independence, Retire Early (FIRE).

Devotees of FIRE structure their lives in a manner that enables them to reach their retirement goals much sooner than the traditional age of 65.

It entails aggressive saving, prudent investing, and a willingness to adopt frugal spending habits – something not everyone is prepared to do.

If you’re keen on retiring early, you’ll need to exercise shrewd money management skills to get you there.

It will involve tremendous discipline, diligence, and sacrifice.

But in the end, you’ll gain the freedom to lead the life you’ve always wanted.

Read on to discover the five steps you should take to retire early in Canada.

1. Start Saving Early

Whether you intend to retire in your 50s, 40s, or even 30s, you’ll need to set aside a considerable sum of money to get you there.

Therefore, it’s imperative to devise a savings plan as soon as possible.

Time will be your greatest ally in this quest, and your savings plan will be your roadmap.

But exactly how much money do you need to have in your bank account before you submit your resignation letter and commence your retirement?

You’ll have to consider your desired lifestyle, the age you wish to retire, and the amount of money you’ll need to live comfortably.

An ideal place to start is to estimate your income replacement ratio, which refers to the income you’ll need during retirement to sustain your desired lifestyle.

For example, suppose you currently earn $85,000 per year and anticipate needing $55,000 during retirement to cover your expenses.

In that case, your income replacement ratio is 65%.

Most financial experts suggest erring on the side of caution and recommend ratios in the 70% – 80% range.

Next, you must determine how much money you’ll need to save up before you officially retire.

A good rule of thumb is to have at least 25 times your required retirement income.

Continuing with our example above, this means you’ll need $1,375,000 to adequately cover expenses and generate a return on your money to protect its value from being eroded by inflation.

Finally, you’ll need to calculate how much to save each month.

The age you plan on retiring will be the primary influence on your target savings rate.

Naturally, the sooner you hope to retire, the more you’ll have to set aside, especially if you’re starting late.

It may entail saving anywhere from 20% – 40% of your income.

Some die-hard FIRE enthusiasts insist on saving up to 70% of their earnings!

Using our example above, suppose you’re 25 years old, anticipate needing $55,000 per year during retirement, and thus require $1,375,000 in savings before retiring.

Let’s say you initiate an investment plan expected to earn you an annual return of 6%.

In this scenario, you’ll need to save $1,838 every month to reach your goal, assuming you started with zero savings.

It’ll take you a little over 26 years to get there.

Sitting on the beach

2. Maximize Your Income

A solid income stream is vital if you hope to retire early.

The higher your income, the more disposable income you’ll have available to contribute toward your savings.

Learning a skill that pays well is crucial, whether that means attending a university, enrolling in a trades program or, these days, leveraging the vast expanses of the internet to generate income.

Whichever path you pursue, ensure it’s something you’re genuinely interested in and can focus on long term, as it will directly fund your early retirement.

When job hunting, look for employers that offer extra monetary perks, such as a group Registered Retirement Savings Plan (RRSP) plan.

Enrolling in a program like this is a no-brainer, as your employer is essentially providing you with free money.

Company stock options and bonuses are other benefits to watch for, as well.

As you progress in your career and your income rises, resist the temptation to upgrade your home, vehicle, wardrobe, and the restaurants you patronize.

his phenomenon is known as lifestyle inflation, and it will hinder your efforts in funding your retirement.

Instead, contribute the extra income to your savings, which will enable you to reach early retirement sooner than anticipated.

If you currently hold down a well-paying job but are lacking in the savings department, look for ways to supplement your income.

Consider leveraging your skills and knowledge by starting a side hustle.

3. Minimize Your Expenses

While maximizing your income is crucial to achieving early retirement, the other side of the equation involves drastically cutting down on expenses.

Living below your means is one of the critical pillars of the FIRE movement, as saving money is impossible if you squander every dollar you earn.

Keeping your spending at bay involves two things: creating a budget and meticulously tracking your expenses.

Luckily, there’s a wide assortment of apps available to aid you in this endeavour – no need for tedious spreadsheet work!

A few notable ones include PocketSmith, Mint, and YNAB (You Need A Budget).

Here are some additional tips to help you cut back on expenses:

  • Use ride-sharing services like Uber instead of driving a car or rely mainly on public transportation to get around.
  • Buy your groceries in bulk and cook meals at home more frequently.
  • Take advantage of coupons and sales on retail items whenever possible
  • Negotiate with your phone, cable, and internet service provider to obtain lower monthly rates.
  • Use a credit card that offers generous cashback or rewards points.
  • Get a no-fee bank account.
  • Make your home energy efficient.
  • Look for cheap vacation packages or book your accommodation at vacation rental homes rather than luxury hotels.

4. Avoid debt

Debt can easily undermine your goal of early retirement.

According to a December 2020 Statistics Canada report, the average Canadian household owes $1.71 for every dollar of disposable income.

As a result, some Canadians are carrying crippling debt loads that may culminate in bankruptcy.

Relying on debt to fund your lifestyle may seem enticing and convenient, but taking on too much can lead to severe financial issues down the road.

Interest charges can cause debt to grow exponentially, especially on credit cards and unsecured loans, where the rates are exceedingly high.

Given enough time, the interest charges may even exceed the principal.

Over time, debt will diminish your standard of living, consuming an ever-greater portion of your income.

For this reason, you should avoid it as much as possible and opt for cash whenever feasible:

  • This one is very debatable based on the unprecedented appreciation some Canadian cities have seen in recent years, however depending on your market, consider renting vs buying a home.
  • Buy a cheap, used car instead of a pricey new car using an auto loan.
  • Learn a skill through an affordable online course instead of taking on student debt to finance a university education.

5. Invest Wisely

Regular savings accounts offer pitiful interest rates that barely keep pace with inflation, let alone generate a return sufficient to grow your wealth for early retirement.

For this reason, look to invest in asset classes that provide superior returns, namely stocks.

The easiest and most accessible way to go about this is to invest in index funds.

An index fund is a passively managed investment that mimics a specific market index, such as the S&P/TSX Composite Index.

Investing in index funds will provide you with exposure to a wide range of sectors and industries, ensuring your portfolio is adequately diversified.

Historically, investing in the broad equities market has been a smart bet.

According to Edward Jones, the annualized rate of return on the S&P/TSX Composite Index was 9.3% between 1960 and 2020. While opinions vary, reasonable estimates for future annualized returns range from 5.5% – 7% for Canadian equities, enough to combat inflation and grow your wealth at the same time.

You may also wish to incorporate bond funds, global equity funds, and real estate into your investment portfolio for further diversification.

There are no hard rules – it all comes down to a balance between your desired return and risk tolerance.

Since you’re investing for the long haul, consider holding your portfolio or parts of it in a Tax-Free Savings Account (TFSA).

Earnings from a portfolio held in a TFSA grow tax-free, which will accelerate your investments’ growth.

Final Thoughts

Retiring early in Canada is possible, but it will take diligent planning, disciplined saving, and sincere dedication – and the willingness to forego some shopping sprees!

If you’ve decided to embark on the journey to early retirement, create a realistic roadmap to get there.

Then, simultaneously maximize your income and cut down your expenses while contributing to your investments and avoiding debt as much as possible.

By following these steps, early retirement can turn from a dream into reality.

Mark Gregorski

Mark is passionate about educating people on how the financial markets work and providing tips to help them better manage their money. Mark holds a bachelor’s degree in finance from the Northern Alberta Institute of Technology and has more than a decade of experience as an accountant.

Outside of writing and finance, he enjoys playing poker, going to the gym, composing music, and learning about digital marketing.