Early retirement could be a dream or a nightmare. Here’s what you should know: Dale Jackson

Brochures offering various retirement savings options are seen Friday, February 3, 2012 in Montreal. (Ryan Remiorz / THE CANADIAN PRESS)

A recent BMO survey finds most Canadians plan to retire at 61.

Reality is much different considering the average retirement age has risen to 65 from 61over the past two decades, according to Statistics Canada. And while we’re working longer, it’s an ironic twist that nearly half are involuntarily forced into retirement due to job loss, health issues or the need to care for someone else.

If you’re forced into early retirement or have the means to retire sooner than expected, here are a few things to consider if you want to make it work.

Good financial advisors prove their worth when the unexpected happens. Even if your advisor only manages a portion of your big financial picture, they probably have other clients in the same situation and could present options you never considered.

Whether you work with an advisor or not, you will need to reassess your spending plans and determine what you need for day-to-day living expenses in retirement. The growing trend toward part-time work, or the establishment of a small business can possibly supplement those expenses if you fall short.

If you have debt, talk to your bank about consolidating high interest debt (such as credit card balances) into one manageable low-interest loan payment plan. For most Canadian homeowners a home equity line of credit (HELOC) provides the lowest rates because the property is secured as collateral. Reverse mortgages are also an option for homeowners but normally charge much higher interest rates. Regular loan re-payments are not required for either but the equity in your home will be eaten away at a compounding rate.

If you pay into a defined benefit (DB) pension plan with your employer, consider keeping it even after you quit. They generally provide steady income and are usually indexed to inflation. If you are in a defined contribution (DC) plan you probably have the option of keeping it with your employer’s administrator but consider rolling it in with your existing registered retirement savings plan (RRSP) so you can manage it as one portfolio. Either way, speak with your plan administrator.

Speak with an advisor or tax expert about the most tax efficient way to withdraw your savings in retirement. Income splitting with a spouse is a great strategy but is limited for Canadians under 65 years. In any case, it is best to withdraw from your RRSP at the lowest possible marginal tax rate and top up any additional funds required through a tax free savings account (TFSA).

Don’t panic and sell potentially lucrative or income generating investments, or become too conservative. You still need your savings to grow in equities during retirement and resorting exclusively to fixed income probably won’t get you to your goals. You will, however, need to keep a portion of your portfolio in cash, or near cash, to meet short-term living expenses.

Canadians can not collect Old Age Security (OAS) or supplemental benefits until they turn 65 but they do have the option to draw from the Canada Pension Plan (CPP) when they turn 60. In any case, the amount depends on how much and how long you contribute to CPP during your working life. For 2026, the maximum annual CPP payout at age 65 is $18,100. Payouts as early as age 60 are reduced 0.6 per cent for each month before 65. Regardless, CPP payments are adjusted to the cost of living and that makes it a great hedge against inflation.

If you want to work through various scenarios, the Canada Pension Plan provides a retirement income calculator on its website.