Pros And Cons Of Retiring In Canada

Rounding it up

• Early retirement can be a wonderful thing – if you’re financially and mentally prepared for it.

• It’s not for everyone, and there’s lots to consider before walking away from your career.

• Pros include no boss, relaxation, time for yourself, travel, hobbies, and did we mention no boss?

• Cons include boredom, loneliness, dwindling money, and missed financial opportunities.

For many of us, the thought of walking away from the grind and retiring early could not be more appealing. Endless freedom. No more demanding bosses or impatient clients. No more passive-aggressive emails from colleagues. No. More. Meetings.

But for others, the uncertainty of an early retirement can seem daunting. No steady paycheque. Question marks about your savings. Too much free time and not enough to do. Loneliness. Boredom.

In the past, it used to be that most folk would work to age 65 (or later) until they reached the more traditional retirement age. But that’s changing – increasingly, people are looking to retire younger.

If early retirement is something you’re exploring, you need to know what you’re getting yourself into. While all that freedom sure sounds appealing… there are some potential drawbacks, too.

The why of early retirement

Quitting your day job is high on a lot of people’s dream lists. There are so many preferable things you could be doing instead of “working for the man”. Hiking, writing, travelling, education, crafts, passion projects, sports, and on and on. The list is quite literally endless.

You only live once! YOLO, as they say. For most folks, it’s normal to work the majority of your days for the majority of your adult life. However, all that working doesn’t leave you with a lot of living at the end of your career.

You need money to retire early, though. Quite a lot of it. And that’s what stops a lot of us from stepping away from our careers. For many, getting into a position of financial stability at a young age seems unattainable. We’ve got mortgages, children, health concerns, aging parents, debt – any number of financial responsibilities that seemingly tie us into the Monday-Friday 9-5 life. There are ways you can make it happen, though.

Increasingly, younger people are exploring early retirement and are showing particular interest in the FIRE movement – which stands for Financial Independence, Retire Early. The FIRE movement is all about saving and investing, early and aggressively (50-75% of your paycheques), to set you up with the necessary funds to retire early (often by the time you turn 40).

Pros of early retirement

Picture this: your boss tells you to please sleep in this Wednesday because they need you well-rested for brunch with friends and an afternoon at the beach. It’s you; you’re the boss, and you’re finally in charge of your days.

The pros of early retirement include more time with friends and family (or by yourself), freedom to spend your days however you choose, and relaxation. Improved health, less stress, more fun.

Better health

Less stress, more and better sleep, more exercise, more fresh air, no more rushed meals at your desk or anxiety over deadlines. It’s easy to see how work can be detrimental to your mental and physical health. Breaking free and having more time and more control over your daily life can have obvious benefits. If exercise and healthy eating have taken a backseat during your career, reclaiming them could improve your health.

See the world

It’s difficult to see the world, or even this vast country, when you’ve only got two or three weeks of vacation per year. When you’re retired, there’s no more dealing with your manager or waiting for HR to approve time off. It’s time to explore!

Of course, travel is expensive, but retirement means you’ve also got more flexibility on dates to find the best flight deals, and you’ve got all the time in the world – so maybe a road trip or two makes sense (or your retirement becomes a never-ending road trip).

Passion projects

Maybe there’s something you love but haven’t had the time to do it. Well, now you have time. It could be that you want to volunteer more, you want to perfect your knitting, take up pottery or carpentry, or have aspirations to turn your overrun yard into an idyllic songbird paradise. Whatever it might be, a passion project can help scratch an itch.

Make money in different ways

If you love your passion project, maybe you can make money from it. The same goes for any other type of side gig. If there’s something you do well and think people want to pay you to do it, give it a try. So long as you have the resources and it won’t affect the retirement funds you have saved, a side gig during retirement can help you stay busy, fulfill you, and add additional money to that retirement kitty.

Just. Chill.

Don’t feel like doing anything? That’s cool – don’t. If you make it to the point of retiring early and you’re financially stable, that’s amazing. You can do all the things to be healthy, stay busy and broaden your horizons. Or you can just chill. That’s the beauty of retirement.

Cons of early retirement

While the idea of early retirement might seem like candy and roses, there are some negatives you need to consider. In truth, it’s not for everyone. Loss of income aside (presumably, you have that under control if you’re taking early retirement), there’s a mindset shift to take into account, too.

Downtime overload

For some who retire early, the boredom wears them down. The relaxation is too much. The reality of retirement doesn’t match the dream. Some retirees struggle with a sense of loss when they leave behind a career and former colleagues and want to go back to work. Some people can experience loneliness – after all, not everyone is fortunate enough to retire early alongside you. Every week, you’ll have 40 hours to kill, so make sure you’re mentally prepared.

Dwindling finances

Well, this might seem obvious, but most people’s finances will start going down the moment they retire. You’ve saved and invested a whole lot of money – enough that you feel comfortable retiring early – but without the regular paycheques coming in, you’re likely to now be spending more than you earn. You need to be super duper-sensible with your money to ensure it doesn’t run out. Emergencies or unforeseen expenses can also damage that nest egg you’ve saved, such as increased healthcare expenses as you age.

A potential hit (on pension and interest)

Based on average life expectancy, early retirement means your retirement savings will need to last longer. Say you’re going to live to 85 – if you retire at the “usual” retirement age of 65, that’s 20 years you need your funds to last. Retiring early at, say, 45 means you’ve got 40 years to pay for. While that’s obviously not a problem if you’ve saved enough and have planned for it, you need to know you’ll potentially receive less ongoing retirement income if you retire early.

Compound interest

Compound interest is when the interest you earn on your savings earns interest on itself. The longer your savings build, the more you get – because compound interest is exponential growth. When you’re earning and saving, you’re accumulating money into your savings accounts. The more you add to your savings and the longer your savings stay untouched, the more money your money earns. If you retire 20 years early and start dipping into your retirement savings, you could be missing out on decades of compound interest (potentially hundreds of thousands of dollars).

Pension

If you contribute to the Canadian Pension Plan (CPP), you’re entitled to pension payments. In 2022, the average monthly CPP payment is $737.88 if you start receiving it at age 65. However, you can choose to start receiving your CPP early at age 60. But here’s where you’d miss out by doing that: if you start taking it at 60, you stand to receive 36% less than taking it at 65. Conversely, if you’re in a position to wait to start taking it until you’re 70, you’ll end up receiving 42% more than taking it at 65.

The middle ground

The thing about retirement – at any age – is that it doesn’t have to be a cold turkey move away from work. Remember, when you retire, you’re the boss. You make the decisions. Many people decide to phase out work and phase in retirement. Some people decide to switch careers, working fewer hours or working on something they truly love and want to do (instead of grinding away for “the man”). Do something you love. Do fewer hours. It’s up to you.

Sometimes, these craft or passion jobs might not pay as much, but maybe that’s okay. It’s about stepping away from the 9-5 and finding fulfillment in your (semi) retirement. This way, you can still earn a little money to keep the bills paid but also get a lot of the benefits that come from retirement – like improved physical and mental health. It's not a bad way to start your retirement journey!

What is the retirement age for Canadian citizens?

To retire in Canada, the standard age at which you'll receive your pension income from the Canadian government is 65. That being said, a lot of Canadian residents choose to retire earlier or later, depending on their finances. Note that if you choose to receive your retirement income before 65, your monthly payments will be smaller compared to if you choose to retire in Canada at a later age.

How much money should you save for retirement?

As we said, you need money to retire in Canada. So, how much money saved for retirement do you need? Generally speaking, Canadians should save between 10% and 15% of their pre-retirement income for their retirement funds. However, with living costs on the rise, especially in major cities, the amount you need to retire in Canada will vary between Canadians, newcomers, and those with permanent residency.

Ultimately, careful planning and advice from a financial advisor who can look at your current financial circumstances and help you develop goals is recommended.

How can I maximize my retirement savings?

If you're unable to meet with a financial advisor to begin your financial planning at this time, you can still maximize your retirement savings:

1. Start a retirement account as soon as possible

Strategic financial planning begins when you start a retirement account. Not only can you lower your income tax on your taxes each year, but you'll also make a return on your deposited money. Remember, Canadian residents, those with permanent residence, and newcomers to Canada can only put away 18% of their taxable income each tax year.

That said, the the more of a habit you make of putting some money each year into a Registered Retirement Savings Plan (RRSP)or other type of high-interest savings account, the more money you'll have saved by the time you retire.

2. Budget your monthly expenses

Beyond contributing to an RRSP each year, you'll need to develop responsible financial management practices as soon as possible. Keeping your debt-to-income ratio low, budgeting your monthly expenses, and living within your means will help you out in the long run, especially if you want to retire in Canada at an early age.

3. Find a secondary source of income

Lastly, consider finding a side gig to generate additional income each year. The more money coming in each month, the more you can reap all the benefits of an early retirement later on if that's one of your financial goals.

Do I need to inform the Canada Revenue Agency that I am retiring?

Yes, you should contact the CRA before you retire in Canada. Generally speaking, the CRA recommends that Canadian residents contact their Canada Pension Plan department at least six months before their retirement date. You'll also need to send a copy of your accepted resignation letter.

How do interest rates affect my retirement plan?

Now, you may be wondering, "How do interest rates affect my retirement plan?" Recommendations indicate that 40% of your retirement bank account should be allocated to bonds while the remaining 60% be invested in stock assets.

When interest rates are high, it makes sense to have more money in your retirement accounts, as you'll be making more on the money you deposit. And, if you're close to retirement in Canada, then high interest rates will benefit you greatly.

That said, because rates create less demand for bonds and fixed-rate annuities, their price will drop. So, if you have money tied up in the stock market, its value will decrease, which can cause some issues for those who want to retire in Canada while rates are still high.

In contrast, low interest rates will benefit your stock holdings, but they can hurt bonds and savings accounts, especially if your accounts are interest-based. Further, even though your stocks may perform well, they're still high-risk investments, which can put retirees in a stressful financial situation. To navigate interest rates before you retire in Canada, we recommend getting investment advice from a qualified financial advisor.

How are retirement accounts taxed in Canada?

So, how are retirement accounts taxed in Canada? Essentially, there are two types of retirement accounts in Canada: The first, as we've mentioned, is the Registered Retirement Savings Plan (RRSP). The second is a Tax-Free Savings Account (TFSA).

Any funds deposited into a Registered Retirement Savings Plan (RRSP) are considered tax-deferred, meaning you won't be taxed until you withdraw money from the account. On the other hand, if you deposit money into your Tax-Free Savings Account (TFSA), it is considered after-tax money, meaning you can withdraw money from this account at any time tax-free. Understanding these tax implications and tax rules is important for financial planning purposes.

Do you pay taxes after you retire in Canada?

If you want to retire in Canada, you may be wondering whether you need to pay taxes once you've retired. The short answer is yes. Your pension income will have provincial and federal Canadian taxes deducted from your monthly income tax each month.

How much does inflation affect retirement in Canada?

Now, you're probably thinking, how much does inflation affect retirement in Canada? Whether you're a Canadian permanent resident, citizen, or newcomer to the country, inflation means that you'll need more money to retire. For those already retired or coming close to it, inflation means paying significantly more to sustain a comparable lifestyle in the years to come. If you can increase the amount you save in any manner, it's highly recommended you do so. If you aren't able to, you may need to reconsider tightening up your budget where you can.

And for those not even closer to retiring, financial planning is essential if you want to retire in Canada in the future. Talk to a financial advisor about your finances, save money when you can, and start as early as possible to ensure you secure a happy and healthy financial future.

Do credit scores affect your retirement?

The average credit score in Canada is 680, which, by standards, is considered a good score. So, what happens if you want to retire in Canada with a score lower than this average? Do credit scores affect your retirement?

The truth is that it comes down to your current financial health before and after you retire in Canada. For those who have ample retirement income and savings in their bank account to live their desired lifestyle once retired, a credit score won't matter as much. However, for those who may consider purchasing a home or taking out a loan during their retirement years, their credit score will matter.

Not sure what your current credit score is? Get a free credit score check and build your credit with KOHO by applying for a virtual credit card that offers overdraft protection coverage and the opportunity to get a cash advance of up to $250 with zero interest!

What is the best retirement age in Canada?

Many Canadians look forward to their retirement years. So, what is the best age to retire in Canada? While the age at which you'll receive your pension income and other retirement benefits begins at 65, there really is no age minimum to retire in Canada. Keep in mind that careful planning is required to retire in Canada at any age, and your pre-retirement income, savings, and debts can all play a role in your retirement journey.

Do newcomers to Canada qualify for retirement plans?

Millions of skilled workers from across the globe immigrate to Canada each year. If you are a newcomer to the country, you may wonder whether newcomer Canadians qualify for retirement plans. In Canada, there are different retirement available for Canadian citizens and newcomers alike. However, there are different qualifications that need to be met, which vary between plans.

For example, the Registered Retirement Savings Plan (RRSP) is a Canadian bank account that enables you to contribute up to 18% of your income to your retirement savings each year. The contributions to your RRSP offer tax benefits and are tax-deferred, meaning you can grow your money tax-free.

To qualify, you must have employment income and file your taxes with the Canadian Revenue Agency (CRA). In contrast, while newcomers to Canada can qualify for the Canada Pension Plan (CPP), they won't be able to access this retirement income until they've reached the age of 70. The same can be said for permanent residents.

We recommend speaking with a financial advisor to streamline your plans for spending and saving and investment advice as soon as possible to ensure you can one day retire comfortably in Canada.

Do retirees still qualify for Canada's universal healthcare system?

Canada is known for its universal healthcare system. Whether you're retired or planning to retire in the future, having high-quality healthcare and health coverage is imperative. Rest assured that the healthcare system is still available to retirees who are Canadian citizens and those with permanent residency.

However, as you will no longer be working, you may want to consider private health insurance to ensure you are adequately protected.

What's the difference between retiring in Canada versus the United States?

If you're a dual citizen, you may have some questions about retiring in both countries. While both countries offer financial support to retirees through different government programs like the guaranteed income supplement, when it comes to health insurance, retirement ages, and other factors, there are significant differences that dual citizens should be aware of before they retire in Canada or the United States.

These differences will also vary between provinces and states, including tax obligations, basic medical services, and social security benefits. Ultimately, if you're unsure whether to retire in Canada or the United States, consider your personal circumstances and meet with a financial advisor who has knowledge of both retirement routes for assistance.

Final thoughts on the pros and cons of early retirement

Not everybody is in a position to retire early. And not everybody wants to. Some people never want to retire at all! Everybody is different, so your retirement plans need to be what’s best for you and your situation. When you’re examining whether or not you should – or can – retire early, it pays to chat with your family and others in a similar position, as well as seek advice from a financial planner to ensure you’re on the right track.

And if early retirement is indeed in your cards, enjoy!

Note: KOHO product information and/or features may have been updated since this blog post was published. Please refer to our KOHO Plans page for our most up-to-date account information!