Income taxes pushing me towards retirement

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tandemkayak
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Income taxes pushing me towards retirement

Post by tandemkayak »

Although I don't feel particularly ready to retire, the weight of income taxes in my budget makes me wonder whether I should consider doing so. I wonder if others have felt the same way in the past and how they have reacted to it.

I am 42. TFSA and RRSP maxed out. I have no debt/mortgage and I own my own primary residence (a small/simple condo). I have been an avid saver my whole life and, as a result, I have accumulated a portfolio of about $1.15 million. I lead a very frugal lifestyle and I could comfortably live well with an income of about $24K.

Due to the fact that I lead such a frugal lifestyle, early retirement is a possibility. Even if my costs were to rise as I age (e.g., health care), I think I can probably keep my portfolio growing at a decent clip because I would be drawing so little as income. I am also keeping around $50K as emergency fund in order to sustain a severe downturn without being forced to withdraw. Currently, my portfolio is still set in aggressive mode with most of it being invested in equities. If I were to retire, I would work towards increasing the FI allocation to about 35%.

Income taxes is the largest ticket item in my budget and it has been so for many years. I am grateful for all the things our taxes pay for but I have started to question whether it is worth working so hard. I am putting up with a tough commute and long hours in the office. I am not complaining. I understand that I should be counting my blessings and that it is a privilege to be able to consider early retirement. It is just that, when I see every year how much of a cut the government takes, it makes me wonder whether it is worthwhile to stay in the rat race. I have started to envy the guy working part-time at my local grocer as I imagine his work routine is much less stressful then mine.

For those of you who might be curious about my portfolio, it is:

* 40% VTI
* 20% ex-US/Canada equities
* 10% bonds
* 10% cash + EM
* 20% blue-chip CAD div payers (each position is less then 3% of total portfolio)

I imagine others may have felt the same way once they reached a point where retirement was an option. Any thoughts?
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kcowan
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Re: Income taxes pushing me towards retirement

Post by kcowan »

Although I don't feel particularly ready to retire
I think you might find a career change more satisfying than retirement. Many people that reach your stage, start investing in rental real estate as a sideline. And if they get good at it, it takes over.

My aunt was a part-time realtor in Toronto and amassed a couple of million by the time she died. This was back in the day when an average house cost $60,000.

My brother was an insurance underwriter. He retired at age 42. Lived off his portfolio.
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Arby
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Re: Income taxes pushing me towards retirement

Post by Arby »

After I retired in my early 50's, I shifted my asset allocation towards conservative Canadian dividend paying stocks. With Canadian dividends as my major source of income, I was pleasasntly surprised at how low my average tax rate had become (as compared my previous tax rate when my income was mostly salary). You should try modeling your projected tax using one of the online tax calculators.

Also, with regard to expenses, I found that the cost of my private health insurance plan was probably my fastest growing cost since retirement.
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Re: Income taxes pushing me towards retirement

Post by BRIAN5000 »

If your company offers some sort of leave of absence you could give retirement a trail run, some are up to a year long.
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ghariton
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Re: Income taxes pushing me towards retirement

Post by ghariton »

I changed careers in my 50s and became a lawyer. That choice is not for everyone, of course, but I do want to say that changing careers rejuvenated me and made work enjoyable once again. So I second Keith Cowan's suggestion -- look at the possibility of doing something else. Real estate is one possibility, if you are inclined that way, but there are plenty of other opportunities. Volunteering for something you are passionate about seems to work out well for some people, especially if it is something that can use your existing skills (or perhaps a skills upgrade).

After all, you have another 40 years ahead of you. That's a long horizon, and plenty of time to do something really interesting.

Good luck

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Re: Income taxes pushing me towards retirement

Post by fireseeker »

I note you don't mention a partner or children. Perhaps they're not part of your life right now.
What would happen if you met someone, or decided to have kids, or met someone with kids? You're only 42.
Do you feel you have the flexibility -- i.e. the ability to significantly increase your annual expenses -- if your life changed in this way?
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Re: Income taxes pushing me towards retirement

Post by Quebec »

tandemkayak wrote: 30 Aug 2017 12:38 Although I don't feel particularly ready to retire, (...)
Could you work 3-4 days a week at your current job, instead of 5? That would lower your tax bill (cf. the title of your post) and reduce total commute time per week. And that would mean every weekend is a long weekend. 8)

More time for leisure, or volunteering, or trying another paid occupation part time.
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Re: Income taxes pushing me towards retirement

Post by OhGreatGuru »

You need some career/retirement counselling before taking any irrevocable steps. What do you plan to do with the second half of your life?
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Re: Income taxes pushing me towards retirement

Post by tandemkayak »

Thanks for all the replies.

The idea of volunteering does appeal to me. I don't see myself sitting at home after early retirement. My basic needs would be covered so it would simply mean the freedom to work without having to worry about a salary. I have also been considering a part-time job as a teacher.
fireseeker wrote: 30 Aug 2017 17:45 I note you don't mention a partner or children...
I am married but we have decided we won't be having any children. My wife is OK with the plan of early retirement. Actually, the $24K figure I mentioned above is for both of us. Even if she were to loose her job, we'd be OK on my income alone.
Quebec wrote: 30 Aug 2017 18:25 Could you work 3-4 days a week at your current job, instead of 5?
I would love if such an option was available but, unfortunately, this is not the case.
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Re: Income taxes pushing me towards retirement

Post by beachcomber »

well at 42 i think you are much too young for retirement - unless you have a passion to sail around the world or travel extensively.

i retired once in my late fifties and again in my late sixties. have since kept myself active (and our income taxes just below the oap clawback level) with volunteer work with the canadian cancer agency and as treasurer for our local senior's golf club. i am not a popular treasurer as i, like yourself, am very frugal and have built a "rainy day" fund for the membership - who are not happy to see their fees being squirreled away. Even though when I started I brought them back from insolvency. We are all seniors so i can appreciate they think their "rainy days" are past.

best of luck, find a passion - one of my golfing buddies works 20 - 30 hours/week in a garden shop - even though i think he has enough money to buy the garden shop! ;-)
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Re: Income taxes pushing me towards retirement

Post by FinEcon »

Money alone, from what's posted so far I think you have nowhere near enough to retire risk free. When I read the original post my first thought was well that is an acceptable stash for a bachelor planning to live like a surf bum in Thailand or other similar destination half the year where you can do lifestyle arbitrage.

IMO, in order to offer intelligent comments we need the equivalent amount of information about your career and life goals as you've provided about your financials. Not only that what are the part time or semi work options available. Some people are experts in a hobby that can pay decent money on a unit of time basis with no real time commitment, i.e. trainer, advisor, consultant or coach of some sort.

How bad is your job and tax burden really. Pure speculation I can't help but think you are overweighting the tax burden because you hate your job and the commute more than anything. Also, you'd be surprised what companies will agree to once you annouce you're leaving: raises, flexible hours, time off, etc. Be a mercenary, spring it on them at the worst possible time for the company.
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Re: Income taxes pushing me towards retirement

Post by tandemkayak »

FinEcon wrote: Money alone, from what's posted so far I think you have nowhere near enough to retire risk free.
That's a fair point and a question I have been struggling with. I have used SWR and VPW in order to estimate whether it would be safe to retire. Both appear to indicate that I could possibly withdraw much more as income and still retire safely. If SWR and VPW are not the answers, how can I go about calculating a proper number?
FinEcon wrote: How bad is your job and tax burden really. Pure speculation I can't help but think you are overweighting the tax burden because you hate your job and the commute more than anything.
My average tax rate is usually around 26% taking full advantage of RRSP room. The main problem perhaps is that I saved too much too fast and a lot of it ended up in a taxable account (some VTI and CAD div payers). It pains me to see how much the government takes from those returns. I guess I have arrived at a point where working hard seems kind of pointless giving that, at the margin, the government takes so much from what I earn. Yes, I could grow my nest egg but, assuming I have enough to retire today (still debatable), what is the point of doing so (law of diminishing returns)?
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Re: Income taxes pushing me towards retirement

Post by AltaRed »

You are letting the tax tail wag the dog. Paying high marginal tax rates generally is a sign of success with abundant spending power.

Example: a former relative of mine, long dead due to old age, refused to put his retirement savings into higher paying GICs rather than staying in low interest bank savings accounts because he would be paying more income taxes. Never could get him to understand he would have lots more after tax income to spend. You can't fix stupid.
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Re: Income taxes pushing me towards retirement

Post by kcowan »

Have you thought about buying a bigger house? That still remains the best legal way to shelter capital from tax in Canada. When I lived north of Toronto, this young guy was building an enormous house for his wife and daughter with the proceeds from the sale of one of his three businesses. I said surely you can put the money to better use, and he said "Not without paying more taxes!"
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Re: Income taxes pushing me towards retirement

Post by zeno »

Sounds like what you're talking about is not retirement, but financial independence. You have reached or are about to reach the point where you can live off your investments. That's a very good thing.
I would set the tax thoughts aside and decide what you want to do with your life now you have that very enviable choice. Many possibilities have been suggested, sabbatical/leave of absence, shorter work week, change of career, charity work, charitable giving. What is going to give your life meaning and leave you fulfilled? Did you ever want to write a book, learn a musical instrument, a second or third language, travel the world?
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Re: Income taxes pushing me towards retirement

Post by FinEcon »

tandemkayak wrote:
FinEcon wrote: Money alone, from what's posted so far I think you have nowhere near enough to retire risk free.
That's a fair point and a question I have been struggling with. I have used SWR and VPW in order to estimate whether it would be safe to retire. Both appear to indicate that I could possibly withdraw much more as income and still retire safely. If SWR and VPW are not the answers, how can I go about calculating a proper number?
Personally, I don't think there is a good way to do it when dealing with amounts of money that are anywhere in the gray area. The result tends to be dominated by assumptions or qualitative factors such as willingness and availability of part time work, cost of living changes, etc. To get a sense of why a purely numerical calculation is a bad idea just pick a few 30 to 50 year windows (1900-1930, 1950-1990, 1970-2020, etc) and take a few minutes to really think hard about how much the world can change in a multi decade window. The balance of impending economic and societal changes might be in your favour, might not. Returns to capital might remain low for a very long time, who knows what will happen with tax policy, etc.
tandemkayak wrote:
FinEcon wrote: How bad is your job and tax burden really. Pure speculation I can't help but think you are overweighting the tax burden because you hate your job and the commute more than anything.
My average tax rate is usually around 26% taking full advantage of RRSP room. The main problem perhaps is that I saved too much too fast and a lot of it ended up in a taxable account (some VTI and CAD div payers). It pains me to see how much the government takes from those returns. I guess I have arrived at a point where working hard seems kind of pointless giving that, at the margin, the government takes so much from what I earn. Yes, I could grow my nest egg but, assuming I have enough to retire today (still debatable), what is the point of doing so (law of diminishing returns)?
If it only pains you that the government takes its toll on your investment returns, invest in tax efficient assets. The real issue is flexibly in thinking. Location matters a great deal. With your level of assets and generational low interest rates, you may wish to use a substantial portion of your capital and get into real estate because it's tax efficient and can be levered safely. Pick up a triplex or fourplex and live in one of the units. You can make this play all over Canada with a $200-500K down and a hefty mortgage. However you will need to live outside a major centre and in a less desirable city. But most people don't really care about living somewhere nice. Just look at Canada as a whole. How many people live in Ontario or Quebec? Not exactly places where someone from Vancouver who wins the lottery moves to but the opposite is not true.

Bottom line is nobody can think for you. You have to do it yourself just make damned sure you are brutally honest with yourself.
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Re: Income taxes pushing me towards retirement

Post by AltaRed »

FWIW, a 26% average tax rate is not so bad. Don't know what that translates into for your marginal tax rate but that is the one that matters 'at the margin'. As already suggested, invest into tax efficient assets. Anything that translates into cap gains (at 50% inclusion rate) or eligible dividends is highly tax efficient. That is what many of us do.
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Re: Income taxes pushing me towards retirement

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tandemkayak wrote: 31 Aug 2017 12:09 My average tax rate is usually around 26% taking full advantage of RRSP room.
Using TaxTips.ca Quebec Tax Calculator, a $90,000 gross salary with $16,200 in RRSP contributions generates $23,388 (26% of $90,000) in Total Federal and QC taxes, and QPP/EI premiums.

After sending $16,200 into RRSP investments (to grow tax free), and paying the taxes and premiums, there's $50,412 net left.

Should one renounce on $50,412 net plus $16,200 in RRSP savings just to avoid sending the government $23,388 to pay part of the costs for hospitals, schools, roads, QPP, employment insurance, and so many other things? I really don't see taxes as a good-enough justification to stop working.

On the other hand, it's always a good idea to plan transitioning to another job when one does not like the current one. This has nothing to do with taxes, but everything to do with quality of life!
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Re: Income taxes pushing me towards retirement

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longinvest wrote: 31 Aug 2017 20:33 Should one renounce on $50,412 net plus $16,200 in RRSP savings just to avoid sending the government $23,388 to pay part of the costs for hospitals, schools, roads, QPP, employment insurance, and so many other things? I really don't see taxes as a good-enough justification to stop working.

On the other hand, it's always a good idea to plan transitioning to another job when one does not like the current one. This has nothing to do with taxes, but everything to do with quality of life!
Well, it is both about taxes and quality of life. The salary was probably very valuable to you when you were still saving money for retirement and/or paying down debt. Once retirement is a possibility though, that salary becomes less and less valuable. Sure, you could continue to grow your nest egg but, at some point, you will start to question the benefits of doing so (law of diminishing returns).

In my case, my marginal tax rate is 44%. Should I really work extra hard for the $8K bonus at the end of the year when the government will take nearly half of it from my hands? What about overtime? Should I bother? Should I try to work extra hard and get that promotion that will net me another $10K per year? It all starts to seem pretty pointless. It starts to look like a pretty raw deal. If retirement was not a possibility, I guess I would just have to be happy with the fact that the government allows me to take half of my bonus home. But if retirement is a possibility (maybe debatable in my case), you might start to feel different about it.

It is not uncommon for the government to impose heavy taxes on things that it wants to discourage like alcohol and smokes. I believe the heavy taxation on income ends up having a similar effect (at least on me).
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Re: Income taxes pushing me towards retirement

Post by tandemkayak »

Thank you all for the replies.

The idea of a part-time/low-paying/low-stress job sounds interesting (along the lines of the example beachcomber provided). If anything, it would be an opportunity to crystallize some capital gains on the cheap if I decide to make changes to the taxable portion of the portfolio.
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Re: Income taxes pushing me towards retirement

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tandemkayak wrote: 01 Sep 2017 14:19 In my case, my marginal tax rate is 44%. Should I really work extra hard for the $8K bonus at the end of the year when the government will take nearly half of it from my hands?
Taxes are a fact of life. Once one gets into a high enough marginal tax rate range, it becomes important to negotiate compensation and bonuses accordingly, taking taxes into account. In other words, to get $8K clear, one must negotiate $16K gross.

Some employers are way too greedy. I wouldn't work lots of extra hours for a small after-tax compensation. Instead, I would look for another employer, one who actually appreciates the value of my work.

I really think that you have more of an employer problem than a tax problem. I would try to fix the employer problem.
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Re: Income taxes pushing me towards retirement

Post by Koogie »

longinvest wrote: 01 Sep 2017 17:17 Some employers are way too greedy. I wouldn't work lots of extra hours for a small after-tax compensation. Instead, I would look for another employer, one who actually appreciates the value of my work.
I really think that you have more of an employer problem than a tax problem. I would try to fix the employer problem.
That in a nutshell is the problem with the way Canadians look at taxes.

Blame the employer, then the employee.

Never the graspy taxman. :roll:
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Re: Income taxes pushing me towards retirement

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Koogie wrote: 01 Sep 2017 17:42 That in a nutshell is the problem with the way Canadians look at taxes.

Blame the employer, then the employee.

Never the graspy taxman. :roll:
I tried hard to keep my text factual. :|

I think that the Water Cooler is a better place to debate taxation.
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Re: Income taxes pushing me towards retirement

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tandemkayak wrote: 30 Aug 2017 12:38 Although I don't feel particularly ready to retire, the weight of income taxes in my budget makes me wonder whether I should consider doing so. I wonder if others have felt the same way in the past and how they have reacted to it.
I am going through a similar debate. Its not simply the taxes, its the utility for the extra buck versus the level of hard work required. Life's not all about money, especially if your happiness suggests you don't need to "keep up with the Joneses"

Sounds like you and your partner know what you want. My issue is my partner still feels she wants to work making my decision more difficult.

Regardless, I've picked a retirement age that is higher than yours given my spending habits exceed yours. If your investment assets exceed and can support your required annual cash flow, then I say give it a try. Someone mentioned a sabbatical as a trial run which I think sounds like a good idea.

Keep us posted either way.
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Re: Income taxes pushing me towards retirement

Post by miguel »

https://en.wikipedia.org/wiki/History_o ... st_century

Now just think of those punitive tax rates the Brits had to endure a few generations ago :D
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