# Retiring Early – Part 2 (The Income)

To continue from Part 1 of the Retiring Early series, we need to determine how our income and savings will pay for our expenses, and how early we can actually retire. We will assume that we die broke.

To summarize our expenses that we calculated yesterday, we determined that we'll need: \$44,616/year (in todays dollars) to retire comfortably.

There are some future income sources to consider:

Wifes Defined Benefit Pension: If my wife retires at the minimum requirement of 30 years service, she will be 52. Assume that she will retain the same salary as today but adjusted for inflation. Everything will be calculated in today's dollars for simplicity sake. @ age 45: Pension benefits are not payable until 30 years of service. Choice of a lump sum or a reduced pension payable at age 52.

• Yearly Maximum Pensionable Earnings (YMPE): \$42,100 (indexed for inflation)
• Annual Salary: \$60,000 (indexed for inflation)
• Projected Pension:
• \$42,100 x 23 years x 1.4% = \$13,556.2
• Add Bridge Benefit: \$42,100 x 23 years x 0.6% = \$5,809.8
• Less reduction on early election: \$5809.8 x 108 mo x 0.5% = \$3,137.29
• Add: (\$60,000 – \$42,100) x 23 years x 2% = \$8,234
• Less reduction on early election: \$8,234 x 108 mo x 0.5% = \$4,446.36
• Total Annual Pension @ 52: \$20,016.35 (indexed for inflation)

@ age 52:

• Yearly Maximum Pensionable Earnings (YMPE): \$42,100 (indexed for inflation)
• Annual Salary: \$60,000 (indexed for inflation)
• Projected Pension:
• \$42,100 x 30 years x 1.4% = \$17,682
• Add Bridge Benefit: \$42,100 x 30 years x 0.6% = \$7,578
• Less reduction on early election: \$7,578 x 36 mo x 0.5% = \$1,364.04
• Add: (\$60,000 – \$42,100) x 30 years x 2% = \$10,740
• Less reduction on early election: \$10,740 x 36 mo x 0.5% = \$1,933.20
• Total Annual Pension: \$32,702.76 (indexed for inflation)

@ age 55 (no early retirement penalties):

• Yearly Maximum Pensionable Earnings (YMPE): \$42,100 (indexed for inflation)
• Annual Salary: \$60,000 (indexed for inflation)
• Projected Pension:
• \$42,100 x 33 years x 1.4% = \$19,450.20
• Add Bridge Benefit: \$42,100 x 33 years x 0.6% = \$8,335.80
• Add: (\$60,000 – \$42,100) x 33 years x 2% = \$11,814
• Total Annual Pension: \$39,600 (indexed for inflation)

Canada Pension Plan (CPP) Since my wifes pension includes CPP, only my CPP has to be calculated. Payable @ age 60:

• Retire @ age 45
• CPP @ \$500/month or \$6,000/year – this depends on how early you stop contributing to CPP, \$500/month is assuming I retire at 45, more if I retire later). Use this calculator to determine how much you will get according to your income.
• Retire @ age 52-55
• CPP @ \$583/month or \$6,996/year

Old Age Security (OAS) Payable @ age 65 (hopefully this will still exist)

• \$982/month or \$11,784/year (for both).
• I'm skeptical over OAS because it is paid by our current tax base and politicians can change this at any time. Albeit, any government that changes OAS will most likely be voted out of office, which is a big deterrent.

Now that I have calculated the potential income streams during retirement, tomorrow I will post some tables that explain the savings required to meet our expenses. Stay tuned..

Continue with the series:

Part 1: Early Retirement – The Expenses

Part 3: Early Retirement – Conclusions

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About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from \$200,000 in 2006 to \$1,000,000 by 2014. You can read more about him here.

• David February 15, 2007, 11:39 pm

So far your expenses seem to be paid from your net income, and your income statement is gross income.

A quick survey indicates that the ony real reduction from my net income is my mortgage. In addition I may have to buy health insurance, or drug insurance upon retirement. Since the mortgage is about 40% of my net, the 70% figure, if assessed against current NET income, seems practical.

David

• FrugalTrader February 16, 2007, 6:54 am

All taxes are deducted in Part 3 when I do my calculation tables.

FT

• Ron June 24, 2008, 5:21 pm

How does retirement pension income factor into net worth calculation. I have a friend who took a cash settlement when he retired. That amount now contributes to net worth. However, he must draw down on that amount for annual living expenses. I, on the other hand receive a monthly pension check for life, but have no claim available to heirs, other than spouse upon death. How can this asset be included in net worth calculation.

• DAvid June 24, 2008, 10:07 pm

Ron,
I think you may have meant to ask this in another thread, but in effect, you have answered your own question. Even a defined benefit plan has a cash value, whether or not you are fully vested. While you may not be able to extract it as your friend did, it still has value. My annual pension statement has a section that describes my contributions and interest to the plan, but not those of my employer. This money is MINE. While held in trust for me it still belongs to me. Should I die before, or after I retire, my remaining pension contributions plus earned interest are paid to my beneficiary or estate. My employer’s contributions remain in the plan. I believe you will find this to be the case for many pension plans. You may wish to have a look more closely at yours.

Since there is a repayment of the contributions and interest to the estate, it is rightly included in net worth.

DAvid

• cannon_fodder July 15, 2009, 4:02 pm

FT,

Based on your projected CPP income if you retire at 45, would I be correct in assuming you have always earned the maximum pensionable earnings since you turned 18?

• FrugalTrader July 18, 2009, 10:17 am

Hey CF!

These calculations are going way back! I believe that when I did the calculations that I averaged my income from 18 until retirement age and accounted for the zero income years until 60. However, averaging the income may not have been the correct way to calculate. What are your thoughts?

• graham cobb December 18, 2011, 9:41 am

stuck with 5yr(4 left) 3% gic (340,000) locked in – but my wife lost her job and we need the monthly income now – any way out of this situation ??

thanks Graham

• electoys January 19, 2016, 3:04 pm

Hey FT,

I’m curious about your wife’s defined benefits pension plan and the CPP. Who did she work for, because I’m surprised her CPP is part of her defined benefits pension plan? With a federal government (or even the Ontario govn, although I realize you’re located in the Maritimes) defined benefits pension plan one also receives a CPP payment.

I followed your detailed YMPE calculations, and the different rates below and above it. With it being eight years since this article, your wife is very likely collecting her pension (having achieved the 30 years of service incredible milestone… congrats). Can you confirm that she will not receive the CPP?