The article “What It Takes To Retire At 45” was originally publishes on MoneySense on February 6, 2019.

Konstantino is 27 and hopes to retire by 45. He wants to know how that impacts his RRSP versus TFSA savings strategy.

Q: I’m 27 years old with a relatively healthy income of around $125,000. I’m aiming to get on the early retirement track with any luck and retire around the age of 45.

I’ve been aggressively in the investing game for a few years now and have been putting money into my RRSP, which now has a balance of around $46,000 (25% fixed income and 75% equity). I realize that putting the majority of my savings into an RRSP is a bit counterintuitive given my early retirement ambitions, however, and am starting to think about placing a larger portion of my savings into a TFSA so I can withdraw from it before age 65.

I’m at odds here, as I appreciate the reduction on my income tax from contributing to my RRSP. Any wisdom or considerations here would be greatly appreciated!

– Konstantino

A: The financial independence, retire early (FIRE) movement seems contrary to what many older Canadians think about millennials. The thing I like most about personal finance is the emphasis on “personal” – personal decisions, personal goals, and personal planning. People are entitled to pursue extreme savings, live for today, or anything in between, because it’s ultimately up to them. Financial planning needs to be personal.

One point I feel I should make right off the bat, Konstantino, is that a Registered Retirement Savings Plan (RRSP) does not have any restrictions on early withdrawals. Your question seems to insinuate that a Tax Free Savings Account (TFSA) may be better for pre-65 withdrawals, or that an RRSP may not be an option for your FIRE plan.

You can contribute to an RRSP and take a withdrawal the next day. There are no minimum contribution periods, nor an age before which you cannot withdraw. Withdrawals from a locked-in RRSP that comes from a pension plan transfer may be restricted until age 55, and then have maximum annual withdrawals thereafter. But regular RRSPs don’t have such restrictions. There are minimum withdrawals required after age 71, but nothing to stop you from taking withdrawals in your 40s upon early retirement, Konstantino.

You can contribute to an RRSP based on the RRSP room generated from your $125,000 salary. You would earn an additional $22,500 of RRSP room at that income level – 18% – each year. If you’re aiming to retire by 45, you may well need to max out your RRSP, and your $6,000 annual TFSA room, let alone some additional non-registered savings each year over and above. I won’t speculate on how much you need to save, because that’s going to be highly dependent on personal factors.

That said, if you’re projecting out your potential RRSP balance at age 45, that math may not be enough to figure out how much you need to save to retire by that age. Keep in mind that 2% inflation will increase the cost of living by 43% between age 27 and age 45, let alone potential future expense increases you may not have yet considered.

If you can’t maximize both your RRSP and TFSA contributions, Konstantino, I would consider a few factors when trying to decide to which to contribute.

If you work for an employer with a matching contribution on your group RRSP contributions, I’d probably take advantage of that free money before personal RRSP contributions or TFSA contributions.

At $125,000 of income, tax refunds for RRSP contributions would start at 35 per cent and be as high as 47 per cent assuming no other tax deductions and depending on your province or territory of residence. RRSPs are a tax reduction tool as much as they are a retirement savings tool, Konstantino, and in that regard, they could work well for a retirement in your 40s. Chances are if you were taking RRSP withdrawals at a rate that would last throughout your retirement, starting in your 40s, your withdrawals would be modest. It’s hard to imagine you would pay anywhere near 35 to 47 per cent tax on your withdrawals in your 40s, so deducting contributions at a high rate of tax and withdrawing at a low rate of tax makes sense.

I think the potential flaw with your plan is that life could change a lot between age 27 and 45. An engagement, a wedding, a baby, children, and the wealth effect could all impact expenses and savings materially. And in order to fund some of those expenses, having TFSA funds to access may be preferable over RRSPs.

You can generally anticipate some of the aforementioned expenses a year or two ahead of time, and perhaps that’s the point at which you start to build a TFSA nest egg, if you don’t already have one. If all your savings are in your RRSP, that may not be a great place to withdraw funds to cover those expenses, as withdrawals could be taxed at a higher tax rate than the initial deduction if withdrawn while working.

I’d also consider one of the biggest potential risks in your FIRE aspirations, Konstantino, besides the costs of a family – disability. I find that people are chronically underinsured against disability. And at a young age, you’re much more likely to become disabled than to die. And when you’re single with no dependents, life insurance is of little value as compared to disability insurance that can help take care of you (since you’re dependent on your income).

Even group disability policies, especially for high-income earners, can come up short. They may not replace your full income, as group plans often have monthly maximums. Group plans also tend to have looser definitions of disability after 2 years of disability that may result in a decrease or end to disability payments. I’d encourage any young person to ensure they are well insured against disability.

Disability insurance is expensive when you’re young, especially compared to life insurance. This shouldn’t be a deterrent against buying it though. It’s expensive because it’s more likely to happen and more likely to pay out than your life insurance. The cost of good disability insurance premiums may be a deterrent for anyone, especially FIRE advocates, but it’s nowhere near as costly as having a disability without proper insurance.

Good luck, Konstantino. I hope your personal financial aspiration to retire at 45 comes to fruition. But coming from someone whose life has changed a lot since age 27, I can tell you the only thing that’s constant in life is change. Retirement planning doesn’t always go in a straight line.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.