What Would Change my “Exit” Plans?

This is a guest post by Dave, who is also looking to retire no later than 45, but unlike Tim has no kids and doesn’t want any.  Dave is from Ontario and is working towards his CGA certification.

I am still 14 years away from my calculated retirement year.  This is a LONG time from now, and any number of things could happen to my financial plan that could change my retirement date.  Currently, I can’t really see this date changing – I haven’t had a change of heart over the last 2 or 3 years since this became a centre-piece of my personal finance plan.  So, until then, I am keeping December of 2024 in my sights as my exit from the workplace.

It may seem (to some) that having this strict “out” date puts too much emphasis on retirement and not enough on living now.  I don’t really think that I restrict myself in anything I do, I just realize that if I want to spend my money on something like a $2,000 trip to Mexico (where my wife and I went in December) or a new(ish) car it requires some extended planning rather than just going out to the store and buying it.

I was talking to my wife about our retirement plan this week and wondered basically what I would do with all of the extra money we would have if we weren’t utilizing a significant percentage of our earnings to either pay down our mortgage or eventually save for retirement.  If I continued to make the kind of money that I currently make, I think that spending the extra money rather than investing it or applying it against our mortgage would lead to significant amounts of waste.  I would be buying things that I didn’t need and wouldn’t use that would fill up my house.

One alteration to my plans that could possibly alter my exit date is a change in career.   14 years is a long time to be at the same place and at some point I may decide (or my employer may decide) that my current position is not the correct fit for me.  I make fairly decent money right now, so a change that results in a significant decline in income could adjust the date.  Besides that, I may decide that I want to work 80% (or less) of my current work week (like Tim) which would reduce my income.

Besides a change in career, a change in a spending goal could alter my exit date.  If (for some reason) some super-expensive “thing” became a priority to me or my wife (such as a luxury car, or significantly larger house) – we could buy it, it would just result in an increase in the number of years we’d have to work to save for the “thing”.  The only reason I could see this spending change happen would be if we decided I wanted more land than the current 10 ft x 10 ft area we have right now.

I’m sure there are many other things that could change my retirement plans, but these are the two main ones that would change my retirement plans by years rather than weeks.  What can you see changing your retirement plans significantly?

Three Scarce Resources

This is a guest post by Robert, who lives in Calgary and works as a financial adviser. He is married, has three kids and plans to retire at age 35.  Robert and his wife then plan to return to school and become teachers, eventually living and working overseas.

I first took an economics class in university, and I found it enthralling. It described how some interactions worked and how certain decisions were made, especially choices about buying, selling and working. One of the aspects that I most appreciated was that classical economic theory replaces conspiracy theories of why businesses and governments make the decisions they do. Instead of believing in a small group of powerful decision-makers, it is simpler to see the economy as a large group of more-or-less self-interested individuals. The economic view doesn’t entirely conform to reality, but it provides a useful working model.

Economics 101 describes two scarce resources, time and money. The idea is that we only have a certain amount of time. We make choices about how to spend our time based on our abilities and our preferences. An interesting variable around “time” is that none of us know how much time we have. We also make choices about how to spend our money, based on our preferences and our resources. Money, when it was physical gold coins, was limited in how much could be earned, but also how much could be stored. Whereas an individual’s share of “time” fits a normal distribution (ask any insurance company), an individual’s share of “money” is not normally distributed. Some ultra-rich individuals control more money than entire communities.

An excellent example of the tension between the scarce resources, in my mind, is the debate around public vs. private health care. Private health care provides care first to those who can pay. Public health care provides care first to those who can spend their time in line. The way we approach this issue depends on whether we believe people should pay for their care using time, which we all have more-or-less equally, or money, given that spending time could have negative health impacts. I won’t weigh in on this debate, but it’s interesting to look at the total cost of health care as “time+money”.

Since I decided to work toward a “free at 45”-type early financial independence, I realized I would at some point have a reasonably large store of both time and money. Not having a financial requirement to work, I could take a day or a week off work, if I felt I needed to spend more time. Having enough financial resources to retire, but continuing to work, I could spend additional money. But I felt there is still something more that rich people have that middle class people don’t. Upon reflection, I determined that there is another scarce resource that can be called “relationships” or “networking”. This is illustrated in the dictum that “it’s not what you know, but who you know.”

A few years ago, I offered to coordinate volunteers to build a playground in our community. I didn’t have an established network, so I set an ad in the community newsletter and mentioned to a couple people I knew that we needed help. Less than a handful of people showed up, and it ended up being a lot of work. On the other hand, my wife is involved in a group called Save Our Fine Arts. They have a board of seven well-connected people and between them they have been able to organize a meeting with the Minister of Education which will be attended by MLAs, school board trustees and administration from the public and separate boards, CEOs and leaders in the arts community, journalists, authors, teachers, parents and students. They could not buy this type of support with either money or time alone.

People who don’t have an established network sometimes try to minimize the importance of relationships by calling it “favouritism”, “cronyism” or “nepotism.” But “who you know” really is important. Think of people you know who have found jobs, and ask yourself how often it was through a help wanted ad, and how often it was working through people they know (or a recruiting agency, which is about the people they know).

How have you developed relationships? Have you been successful in networking, and using your network for a beneficial purpose?

The RRSP Debate

Well yesterday’s post had an interesting debate in regards should you use an RRSP.  Some comments were saying you should never use them while others thought they made an excellent choice.  So who is right? Why both of them of course!

I’ve said this before, but it is worth repeating.  Personal finance is personal.  You will do want works for your giving talents and way of thinking.  It doesn’t mean people are wrong or right but rather the situation will drive the decision just as much as any data set you present.

So what I was finding missing from the debate yesterday was some numbers, at what point of income would you not contribute to an RRSP?  Also what is your marginal tax rate if you do contribute?  For me, my marginal rate is 39% so it’s for me an RRSP is a obvious choice for some of my cash to get that refund since I know my tax rate will be lower in retirement.  I would personally stop contributing to an RRSP around $41,000 in income.  Why? At that point the marginal rate is significantly less (26%) and dividend income and TFSA are a better bet.  So where is your threshold for contributing to an RRSP?