My Goal is Early Retirement But I’m Not Saving for It….

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.

My goal is early retirement but I’m not saving for it.  Last week sarahhiggs asked a question – whether I was saving for retirement or utilizing a Tax Free Savings Account or Registered Retirement Savings Plan.  The short answer is no – my spouse and I have decided our primary goal right now is paying off my mortgage.  Paying off the mortgage is our primary financial goal for the following reasons:

1) I don’t like debt

Regardless of your view on whether a mortgage is good debt or bad debt, I think the bottom line is that there is an agreement between the buyer and the financial institution to pay something back.  My preference with this debt, as well as all of my debts, is to zero it out as quickly as possible.  I don’t like owing anyone, including a faceless bank, money and never really have.  Our mortgage will probably be the last major debt that we will ever have (or plan to have) – paying it off is freeing.

Ideally we would have saved the approximately $200,000 to buy our house, but we were kind of anxious to “own” a house.  We felt that the $20,000 in interest we would have to spend over 6 years (most of it in the first few) was worth it.

2)    Financial Freedom is more important to us than savings right now

After our house is paid off our fixed monthly bills will be approximately half what they currently are.  After this point we will have some decisions to make.  Right now we plan to work full-time until we have enough passive income to cover our living expenses.  With our bills significantly lower we will be able to put significant dollars towards our savings goals and hopefully achieve our financial goal of retirement at 45.

3)    The “return” on our mortgage is risk free

Looking at Tim and Robert’s returns over the past year or so I may have been better investing my money than paying off my mortgage.   Paying off my mortgage is (to me) a sure thing investment wise.  My fixed 3.59% is not great compared to what I could have achieved in the market last year, but coupled with my other two reasons it is a rate I am willing to accept in order to achieve my end goal.

My wife and I keep our finances separate.  Right now over 75% of each of my paycheques is going towards paying down the mortgage.  My wife’s money is used for our other savings, which will soon be used in purchasing a car, but is also our trip money, house renovation money and other larger “stuff” that we generally buy together.

We are currently 1/3 of the way done paying off our mortgage, with 4 years remaining.  I’m looking forward to paying this off in the near future, but along the way we’re trying to have some fun.  If we put every penny we made towards our mortgage we could probably shave off a year or so in payments, but we have decided on a more moderate plan of attack right now.

\How about you? Do you have a singular financial goal, or are you spreading your money around to many goals?

13 thoughts on “My Goal is Early Retirement But I’m Not Saving for It….”

  1. Your mindset about debt and your mortgage was a lot like mine in the 1990s before I paid off mine in 1998.

    While the mortgage on my studio co-op apartment was not nearly as high as the one on your house (mine was $56,000 in 1989), the interest rate on mine was very high (nearly 11%). Banks don’t like making loans for co-op apartments because they are riskier for the bank. Furthermore, interest rates in general were high in early 1989.

    I had a 5-year ARM but when interest rates took a fast dive in 1991 I was able to refinance it to a 1-year ARM at 6%, saving me $200 a month. This more than offset the increase in my monthly maintenance charges (i.e. property taxes, co-op’s interest, fuel were the main drivers) in 1990-1992. I was still rebuilding my savings which was mostly wiped out by the $14,000 down payment but I was able to do the refi at $52,000.

    In the few years after the refi, my pay raises at work were still going strong while my monthly expenses decreased by $200 a month (the co-op maintenance charges had stabilized, too). The interest rate crept up some (it was over 8% now) but remained well below the 11% from before. By 1997 I had built up some good mutual fund balances as the mid-late 1990s stock market boom began to take shape.

    It was in 1997 when I decided to take some of my “winnings” off the table and pay down the mortgage with the intent to pay it off by 1998. My money had just nearly doubled in those 5 years so withdrawing what I had invested myself (to pay off the mortgage) still left me with that same balance in the accounts! The implied rate of return after taxes was still good.

    Paying off the mortgage in 1998 (age 35) enabled me to basically live on one biweekly paycheck each month. The other paycheck was used to quickly rebuild what I was used to pay off the mortgage and start thinking about Early Retirement.

  2. I look at the return for paying down your mortgage at greater than 3.59%, as that only accounts for the interest portion. What you also gain, is freedom from rent (the principle portion). So, if your payments in $1200 and you’re paying $800/month in interest, then your also getting a $400 return from not having to pay rent.

    Assuming that $1200 ($14,400 annually) is your actual payment, your initial principle would have been roughly $240,000. If you outright paid that entire principle, my view, is that your return would actually be 6% annually.

  3. In regards to your return from paying down your mortgage, keep in mind that you are paying the mortgage using after tax dollars. Therefore, the 3.59% is your rate of return after tax; grossed up before tax, it is higher.

  4. Dave – thanks so much for this post.

    My husband and I (both 24 years old) are quite obsessed about paying off our mortgage. As it is right now, we’re at 10 years left. We are aggressively paying it down and are looking forward to being debt free by our 35th birthdays (or before hopefully!!)

    The reason I asked is because we get a lot of grief about this decision. Especially from our contact at our bank, saying that we are missing all of the great compounding years, etc, etc. It makes you question everything, you know?

    I look at it this way, when our mortgage is paid off, we’ll have a combined gross income of 140 000+, and without any of our huge mortgage payments, we will have all of that going into our savings account.

    And even now, we are putting very small amounts into our RRSP.. just to get them started (and likely to satisfy the staff at the bank.. sigh!)

    Thanks again!

  5. JMHO, but I’d save up as much of my RRSP contribution room as possible in order to dump a ton of money into the RRSP’s when your salary is at the highest Sarah. Which will likely be somewhere around 40 y.o. according to this:

    Which seems pretty accurate from my experience +/- a few years.

    So your goal to start contributing at 35 makes quite a bit of sense. Assuming that the government tax policy on RRSP’s won’t change, which I doubt it will.

  6. The bf and I have a mortgage on a condo in Vancouver. Although we do make extra payments, it’s not a super-high priority for us right now because we’re still in our mid-20s and we are currently renting out the condo at a profit while we rent an apartment closer to work. We also don’t intend on living in that condo again and plan to sell it in 5-6 years. So we’re not in a real push to pay it off quickly. 🙂

  7. I think an argument can be made that you are in fact saving, although (to over simplify) you’re only investing in one asset class – real estate. While I tend to be an optimist and don’t believe there’s a real estate bubble in Canada, there’s nonetheless something to be said to investing in a more diversified set of assets. Your “risk free” return of 3.59% assumes that your house does not depreciate in value, which is probably a safe bet, but a bet nonetheless.

    Perhaps a move to a more diversified mix of assets(fixed income, equities and real estate – but a less agressive mortgage repayment plan) would in fact help to reduce your overall investment risk.

  8. Reply to TS.
    TS you are forgetting that once you have purchased the house you have already made the investment. No matter what happens with the real estate market you are still required to pay off your mortgage. The 3.59% return is based on the savings incurred from not having to pay the interest on the loan amount. Any additional return (or loss) based on an increase in the value of the house would be over and above the return from not having to pay additional interest.

    Reply to sarahhiggs.
    Sarah always remember who the financial advisor works for, namely the bank first and you second. It is in the banks interest for customers to invest with them and still maintain a long term mortgage. The reason of course is that the bank has a very secure investment with your mortgage and the longer they extend the more income they will receive. The bank will also benefit from the fees and other charges they collect when managing your investments. It is a win-win for the bank to have you maintain long term debt. That being said it’s your money, do your research and make your own decisions.

    There is also a comment about missing out on accrued interest, however, by paying off your mortgage quicker you actually benefit from the accrued interest savings. The interest savings compound the same way as an investment would expect that for each dollar saved you would pay less interest on future payments. The savings will accrue and compound and result in the savings in the same amount as an investment at the same interest rate.

    One last comment, when comparing paying down debt versus saving for retirement everyone seems to forget that investment income is taxed (except for in the TFSA of course). Therefore, my 6% return on my investment taxed at 42% actually turns into a 3.48% return. All of a sudden a safe and guaranteed return savings of 3.69% looks pretty good once you factor this in.

    I prefer keeping a balanced approach to debt payment vs. savings but put more weight on paying back debt. It is a safe guaranteed return, tax free interest savings and the bank will want their money bank whether or not my house gains or loses market value.

  9. @ sarahhiggs – I agree with Ross re: the bank’s interest. I am giving up a few years of compound interest by not investing anything right now, but in the end the trade off is that my house will hopefully be fully paid off and I will have extra free cash-flow to invest later. This does take some amount of discipline to do, as the free cash-flow could also be used for “stuff”.

    @ Jacq – I don’t really get much in the way of RRSP room as I have a defined benefit plan at my work (which is also a reason why I’m not too worried about saving for retirement right now).

    @ Ross – Thank you for your comments – If I didn’t hate paying the bank interest so much I would probably take a more balanced approach, but it’s just one of those things I really dislike spending money on.

  10. This is a great post… and some great comments… One factor that is often overlooked is the cost of bearing the “Burden of Debt”… And in my opinion getting rid of that burden has a much greater value than the 3.59% return you get from your debt repayment… After all this Blog (and its participants) are looking to achieve one thing and that’s “Financial Freedom”… And you can not be free with debt. If you have a $500,000 Mortgage and you have $500,000 in RRSPs you are not free. You certainly do not have the freedom to quit your high paying job in the city (with its soul crushing commute) and choose to work part time at your local hardware store selling nails (walking distance from your house).

    Paying off your mortgage instead of investing might be BAD advice if what you want to do is get rich. But financial freedom comes from getting rid of the burden of debt.


  11. My $700,000 home will be completely paid for in about 6 months and I am 40 years old. Its been a lot of hard work and diligent focus on paying the mortgage off. In 2010 alone we paid $112k off the principle of the mortgage and another $3k in interest. I can’t tell you how great it feels to have an almost mortgage free home at a relatively young age. We still max out our rsps each year and have no pensions to look forward to but starting later this year we will have a lot more cash to divert to retirement savings. I predict a fiscally healthy retirement well before 60.

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