Free at 40

As long term readers on this blog know I started planning my retirement to be ‘Free at 45’, yet the reality has been that target has been slowly dropping for a number of years.  The last official calculation I did back in 2012 (see the series on the side bar under Popular Posts) came out with me being able to leave work at 42 with cash to spare.

So I’ve had this idea in the back of my head, could I be ‘Free at 40’ instead?  After all things have been going really well and I wondered how different would that look like if I decided to go for it.  So I did look into it and I’ve decided I really like the idea, even if it means some significant changes to the original plan.

The major shift that occurs if I do Free at 40, is the fact I go that early I’m much more in the realm of semi-retirement rather than closer to full retirement as with the original Free at 45 plan.  I’ve always had some work for me in these plans the question as always been to what degree do I feel comfortable depending on future work income.  The Free at 45 plan only used work income to cover vacation spending or other purely fun items.  The money wasn’t needed to pay any day to day expenses.

Yet as I grown I’ve come to realize I don’t really mind doing some work, as long as it isn’t too much.  So I am willing to trade some future work at part time to cover off some expense if it means I can get out of full time work sooner.  So for the longest time I had trouble finding where I could be comfortable on depending on some work income.

In the end, I approached the solution backwards, I picked the age of being done work at 40, or just under four more years.  If I do that I estimate I can save approximately $600,000 by that time, which is about $100,000 less than my original $700,000 in the Free at 45 calculations.  Which on a yearly basis, means I’m short about $4000 a year than my original budget (so all the other costs like food, property tax and all the house bills would be still fully covered from investment income).  In practical terms, the amount is the money I would be saving on an annual basis to eventually replacement my car and future house repairs.

So a solution to provide some buffer on those amounts is to save a slush fund for approximately five years or $20,000.  Thus giving me the ability to cover any immediate expenses the may come up.  I’m still also attached to my backup plan of having a few years of living expenses in a second slush fund to allow me to avoid taking money out of my investments in a few really bad years.  This would require another $50,000 to be saved.

These slush fund may very well be in place when I turn 40 since I typically do better on my savings and investment returns than I predict.  If not, I estimate I could save those in just over six months, which would turn free at 40 into free at 40.5…I think I can handle six months if required.

So you might be wondering why bother with Free at 40, when Free at 41 would likely be damn close to the original plan?  Because in short, I’m sick of making excuses to keep working full time.  I’m ready now to move on and do different things with my life and the only reason I’m sticking around at the moment is to save money.

I noticed in life it is easy to make small amounts of money doing things so some dependence on income doesn’t scare me. I’m tired of finding reasons to stay working full time when more often than not I’m noticing how things can turn out just fine anyway.  Humans are extremely good at adapting to our circumstances so I don’t fear doing this at all.  I will still have a good life.

So what do you think of ‘Free at 40’?  Brilliant, insane…somewhere in between?  I welcome all feedback on this idea.

Change in Savings Plan

In order to pay off our mortgage at the end of May, my wife and I had to almost zero out our entire cash savings we had. I will be the first to admit that the amount we had sitting in a 1.3% ING (or Tangerine account now) was probably too much. There were relatively safe alternatives to the interest rate we were getting that were just as liquid to access, for example iShares XBB is yielding almost 3x my Tangerine account right now, at 3.2% (previous year trailing yield).

I have what could possibly be described as an irrational angst towards running out of money. As of this April, I’ve worked for the same employer for over 10 years and have no real concerns for my prospects in long-term employment – whether I continue working where I’m at or with a different firm in the city I live in. With no mortgage payments, our monthly bills have been reduced by around 50%, leaving less of a reason to have a significant amount of money set aside.

My largest concern is a significant expense that I can’t pay – something like a furnace breaking, a major car repair or a pipe bursting somewhere in my house. Going forward I think we will still keep some cash on hand in a savings account, but we will lose a majority of the previous “buffer” we had prior to the mortgage being paid off in exchange for hopefully higher returns on our savings account.

The question comes down to how much money is a reasonable amount to keep in cash savings. Is $1,000 enough? Should we even bother keeping any savings in cash, or just invest 100%? I currently have an unsecured line of credit along with a pretty good limit on my credit card. Between the two options, I should be able to manage any significant expenses. I could turn the unsecured line of credit into a secured, reducing the interest rate and monthly insurance requirements prescribed in the agreement.

A couple of years ago, I was very comfortable having a bunch of money sitting around. With no debt, I think I am willing to be a little more risky with my finances. This type of change will initially take me out of my comfort zone, but I have to remember that I’ve kept a bunch of cash sitting around and it’s essentially been losing me money over the past decade or so.

Is there a particular expense that you keep money around for “just in case?” Are you comfortable borrowing to cover emergencies?


10% Less Pay, But $8 Less on My Paycheque

I got my first pay cheque after I’ve reduced my working hours by 10%, so I’m also getting paid 10% less.  Yet after looking back at my previous pay stub I’m only making $8 less in take home pay.  How the hell is that possible?

Well the answer lies in a little bit of math that most people don’t really consider.  First off I make roughly $100,000/year at full time hours.  So at 90% time my salary drops to $90,000.  So $10,000 year less or $417 per pay cheque, yet that is on a gross basis.  You have to consider that $10,000 is getting taxed at my highest marginal tax rate or roughly 40% income tax.  So in fact if you reduce that $416 by 40% you would expect a $250 reduction on my take home pay instead of $417.  Yet my reduction was only $8, so we are closer but not there yet.

The answer was in the fact I had just max out my CPP/EI payments for the year on the previous pay cheque.  The 2014 contribution rates are 4.95% for CPP while EI is 1.88%, so all total you lose 6.83% of your pay cheque to these until you max them out for a given year.

So it may seem sort of obvious by now that out of my 10% less pay, I lose 4% approximately to income tax normally and the rest to CPP/EI, thus once I maxed out those my tax home pay is nearly identical for the last half of the year.  Of course the real drop in pay kicks in next year when I start paying CPP/EI again, but in the interim it does mean the rest of the year is fairly easy to live with the salary reduction.

Yet for now, life is easy and I don’t even really notice that I’m making less money.  It’s sort of a nice way to break myself in to the change in salary.  So have you ever got a weird pay stub?  Did you figure out what the issue was?