Capital vs. Cash Flow

An early retirement plan is an inherently risky thing to take part in. The risk in following through with the plan is that money will run out before you are readily able to make more of it, but there are still bills remaining to be paid. On the other hand, there is the risk (although less detrimental) that I could be one of those guys that drop dead at 52, while walking up a steep hill, or shaking my fist at a bunch of punk kids to get off my lawn.

My wife and I live fairly cheaply – beyond my golf habit and my wife’s desire for warm vacations, we really don’t have expensive lifestyles. Beyond the possibility of health problems causing significantly increased monthly expenses, I wouldn’t expect much in the way of lifestyle inflation to take place.

I like measuring sticks to show progress. In the past, I have written about slowly knocking off individual bills through investment returns – slowly taking chunks out of monthly expenses until they’re all taken care of (with a buffer). From my standpoint, it will be difficult to tell myself to keep working (especially on a full-time basis) at the point when all of my annual expenses are taken care of. The risk at that point will be that my investment portfolio gets wiped out and I’ll end up sitting in a dark, cold house eating beans and rice.

I’m sure I’ve read this somewhere else, but I’m not sure who to attribute it to, but living off a portfolio of 20+ diversified stocks and bonds does seem to be a lot less risky than my current dependence on a paycheque. Even though this pay has been continually deposited for over a decade, and I don’t expect it to end, it is dependent on me continually showing up and working for the next 10 or so years.

If I have adequate cash flow to cover my lifestyle at age 45, with enough of a buffer built in to cover major expenses within a diversified portfolio how much risk exists? If, for example, I have $750,000, yielding annual returns of $25k, and my household expenses are only $20k – should I work until I get to $1 million?

How long would you stay working? How did you arrive at your comfortable “exit number” ? Did you err on the side of caution, or plan on exiting the workforce as quickly as possible?

6 thoughts on “Capital vs. Cash Flow”

  1. If I have enough in my portfolio to yield enough money to cover expenses I’d ask myself this question:

    “Am I enjoying working? Or is there something else I’d rather do?”

    If I still enjoy working then I’d stick around work but maybe see if I could work less hours, which is what you’re doing already I believe.

    For me I probably would be on the side of caution and stick around work for a few extra years. In parallel I’d be looking into other income streams.

  2. We are at that point right now. Running the numbers it appears we are good for life. But we hesitate…do we REALLY have enough?
    More money would be more travel…we like to travel so maybe work another year…
    Hardest decision ever!

  3. My exit number back in late 2008 was $300k in exploding company stock which I would cash out and buy enough (cheap, thanks to the tanking markets at the time) shares in a specific bond fund to generate enough in monthly dividends solely from that to cover my dividends (with a little left over). My (additional) buffer would consist of dividends from other bond and stock funds.

    I have had to adjust my strategy over the last 6 years as the monthly dividends from the bond fund have declined slightly. I have added a lot of shares to that bond fund to partly offset its decline in dividends per share while I have begun using some of the aforementioned buffer of the stock fund’s quarterly dividends. These are just some tweaks to my plan which were always a possibility as I was forming the plan back in 2007-08.

    All of this exists just to get me age ~60 when I will gain unfettered access to my IRA whose value has nearly doubled in the last 6 years without adding a dime of outside money to it in that time, all while carefully rebalancing to take some advantage of the rebounding stock market. My IRA is te first of my “reinforcements” I will add to my cash flow; the other two are Social Security and my frozen company pension. My outlook only improves greatly when those become available.

    Just get me to age ~60 intact, even if I have to dip into principal a little bit in my late 50s. Right now, at age 51, the principal is $1.3M with about 2/3 of it in taxable accounts and 1/3 in the IRA.

  4. I think a big missing consideration in your scenario is inflation – that 20% buffer can be demolished rapidly even with inflation at 2% (supposedly – check what your real inflation is).

    This is even more important when the length of non-active income period(i.e. retirement) is longer.

    Personally I’d add a larger buffer – my passive income covers my actual expenses (diligently complied over 30 years) and adds a further 50-80% depending on the year – lets me sleep with absolutely no worries and can indulge in virtually any whim and/or or deal with unforeseen expenses.

  5. My comfortable exit number, would need to include the cost of senior care for my final years. My Grandmother is 92 and has recently started homecare support and eventually to Assisted living. Oh my, the cost is high!! $3000 to $6000/per month! x 12 = $72,000/year!!! in today’s dollar! not factoring in future inflation! My goal is $75,000/year passive income before I choose to do early retirement. When I am retired and still able-bodied, I will still continue to save money from the $75,000/year towards future senior care. I’m still working only b/c I enjoy what I do (keeps me sharp) and like the extended medical dental benefits. And it’s only 4 days per week which is beginning to feel like a long week at times. LOL

  6. My wife and I decided that we have had a enough of the daily grind and are planning on taking the commuted value of our pensions rather than continue to work for the next 10 years. So, in 9 months we will both be retired at the age of 32. We’ll have to unlock our locked-in RRSP so that will be fun but we look forward to it. And if I feel we need to supplement our income I may work a part-time job at Lee Valley or MEC…plus their employee discount would be a bonus!

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