I Don’t Have Enough Money, But I Retired at 40 Anyway

It might sound odd coming from a personal finance blogger, but the truth of the matter is I don’t have enough money for early retirement but I retired before my 40th birthday anyway.  Oddly enough, despite all the readers on this blog no one has really called me out on this so far. Why?

Because I was honest enough to state what I’m doing really isn’t a full on ‘I never plan to work again retirement‘ but rather a ‘I plan on doing some fun work during a semi-retirement.’  And in that little shift of wording on what I planned to do made a huge difference between being able to leave now and being able to leave two to five more years in the future.  You see despite most personal finance bloggers obsession with numbers and saying you need to have around 25 times or more of your annual expenses saved to retired the secret it this: it’s actually bullshit if you semi-retire.  In fact you can think about leaving work when you are around 80% of the way there.

Pardon? Well you see the analysis behind that 25 times your expenses (also know as the 4% rule) is solid, but my beef is with one of the underlying assumptions which is: you never receive any additional money from work or other sources.  Basically it assumes you only use your investment income to live off of, which is fine if you really plan to NEVER work again, but generally ignores certain items in reality.  For example, it ignores you may get some government benefits in your old age (like Old Age Security in Canada or Social Security in the US) and it also ignores the fact it is fairly easy to earn small quantities of income when you don’t have a full time job.

So let’s break each one of those down.  First off you will be getting some kind of income from your government when you get older.  You can debate how much depending on which country you live in and how well funded the given program is.  As an example, in Canada the Canada Pension Plan (CPP) is rock solid and has enough to easily make its obligations for my retirement.  On the other hand the Old Age Security program is paid out of the current yearly revenue for the government and thus has a significantly higher degree of being altered in the future to change either the qualifications to get the money or reducing benefits or increasing the age to collect it.  Yet despite all of that I’ll likely get something from both programs and during my model work for my retirement I just assumed half of the OAS payments.

Now onto that second point about earning income.  The internet seems awash in articles about having a side hustle to earn extra income so if you even just keep on doing a hustle you can likely bring in $3000 to $5000 a year fairly easily.  For example, minimum wage where I live is currently $10.96 per hour and even at half time (20 hours a week) that is $11,398 per year income.  Or if you do just 10 hours a week you could still pull in $5669 a year and that is at minimum wage.  Imagine for a second how little you would need to work if you get a higher wage.  In my particular case I’m going to take a stab at writing fiction for some income first and if that doesn’t work out I will consider other options.  Also it helps my wife has decided to keep her home based daycare running for a few more years which provides some income for us.

In the end, the reality of the situation is this.  If you are prepared to do some work after you leave your job and you are willing to depend somewhat on government benefits you can likely get away with about 80% of your target savings amount and reduce your working career by a few extra years.  Of course there are risks doing this such as not having any other income for long periods or poor investing returns.  Yet managing those issues is entirely possible.

You just need to have some backup plans in case things don’t work out and also keep a bit of a cash buffer around to allow you avoid work for periods of time if required.  So in our case we have one backup plan which is linked to my wife’s decision to shutdown her daycare.  We would downsize the house and move.  This should free up some money from the house and also reduce our property taxes going forwards.

But the reality is your current situation of having a job also has risks.  We just tend to ignore them as we are so used to having them.  For example, job security is largely non-existent.  The reality is that if the company is willing to spend the money they can fire  you or lay you off at any moment without much of a reason either.  We know this but we just don’t think about it all that much.  So what you are really doing with an early retirement is just changing your risks, not removing them.

So what do you think?  Would you be willing to enter a semi-retirement to get out of work sooner? Or are you more interested in not having to ever work again?

March 2018 – Net Worth

Welcome to my net worth posts where I try to prove to myself and you that I wasn’t crazy for leaving work in the fall of 2017 to start my early retirement.   A few important notes:  we are mortgage free and our goal is have our income/investment gains exceed our spending on a 12 month rolling average (please note this metric is still under development).

Investments

Accounts

RRSP $63,550
LIRA $17,100
TFSA $93,400
Pension $171,940
Wife’s RRSP $90,860
Wife’s TFSA $86,960
Wife’s Taxable $45,690
High Interest Savings Account $37,280

Investment Net Worth $606,760 ($3,700 decrease over last month from investments)

Home Equity

Estimate $395,000

Income

To keep things simple I’m only going to track what income comes into our main ‘house’ chequing account.  I won’t be tracking my wife’s or my businesses income as those don’t really matter until the money moves over to the ‘house’ account.  Also I won’t track investment gains since that is covered above.

  • Interest Income: $27
  • Wife’s Monthly Payment to House: $550
  • Child Tax: $310
  • Mystery payment $8
  • Total Income: $892

So I literally have no idea why my old workplace paid me just under $8 and I’ve left a voice mail with their payroll department trying to sort it out.  Oh well, for now I’ve logged it in here.

Spending

Last Month $1648

Again a fairly low spending month but that is normal this time of year for us.

Trailing Last 12 Month Average $3729 (or $44,755 for the last 12 months)

Results

Net Worth ~$1,001,760

Feb Investment Gains & Income/Spending Ratio = (-3700+892)/1648 = -1.7 (Target 1 or higher)

Sept to March Invest Gain & Income/Spending Ratio = (10857+8762)/19175 = 1.02

Just a note on the multiple month ratio I stripped out all income related to my old job from the early months to provide a more realistic picture for retirement.

Commentary:

Well this downward slide in the stock market is starting to take its toll on my ratio target (but this is life with Trump getting into a trade dispute with China).  This is the second month in the row when it was negative and it has dragged down our multiple month average to just over target.  But we are  staying ahead of our spending between our investment gains and income so it isn’t bad yet.

The good news is in April this should get a shot in the arm as I get my tax refund which should be just under $4000 thanks to using up my RRSP contribution room in 2017.  This should in theory drag up the multiple month ratio if we keep our spending down.

Any questions?

(click to make bigger)

Managing Your Retirement Money

I’ve noticed something since being retired that doesn’t get discussed that much among personal fiance bloggers. Prior to early retirement we tend to focus exclusively on growing our net worth. It’s all about the increasing balance of our investment accounts and paying off debt. Yet after hitting my ‘number’ and going into my semi-early retirement I have noticed the worries and concerns don’t even really look at my net worth so much. Instead I’m now focusing on my cash flow.

Which when you think about it makes sense.  After all if your income from your investments and other sources continues to exceed your spending over the long term you likely won’t ever run out of money. So while I still worry about living within my means it is now more focused  on managing our cash flows. Of course if your cash flow is constantly negative then you may see your net worth declining if that negative cash flow exceeds your investment growth.  But in short if you are constantly in a positive cash flow you rarely need to look at your net worth anymore.

So this is the game I as playing right now. Can our dividend, interest and small business income exceed what we spend on average over a year?  With that in mind I thought I would explain a bit how I plan to manage our money going forward.

First off let me state that I don’t plan to look at my accounts daily or do anything stupid like day trading.  Our portfolios are designed to require very little management from us on a day to day basis and I want to keep it that way.  But of course this doesn’t exclude you from doing some work on the investments, it should keep the amount of time required to a low level of an hour or two per month with one notable exception.

That exception is that each year around the start of November I would do a little maintenance on our accounts and move money around as required to rebalance the RRSP accounts which are all invested in index funds (but I only do that when the gains are around 20% or so and then shift a chunk from equity to bonds).  Why late fall/early winter?  Well because that allows me to take money out of the RRSPs if required with a fairly accurate estimate of any earnings we have made for the calendar year.   This is important as any RRSP withdrawals are subject to a withholding tax which is used as an estimate of our income tax owing on the withdrawal.  So by doing near the end of the year we only give the money to the government until we file our taxes the following spring and we will typically get most of that money back as a tax refund since our actually income tax bill should be very low.  Please note for 2017 I didn’t actually do this since I have pre-saved our expenses for 2018.

On a day to day basis we normally use our cash in the high interest savings account to cover expenses.  To simulate a pay cheque we have setup auto transfers twice a month to the main chequing account.  For now I’ve defaulted that amount to $1000 twice per month.  If I don’t use the money in a given month I just push it back over the high interest savings account when I calculate our net worth at the end of the month (and write a blog post about that).  Also keep in mind that our cash position in our high interest savings account when I left work in the fall of 2017 was at over $50,000 which is a bit larger than normal.  This is because it was also holding our 2018 TFSA contributions of $11,000 in that account.

In addition,  twice a year we drain off the cash sitting in our TFSA and taxable accounts and put that into the high interest savings account to pay for our day to day spending.  We don’t reinvest our dividends and distributions, but rather just let them accumulate in those accounts during the year.  I plan to take the money out at roughly six months apart.  One will be in November during my annual financial RRSP balancing session and the other will be in May.  At the moment those dividends are just under $10,500 per year (this recently just went up since Husky Energy just started paying their dividend again).

Meanwhile my wife’s daycare business transfers a monthly amount over to house once a month ( this is currently $550/month).  Then towards the end of the year she also does a lump some payment to cover the cost of her Rough Rider season tickets.  I had previously offered her the option to retire with me but she decided she wanted to work for a bit longer.  With that extra income in mind I left work about a year earlier since I didn’t need the capital to cover off her income right away.

Meanwhile any cash I earn (from writing or what ever I do that happens to generate some income) I’m putting that into our slush fund for vacations, house renovations and car replacement.  I retired with a $20K slush fund balance in that which is also stored in our high interest savings account.  So with our current draft taxes of 2017, I should see a refund of over $4000.  I’ve already decided to put 90% of that towards the slush fund and put the other 10% to buying some equipment to set me up for all grain beer brewing.

While we are currently getting some Child Tax Benefit cash each month that is currently moved directly to the kids’ RESP account.  That will end this year after the RESP account gets to around $80,000 (which is our overall savings goal for that account).  At which point we will stop the transfers and just roll that cash into our monthly spending on the kids (currently this is mainly clothes for my 13 year old who seems to be getting taller each week (don’t get me started on what he is doing to our grocery bill) and then activities like swimming lessons).

Of course all of the above is more or less my planned framework.  Reality will be different.  Case in point, after I file my taxes for the 2018 tax year I fully expect our Child Tax Benefit to increase dramatically in July 2019.  This will allow us the odd situation of really not having to touch the RRSP at all if we so choose.  So even when I go to take some money out of my RRSP this November I really won’t need all that much.  This is part of our longer term plan to account for my wife’s retirement in the future.  By not touching that RRSP accounts for a few years they should grow enough to cover off my wife’s business income to the house (at least that is the plan).

This of course then brings into the eternal debate do you take money out of your RRSP up to your basic deduction each year even if you don’t really need the money?  Why would that be a good idea?  Well because that money will effectively be a ‘tax free’ withdrawal from your RRSP.  Yes you will have the withholding tax applied initially but after you file your taxes you will get the money back.  But if you don’t need the cash you will likely put some into your TFSA but that amount is less than the basic deduction amount.  So then you end up with having to start a taxable account and potentially have a tax liability with that.  Which then leads you to wonder if you should just take out your TFSA contribution plus any cash you need to live on in the next year and quit at that.  To be honest, I haven’t fully decided on this yet.  I’m currently leaning towards taking less than from my RRSP and dealing with slowly melting the RRSP down and moving it into the TFSA.  In my wife’s case, this gets even more messy because of your business income will likely be much higher than mine and closer the the total basic tax deduction.  And we won’t touch her spousal RRSP until 2019 at the earliest to ensure any money we pull from that account is not attributed back to me  – you need to wait three years from the last deposit to make sure that doesn’t occur which is why I stopped putting money into her spousal account literally years ago.  I know it is confusing, but those are the rules so I just work within them.

So hopefully all of that helped you understand how we manage to pay for our expenses now that I don’t have a job.  I suspect that I haven’t been clear on everything so please do ask any questions in the comments.

A blog about early retirement and happiness