Early Retirement and the Cash Flow

Over at Common Sense Financial Wisdom From My Wife, there was an interesting post about early retirement being more about having a cash flow to cover your expenses rather than drawing down your nest egg. I believe the point of the article was to point out that if you have the cash flow to retire early it doesn’t matter how long you are retired since you won’t run out of money.

This is a bit of dangerous idea when it comes to early retirement planning. Yes you can retire that way, but I’ll explain what I mean about dangerous. If you assume that your spending will stay the same for your entire retirement your ignoring some studies which seem to indicate this isn’t true. Actually it seems your spending goes down in phases in your retirement years. During your initial retirement you will burn through more cash as you travel and do all those things you been waiting to try. Yet as you get older you can’t travel as easy and start to want to spend more time with the family, so your spending drops off. After all how many 80 year olds do you know whom still travel around the world every year?

So your asking, how is the cash flow model dangerous? Well it makes you saving up enough to fund your entire retirement like it’s your early retirement phase, you will be grossly over saving compared to your entire retirement spending. The net result, you actually spend more time working than you needed to. After all isn’t early retirement, about getting started early?

PS: You might notice that I’m posting on a Sat. when I normally don’t do this. Well the fact is I’m generating ideas faster than I can write about them at the moment. So I’m going to give Sat. posts a try for a while and see how it works out. Yet a word of caution about this, I can’t tell you when the post will be up on a Sat, since I don’t set an alarm on the weekend. -CD

Guest Post by Margot Bai

Thanks to everyone who entered the contest to win a copy of Margot Bai’s new book Spend Smarter, Save Bigger. The winner is Duane L, who should have an email back from me asking for his address. With this contest I ask Margot if she would be willing to write my first guest post and she graciously agreed. So here we go. – CD

Thanks CD for the opportunity to be your first guest post!

Thousands of dollars spent (I would say lost) following the “advice” of commission-based financial professionals. In our efforts to take responsibility for our financial future, many are paying a high price, locking up their money in high-fee mutual funds, high-interest rate
mortgages and expensive insurance policies.

Mortgage reps recommend we lock in for a 5-year term, trapping us at a higher rate. Insurance salespeople convince us to pour our money into expensive permanent life insurance policies. Financial planners like author David Bach try to distract us from their fees by telling us that
what really counts is cutting back on discretionary spending like coffee and take-out.

When did common sense fly out the window? My message is simple but I believe pivotal to financial success: focus on bigger savings because this will build your wealth much faster than the small stuff. Often these big savings come at the expense of commission-based service
professionals whose livelihood depends on taking a slice of our pie.

While there are certainly many well-meaning financial service providers, their compensation is based on them convincing you to buy their more expensive products. It is a situation that can make one very angry, especially because these people appear to be there to help us. However,
the age-old principle of buyer beware applies to every other area in life. Why should financial services be any different?

I wrote Spend Smarter to inspire Canadians to create an affordable lifestyle that will allow them to live comfortably while saving a significant part of their income. However, a frugal lifestyle alone does not guarantee financial success. When it comes to financial services, we need to educate ourselves so we can see through the sales pitch and make the choice that will help us keep more money in our pocket. At the end of the day, isn’t that what saving money is all about?

-Margot Bai, Author of Spend Smater, Save Bigger

Book Review: Spend Smarter Save Bigger

I was recently sent a copy of Spend Smarter Save Bigger by Margot Bai which I just finished reading and I have to say it is the best general personal finance book I have ever read.

Overall Margot’s book is just full of practical ideas that everyone can use and she explains everything in very basis terms that anyone could understand. She covers life insurance, buying a house, getting a mortgage, buying a car, car insurance, index investing, RRSP’s and their role in retirement. She even manages to squeeze in a brief section on estimating your savings for retirement and RESP’s.

I find most books tend to ignore certain things like the psychology of how people view their money. Margot uses her degree in psychology to really examine in some cases the our excuses around things and calmly cuts through our internal bullsh!t.

I also noticed in her recommended reading section a number of books that I have read and enjoyed as well such as Stop Working by Derek Foster and Stop Working…Start Living by Dianne Nahirny.

Perhaps my only complaint about the book is the retirement saving section could have been longer, but with all the other great material she covers I really can’t fault her for keeping it short in the overall context of the book.

I would highly recommend to anyone that they go out and buy a copy of this book as it great addition to any home library for anyone who doesn’t win a copy of the book from me. Yes that’s right folks, I’m having a contest to win a copy of the book.

Win a copy of Spend Smarter, Save Bigger Contest. To enter please send me an email at candian.dream.free.at.45@gmail.com before March 7th, 2007 at 7pm CST (You must send me an email to enter, I won’t accept just leaving a comment since I don’t require email address on my comments). Limit one entry per person. Only open to residents of Canada. The winner will be picked from a random number generator. Your email address will only be used to obtain the winners mailing address.

For additional opinions of this book also check out Million Dollar Journey’s Review and the Canadian Capitalist’s Review.

A blog about early retirement and happiness