Early retirement is possible with some alterations to plan
None of these things were in the plan. But it is important to reward yourself periodically to keep motivated.
Over the past two years, the Toronto Star has followed my early retirement journey, which started as a dream to retire when I was 45. I’ve been working hard over the past few years to make the dream come true and I’ve managed to bring the target down to Freedom 42, just seven years from now.
Yet I recently realized I had made some mistakes when it came to the assumptions behind how much money I could save and what sort of returns I would need to make it all come true.
At 30, looking ahead to working until I turned 65 sounded like a prison sentence. So I looked into the idea of early retirement, which sounded good, but I didn’t know how to get there. I did a little research, with books such as Your Money or Your Life, and came to realize that retirement doesn’t have to be sitting in a rocking chair. You can plan to have a second career or even start a business.
It can be an exciting time rather than just endlessly relaxing, which appeals to me. During my initial retirement calculations I made several assumptions, including only getting raises equal to inflation, assuming a 5 per cent rate of return and guessing at my current spending. As I look back, I am aware that some of my assumptions have been wrong. What it means is that I will have to adjust my plan. I’ve also altered my view of what retirement is. It will mean different part-time work for the first five to 10 years, not stopping work entirely.
Here’s what I have learned:
Good news, rising income
My calculations assumed no raises above inflation, while my income has gone up beyond that. For example, between 2007 and 2012, inflation in Regina rose by 9.5 per cent, while my income, due to a few promotions, increased by 55 per cent. Our family income is now around $100,000 a year. Most of the extra money went into savings, helping to bring down my retirement target from 45 to 42.
We spent some of the extra money on luxuries. We hired a house cleaner and arranged private transportation for our youngest son to attend preschool. We treated ourselves to a10-year anniversary trip to Hawaii and spent a month in the Maritimes this summer.
Bad news, lower rate of return My retirement plan assumed a 5 per cent after tax and inflation return on my investments. I didn’t track it that closely until this year. Stocks markets and share prices don’t move in a straight line. They’re up some months and down others, so you have to look at longer periods to get a good fix. On average so far, I’m just barely on track for the last six months, so we’re making a few adjustments.
We closed out our high-fee taxable trading accounts at the full service brokerage at Royal Bank and moved the money into our discount brokerage at Questrade Tax Free Savings Accounts (TFSA), saving us about $300 a year in fees plus future tax savings.
We add dividend-paying stocks to these accounts on an infrequent basis, so this has reduced our cost from $29 per trade at RBC to $5. We were also charged a quarterly maintenance fee at Royal. This cost us $200 per year for both accounts. In addition, our previous accounts were subject to capital gains and dividend taxes and now all future growth in the TFSA will be tax-free.
Next up is moving our RRSP accounts from low-cost index mutual funds to even lower cost Exchange Traded Funds to reduce our investment management fees. This should over the long term give us a bit more of a margin of safety to our investment returns and keep us on track. Overspending My last mistake came to light when I signed up for Mint Canada to help track our spending. According to the software, I’m spending 20 per cent more than I thought, which reduces my savings. I discovered I was including costs related to my boys that won’t be there in retirement. Half of our overspending was related to their sports and school-related activities, which we presume will end about seven or so years into our retirement. Even so, I’m setting up an extra fund to cover kid-related costs from age 42 until 49. This plan will delay my retirement by six months based on current calculations.
Meanwhile, the remaining overspending is related to paying off our car, as I decided to use our line of credit instead of cash.
Since I borrow the money at 4 per cent, but buy investments that yield 5 or 6 per cent in a TFSA I’m ahead by not paying off the debt faster. Once interest rates rise I will likely switch back to paying off the debt. Basically, the problem is more temporary in nature, but it does remind me I should perhaps consider raising my long-term spending on the car in my plan. I plan to drive this car for a few years first to confirm its maintenance costs before I change that assumption.
The biggest lesson is that the plan is always a work in progress. Check yours annually to see if your assumptions are still valid.
The trick is to add a few conservative assumptions that will work in your favour, such as lower rate of return and ignoring raises beyond inflation, to help balance out some of your other potential mistakes or changes in priorities. You can follow Tim Stobbs attempt to retire early on his blog Canadian Dream: Free at 45.