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Wednesday, January 18, 2017

Other People’s Fear

Posted by Tim Stobbs on January 16, 2017

Well as I  enter the last year of my full time working career (I hope), I’m starting to notice a new emotion in other well meaning people around me: fear.

After all I have already told some of my family members a bit of what I’m planning on doing.  It’s not like I blog under another name so they could always find out the details anyway, so I’ve open to my family with my plans at least in general terms.  I usually don’t bother getting into too much detail in the more extended family.

Yet now when I’m mentioning I could be done before the end of this year, it suddenly becomes real for those around me and I get the usual well meaning concerns like:

  • Are you sure you have enough saved?
  • What happens if you don’t get a part time job?
  • What will you do with unexpected expenses?
  • Maybe you should work just one more year?

Of course I short of do an internal giggle at these questions as I have already asked myself those exact questions.  After all this whole leaving you job thing to live off your investments is a bit like jumping off a cliff.  You can’t stop it once it’s started so you need to be very sure on what you are doing before leaping off.

Depending on the person I will try to answer those questions, but of course I realize that with some people I can give all the answers they want, but I can’t stop another person’s fear.  By the way the answers are:

  • Are you sure you have enough saved? I’m mostly sure.  I can’t be completely positive because of the number of variables involved, but that is okay since I already have a number of backup plans in case things don’t turn out.
  • What happens if you don’t get a part time job?  Short term this isn’t a problem as I’m saving our expenses for the first six months.  Longer term I have lots of options for bringing in some extra money and keep in mind I don’t need this money for anything immediate like groceries.  It’s for vacations.  Worst case, if things go very badly I can go back to full time job for a few more years to build up more money.
  • What will you do with unexpected expenses?  The same thing I do now.  Pay them from the emergency fund or put them on a line of credit to spread out the impact.  Also depending on what happens, like something breaking in the house  I will have a lot of time to fix some things myself.
  • Maybe you should work just one more year? I’ve considered that and I may do it if for example the stock market does another 2008 crash or other horrible event occurs.  I’m willing to be flexible if things happen and adjust my plans accordingly.  After all I’m not locked into this plan until I provide official notice of my retirement at my job.

I like to hope the fact I’m very calm when discussing these things helps put people at ease, but ultimately they have to find the source of their own fear and face it.  I can’t do that for another person.  I can merely help them discuss the issues in their heads and put them a bit more at ease.

Perhaps the one thing that gets people is I’m aware of the flaws in my plan.  I fully admit I may not have enough saved to head into semi-retirement.  But I don’t want to live a life based on fear of the unknown.  I’m willing to try out something new and see what happens.  Yes things can go wrong, but they can also go right as well.  In the end, I live in a world of hope rather than fear.  Time will tell if that is a smart point of view or not.

Overly Optimized Spending

Posted by Tim Stobbs on January 10, 2017

As many of you already know I have a very optimized plan when it comes to us spending our money each year.  I don’t spend more than I have to on my water bill, we borrow books from the library prior to buying them and will gladly spend money on buying a wine kit to brew at home instead of buying a bottle from the store.  Over all this results in us having a very good life on far less than most people would for a similar lifestyle.  Our spending is highly optimized to our particular wants and needs.

So for years I’ve generally considered optimized spending a strength of our plan after all when you are reducing your spending the you have more money for savings each month and you also can reduce your overall retirement goal.  For example, if you need $1 million to retire with a $40,000 per year expenses, if you drop your expenses to $30,000 you only need $750,000.  So you don’t have to save that extra $250,000 in the first place.  I always considered this a good thing.

Except when it isn’t.  Oddly enough I came across the idea it can also be a weakness to your retirement plan.  Which I thought was a bit silly at first until I realized what they were getting at (sorry I don’t recall where I read this or I would link back to the source).  Having overly optimized spending also means you don’t have much fat in your budget to cut as the core spending (like your property taxes, home heating, power or water) takes up a greater percentage of your overall budget.  It also means any jumps in those core expense have greater impact on your budget as you have less optional spending elsewhere that you can cut to cover it.  After all, when you are overly optimized you already cut most of the optional spending out years ago.

So let’s compare two cases to demonstrate this:  let’s say family A is spending $40,000 a year and they retire with $1 million saved.  Then the stock market drops 40% and inflation spikes so their core spending goes up $1000 per year.  So being reasonable people they look to cut $1000 per year out of their spending (or 2.5% of their yearly budget) and they go after a few things they haven’t optimized before and make up the difference.  Then we have family B with $30,000 a year spending and only $750,000 saved.  They have the same event and $1000/year increase in core spending from inflation.  Now they have less to cut in the first place and they have the added bonus of the increase being a higher percent of their spending at 3.3% of their yearly budget.  Over all family B’s ability to cut spending is more limited and the increased core spending dollar amount has a greater impact overall.

Hence the point that overly optimized spending can also be a weakness during your early retirement beyond being a help to get you their sooner.  So how do you deal with this issue?  Well me personally I don’t plan on changing my plan because of this, but I would suggest the idea of making sure you do have some buffer in your budget.  You might not really need that buffer most of the time, but even if you don’t use it initially that extra money could be spent on a one off event later on if you aren’t using the buffer.  For example, take an extra trip every five years if you aren’t using that buffer amount.  The size of that buffer is a personal choice and will shift with how much slack you have in your overall budget.  The more optional spending you have, the less buffer you may need and vice versa.

So do you have overly optimized spending?  What would you do to resolve the risk of higher inflation and a lower market?

Dec 2016 – Net Worth

Posted by Tim Stobbs on December 31, 2016

The following is an update of Tim’s plan to retire early.  Please note we are mortgage free.

Our ultimate goal between investments and the home equity is a net worth of around $1 million.  The investment part of that target is $582,000.

Investments

Accounts

RRSP $52,910
LIRA $15,830
TFSA $74,580
Pension $151,790
Wife’s RRSP $83,590
Wife’s TFSA $70,020
Wife’s Taxable $62,880
High Interest Savings Account $14,880

Investment Net Worth $526,480 (increase of $19,390 over last month)

Home Equity

Estimate $395,000

Spending

Last Month $3339

There was a bit more Christmas shopping in this month. Yet the big purchase was my wife’s Rider season tickets which was $1270 for the pair.

Trailing Last 12 Month Average $2726 (or $32,714 for the last 12 months)

Results

PF Score: 28.2 {Target 31}

Net Worth ~$921,480

Commentary:

Out of curiosity, I looked up our investment net worth from last year.  Back in the end of Dec 2015 we had an investment net worth of $384,230, so for 2016 we went up $142,250 (yes that is a crazy high number).  That is also a slightly misleading number as we had some cash put aside that wasn’t showing up in these updates since I wasn’t tracking that account (our chequing account by the way, it’s never shown up in these updates since it is just a spot for money to move around).  I estimate that was perhaps ~$12,000 or so, so the actual increase in our investments was likely closer to $130,250, yet that still is an 33% increase in our investment net worth.  By the way, no I didn’t track our actual contributions this year.  I would estimate our contributions at around $60,000, so backing that out would mean a pure investment return of ~$70,250 or 17.7% (which kicks the crap out of my little 4.5% target). Compounding is a great thing! ;)

Our spending was up a for the year, but that is hardly surprising as I’ve been making efforts to get certain upgrades and maintenance issues done around the house prior to leaving my day job.  The trend will continue next year as we have some big ticket items coming up like new singles for the roof.

Any questions?

Dec 2016 Invest Net Worth

(click to make bigger)