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Wednesday, November 25, 2015

Extremes Make Poor Examples

Posted by Tim Stobbs on November 5, 2015

I have to admit I’m a bit torn by a recent article in CBC about Sean Cooper paying off his mortgage in three years. On the one hand I’ve met Sean before and his a nice guy and I am thrilled he managed to pull off this feat of being mortgage free by age 30.  On the other hand, I think that the media attention is bad for most people’s self confidence on doing better in their own financial life.

I understand that from a reporting perspective that showing off the extremes is good way to get interest in your article and provide an example of how far people can go towards a goal if they put everything towards it.  Hell, I’ve been in some of those articles.  So I do get the idea, but I feel that people that go to the extremes don’t tend to be great models for others.  The reason being is largely the fact the duplicating the results is largely impossible for most people.  In Sean’s cause, working 100 hours a week over three jobs just ain’t possible for someone with kids if you actually want to see them.  Or even in my case, I bought my house at a bargain price of $190,000 (back in 2006) that most people can’t potentially get close to in most of urban Canada today.  So while I think these tales can be inspiring to some it also becomes discounted by many as being impossible for others to achieve anything even close to it.

Yet perhaps I’m odd that way, I want to show people what they can do with their lives and not focus entirely on my particularly odd quirks that helped me along my path.  While yes, Sean did some extreme things to reach his goal he also did several very normal things like taking a lunch to work rather than eating out each day.  Or riding a bike to work.  These are not unrealistic changes, but often get ignored in terms of trying to discount why someone can’t do something to be a bit better at paying off their debt.  I’m not talking about paying off your mortgage in three year (like Sean) or eight years (like me), but can you take your 25 years down to 18?  Likely yes, and without too much effort.

Yet stories like that are common and don’t get much fanfare, so they largely go unnoticed until the person manages to retire 10 years earlier than their co-workers which everyone tends to write off as ‘luck.’  Yet the true of the matter is building a more secure future is the produce of a bunch of minor decisions over the course of decades.  Taking your lunch to work isn’t sexy and doesn’t save a tonne of money in a year, but compounding that over three decades and it starts to add up.  Repeat that in 25 different ways and add in a touch of taking advantage of a good break during your life and suddenly you are that ‘lucky dog’ that every talks about in the office for a few weeks.

The truth is being financial responsible is rather boring on a day to day basis.  Occasionally you do hit those highly emotional milestones which you should celebrate but most of the time it is rather boring and routine.  Taking your lunch most days won’t get you in the evening news, but over the years it can make your life considerably better.  So don’t get upset at the extremes and remember even they do the boring stuff just the sames as you.

The Plan for Getting Out

Posted by Tim Stobbs on October 21, 2015

Recently I had a frank discussion with my boss about the fact I’m around two years out from leaving the company.  I didn’t provide an exact date, but we did discussion his question “How do I get you to stay around longer?”  I bluntly answered at the time “Working less. Like a lot less.”  So we started an investigation into options on how to get that done.

Unfortunately I came to realize just how hostile my workplace policies are towards part time work.  While I give my workplace full credit for being open to discussing the idea of part time work in actual practice the policies aren’t much good beyond getting perhaps 80% to 90% time rather than the full 100% of full time work.  I ran multiple potential scenarios on to see if 60% was doable, but most of the time the overall costs to the company made the option of doing this hard to justify as the polices are stuck in thinking of bodies not dollars.

In the end, I just went with the path of least resistance.  I’ll keep my current 90% time and then use our existing flexible benefit, which is equal to 3% of my pay, to fund a bit extra time to further reduce my working hours starting in 2016. The flexible account doesn’t require any additional approvals…I can just pick the option and be done with it.  Three percent sounds like a tiny bit, but when you start to add up all the time I already don’t work I started to realize something important…I don’t work that much.

The math goes something like this.  A standard 52 week year has about 260 potential working days (52 x 5 working days).  Yet I also get 12 days of stat holidays a year, so that real total is now 248 working days.  I currently get the following time off 4 weeks of vacation (20 days), 13 Banked Days off, and if I use the flexible benefit another 7.8 days or 40.8 days off when you add it up.  Yet because I work 90% time, those totals get scaled down by 10% to 36.7 days off, but in exchange I get another 26 days off.  Oh, I get another 3 family days a year that don’t scale on top of that.  So grand total that works out to 36.7+26+3 or 65.7 days off.  So out of the total working days of 248 in a year I’m not working about 26.5% of the time starting in 2016 or inverting the result I will only work 182.3 days next year.  So out of total year of 365 days that means I only work about half the time (yes I love my workplace for time off…it was one of the major reasons I came to the company).

So bluntly, I came to realize I really don’t need to reduce hours any further since I already don’t really work that much.  Instead I’ll keep up this nice coasting pace for the next year or two and just leave when I hit my savings target.  Isn’t it funny how when you go looking for something, you come to realize how valuable what you already have is.

Tax, We Pay No Stinking Tax

Posted by Tim Stobbs on September 30, 2015

Of course the title of this post is misleading…of course I pay some tax right now…actually a LOT of tax when you get right down to it. Overall the number shifts around but in the end we pay about 20% income tax after using ever tax credit and deduction we can claim (based on total income for my wife and I – mine being almost all the taxes paid). So when it comes to retirement planning reducing your tax bill can go a very long way to shortening your retirement savings goals.  After all if you pay less tax in retirement you need to save less in advance to retire in the first place.  So how on earth do you keep your tax rate in retirement hovering around zero?  Well that are a few different ways to get close to zero in Canada, but to be honest a zero dollar tax bill is difficult to get down to.

The first one is likely the most straight forward and hard to do depending on your spending. Your basic income tax deduction allows you to pay no tax on the first $11,327 you earn for federal tax  in 2015 (I’m going to assume your provincial rate is equal to or higher than that number for this post, but please do check here).  So a couple can take in $22,654 in wages and/or RRSP withdrawals and pay no tax on it.  So if you are willing to keep to a low spending rate this gets fairly easy to do.  Just a note, yes you will pay a withholding tax on an RRSP withdrawal, but it will be refunded when you file taxes the following year if you stay below this limit. Oh, and please note…I’m not including Canada Pension Plan (CPP) deductions in this post since in my mind it isn’t a tax but rather a pension contribution.

Of course, even my spending budget is more than $22,654 so get more money out tax free you next stop will likely be the TFSA.  After all this account rocks, you put in after tax money and any growth you take out is tax free.  Nice deal, especially for young people who can potentially mainly skip the RRSP and put everything for their retirement dollars in this account.  Obviously the draw back here is for older folk who don’t have much savings in these accounts.  In our case, my wife and I plan to take out about $6000/year from these accounts during our retirement years.  So adding that to the basic deduction amount I can pull out $28,654/year tax free.

Yet that is still slightly short of our target spending of $30,000/year.  So am I out of tricks? Of course not, the last particular trick lies in the fact for lower income earners that you can often get dividend income completely tax free.  For example, if you clicked on that previous link and checked out Saskatchewan’s marginal tax rates you would have noticed for 2015 the tax rate for eligible dividend income is actually -0.03% for up to $44,028. Yes, the tax credit is actually worth just slightly more than the amount you get (hence the negative rate), so it is possible to get some eligible dividend income tax free.  The key here is to know what your particular province allows you to do.  For example, Ontario is even richer on the tax credit so while the limit is a bit lower at $40,922 but has a rate of -6.86%.  Nice eh?  Of course the downside is during your working career you will pay more taxes on this dividend income, but once you drop your income down in retirement you should be paying less.

Now the fine print…this works well in broad theory, but if you play a tax calculator (like these) you might find it doesn’t work out just perfectly.  After all if you have some working income during your semi-retirement years you may end up paying some Employment Insurance premiums and CPP contributions.  This also tends to break down when you get higher income levels.  So once you push past that eligible dividend limit you start paying more taxes.  Sorry, that are limits on how well you can play this game.

So have you tested your income plan to see how much tax you will be paying in retirement yet?  If not, I would suggest giving it a try.  It can be educational.  Or if you are retired how low did you get for your income tax bill?