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Friday, March 31, 2017

An Engineer’s View of Retirement

Posted by Tim Stobbs on March 7, 2008

Inspired by Larry MacDonald’s recent post about bloggers and their day jobs. I’m presenting a little humorous view of how an engineer would approach retirement.

Step 1: Define the Problem

  • I rather be doing any of the following more than working for a living till I turn 65: reading, cooking, gardening, home improvement, writing, playing board games, playing computer games, watching movies, watching paint dry or grass grow.

Step 2: Define the Variables

  • Current money dedicated to retirement, amount of positive cash flow for additional investing, list of debts, list of assets, previous rate of return for the previous five years on investments (recalling that prior performance is no indication of future performance), desired age of retirement (45), amount of low interest credit available for leverage (providing it passes the sensitivity analysis – you can sleep at night and not worry about it!), government provided income in retirement

Step 3: State Assumptions (if you don’t know the answer, here is what I used for guesses)

  • I’m going to do my genetic hardware proud and live till 90 years old (based on that fact my grandfather survived four heart attacks, smoked for 30 years and still lived to 86)
  • The government will not try to achieve political suicide by reducing benefits to the CPP and OAS programs in the next 60 years (or if they do they won’t fall below my personal inflation rate)
  • Using the divination tool of your choice (cards, rocks, sticks, candles, animal insides (from the butcher)) or a SWAG (scientific wild ass guess) to determine your future rate of investment return for the next 60 years
  • Assume my personal inflation will stay below the government’s inflation rate by at least 0.5% based on the fact I’m cheap and know how to keep my expenses down better than they do
  • Based on my wife’s intelligence and my own, my children will hopefully take up some engineering like tendencies and be self supporting by age 22 and won’t need any additional assistance to pay for their university education beyond their RESP account balance

Step 4: Solve the Problem

  • Using the Murphy’s law of engineering calculations (which states any calculation you do that takes five hours will be approximately just as good as anything you come up with one sheet of paper in under ten minutes)
  • Keep income up and expenses down, save the difference, be smart about your investing and one day your investment income will exceed your expenses which means you should resign because you don’t need to work

Step 5: Perform Sensitivity Analysis

  • Given humans still can’t predict the stock market for ten seconds or the weather for tomorrow I’m not going to try and predict the next 60 years of my life and that of the economic, political and social forces that will influence my life. It would be a waste of my time.

Step 6: Bask in the glow of being right and knowing that one day you will retire early.

  • Problem solved.

This post is now part of the 145th Carnival of Personal Finance.

Comments

11 Responses to “An Engineer’s View of Retirement”
  1. Jonathan says:

    As an engineer as well, I would say the real situation is that you just walk away since there are too many variables and margins of error. If you can’t box the correct answer, what’s the point? :)

  2. Another engineer here, great post. Come on, Jonathan, do you really need to box an answer? Whats wrong with a relying on a little estimation and intuition. Funny thing about finances… doesn’t work quite like physics. Where there is a will, there is a way!

  3. Jordan Clark says:

    What SWAG rate of return are you using for your investments?

  4. Canadian Dream says:

    Jordan,

    In my previous calculations I used a 8% rate of return, but then I deduct 1% as a margin of safety and then 1.5% for inflation to get 5.5% real rate of return.

    Tim

  5. Retired Syd says:

    Tim:

    Loved this post, and I’m not even an engineer! Sounds like you come from healthy stock, though, you better assume 95 instead of 90! (Or take up smoking now).

  6. White Eagle says:

    From one engineer to another, I totally agree.

    Like they say, “A Good Engineer is a Lazy Engineer!”

  7. Jordan Clark says:

    Hey Tim, so far have you so been successful at hitting your 7/5.5% rate of return on investments?

    From what I recall you’re taking a passive investing approach based on index funds as well as a more active portfolio? Have they performed equally or been hit different with the market correction this year?

    Could you post more on what your investment strategy is? Do you use indexed mutual funds or ETFs? How much do you allocate to different indexes in your portfolio? What factors do you use to identify that a stock is a good buy? Are you open to sharing what holdings you have?

    Even if not, the way you track everything I bet you could give some really good detail on the rate of your return over the length of your investments?

    Cheers, Jordan

  8. Wooly Woman says:

    My grandfather was an engineer, planned out his retirement step by step, lived to 90. His mistake though was that when he did he planning he didn’t expect to live until 90! So all his calculations were off, and they had to scramble a bit in later years. On the plus side he also miscalculated property value, which increased dramatically around the time he turned 90 (engineers can’t see the future right? just guess at it), the result of which now allows my grandmother, his wife, to live on comfortably after his death. I am sure I inherited some of those “engineer” traits, even though I chose a different profession :)

  9. Canadian Dream says:

    Syd,

    True. I could break 100, but at that point I would have likely sold the house and moved into a care home. So 90 is a good enough of a number.

    White Eagle,

    Engineers aren’t lazy. We are efficient. *grin*

    Wooly,

    I’ve met many people who would make good engineers but are not. All in all it seems to be a good group of people as long as you understand their limits (ie: not the greatest social lights, but can carry a conversation).

    Jordan,

    Wow! That’s a lot of questions. I won’t try to cover them all here, I’ll need a post to do that, but here is a good start.

    Frankly I don’t know if I’ve been making the 5.5% real return or not. I likely have the data to confirm it, but I’ve yet to follow my rate of return all that closely. Why? Well because when you are starting out the amount of the return isn’t all that important. +/-2% on $10,000 is hardly important compared to adding $20,000 to my net worth yearly. Granted now I’m likely to the point of I should be following it more closely. So thanks for all the questions. I’ll write a post on them sometime later this month.

    Tim

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