Reader’s Question #10

Well my since my second opinion post was turning into a monster length comments I decided to take the last set of questions be Jordan and answer them in their own post. Jordan asked the following:

But do you think it would be possible to share some of the more general  information of your plan, like the % of income saved for retirement, paid to the mortgage or other financial goals like the RESP you mentioned. How long you project it will take to pay off your mortgage? Is your priority to pay it down or save & invest? What % or $ do you expect your net worth to increase annually? What have you set as important milestones along the way and when will you hit them? Can you describe in a bit more detail the types of “What if” plans you put in?

All of the above are very good questions so here are some of the answers. The plan using most of my yearly savings to cover everything including a slight mortgage acceleration, the RESP’s and retirement. The plan requires I save just over $15,000 annually (about 21.5% of our pre tax salary/daycare income) which includes $230/month for RESP’s for the boys and $150 annually to accelerate the mortgage to insure it is paid off on my 45th birthday.

The goal for the RESP accounts was to ensure each child has at least $10,000 a year (today’s dollars) for four years to help cover their education costs. Meanwhile the slight mortgage acceleration is to just make sure it is paid off when I retire at 45. At this time I have no plans to put any additional funds at the mortgage beyond what is outlined in the plan. I just want it gone by the time I retire, beyond that I don’t feel with today’s low rates there is any point trying to pay it off faster. The pay back just isn’t there. If rates increase to 7% or more it might be worth my while to adjust the plan depending on how my investments are doing.

According to the plan by next year my net worth should be up 12% (note the plan using my actual net worth, not the blog version). From there the % should drop as my savings are only scheduled to increase by 1.5% per year (with inflation) meanwhile the assets should keep growing at a higher rate.  While I expect my salary to increase by 3% annually. This should allow me some wiggle room if inflation is higher than I expect. The plan also allows for any additional money that shows up at my door to be spent with no effect on the plan. So any bonuses, or daycare income is freely available for personal spending. The plan does have a yearly net worth number which I could use as a target if I like (which would mean I should have a net worth of over $1million in today’s dollars when I retire).

The ‘what if’ plans consists of several scenarios I had Preet run to determine the effects of certain events on my goal. The idea of the ‘what if’ plans is to cover any short fall in the main plan if my personal inflation is higher than expected or my investment performance isn’t as high as predicted. The plans consist of two main options 1) downsize my current home to a smaller one by 20% of market value and 2) work part time in retirement and produce $2500/year during my early retirement phase (45 to 60). The second option was put in the simulate the fact I expect to do some things that earn some income in retirement (freelance writing/this blog).

The interesting fact of the plan is I set it all up to be reasonable for goals.  I could easily exceed the savings goals and consider retiring earlier than 45.  At this time I not willing to do that.  Why?  I need some money to enjoy today and cover this little odd expenses that show up.