Posted by Tim Stobbs on January 13, 2009
Welcome to my three part series on modifications to my retirement plan. If you haven’t previous read them I suggest you read my series “How Much Do I Need to Retire” for some of the background of the numbers.
Ok, today’s post is all about the market crash and the secondary affects on my plans to retire early. So overall most people would think a plan like mine would be more or less killed off by a setback like a 20% loss to my investments. The reality is my plan could have been killed off if this event had happened much later in the savings cycle before I stabilized my funds to be more conservative. But that isn’t what happened.
The reality was my investment net worth peaked at just over $60,000 during the summer of 2008 and during my last net worth update it was about $51,000. I’m only off 15%. So how is that possible? Well recall my overall amount is small and my contributions do make up a fair percentage of my increases. So they help buffer the drop, but it also means I should recover back to $60,000 by the middle of this year provided the market doesn’t drop further. So currently at most it’s cost my plan about 18 months to 24 months currently, which if you compare that to my earning potential just before I retire I might need to work another 6 to 12 months.
Actually overall I would have to consider they crash has done me a favour. It’s reduced the over valued stocks back down to a more reasonable range and pushed up yields. So my short term plan is to pour money into my investments so when the recovery does finally take off in 2010 or later I will be in a great position to make up some losses and hopefully get in some good growth. I haven’t done a detailed double check on my calculations yet, but given I only need a 7% average rate of return I’m in a fairly good shape to still retire at 45.
In the long run depending how this exactly plays out I can actually see this crash combined with my new job being the events that take my plan from ‘possible’ to ‘damn likely’. It’s also provided a wealth of insights into my own investing personality and the risks I can take. For example, I still think index investing is a good plan for most people for the core of their investments and I’ve learned to actually love some bonds in my portfolio.
So in the end, I’m not sure, but I suspect that the crash was actually a good thing to my plans to retire early. So to all you dreamers out there don’t lose hope yet. Keep to the plan and push forward, depending on how much time you have left you might be alright after all.
Well tomorrow’s post is about TFSA’s and where they fall in my plans and a few modifications to my overall plan that have fallen out of this crash and little soul searching.
Posted by Tim Stobbs on January 12, 2009
Welcome to my three part series on modifications to my retirement plan. If you haven’t previous read them I suggest you read my series “How Much Do I Need to Retire” for some of the background of the numbers.
Well several significant changes have occurred since I’ve last updated my plan. The obvious ones include the stock market crashing down, Tax Free Savings Accounts (TFSA)’s are now available and I started a new job in December last year. Today’s post is going to look at the changes coming out from my new job.
Now for those of you with good memories you might recall I was excited by my last employer’s pension plan because in fact it wasn’t a pension plan at all, but rather a group RRSP. Which in simple terms meant I didn’t have any age restrictions to using any of that money I got and I also didn’t have any waiting period to ensure I vested in the group RRSP (therefore when I left I got to take all the company matching payments with me regardless of how long I had been there).
Well with my new pension plan I’m back to having an age restriction. I can’t access the money until I’m 50. Which all in all isn’t too bad. It’s only leaves me with five year to fund out of RRSP’s and other savings before I can use my pension money.
The good news on my new pension plan is first off the fees are incredibility cheap. The MER for my particular investment choice is a 0.35%. Which is so cheap in fact I might take advantage of the fact I can keep my money in the plan even after I retire. The highest fee I’ve seen on any investment choice is 0.45% which firmly puts the fees in the range of ETF.
The really good news on my new defined contribution pension plan is I put in 5% and they match with 6%. Oh, but it gets better. I also have access to two other programs that allow me to put in an additional 3% and 2% respectively in the pension plan as well (an aside note here, I also have the option of putting these additional funds in a group RRSP in stead if I like). So in total I put in 5% and the company puts in 11% for a grand total of 16% of my salary. Yes, that wasn’t a typo, 16%. So I only have to put away 2% of my income per year into my RRSP’s to maximize my contribution room for a given year. Have I mentioned I LOVE my new job’s benefits?
So using an average rate of return of 5.5% I should have around $260,000 in today’s dollars when I retire at 45. Needless to say that is going to help me pull off a early retirement.
Also I should point out I’m still using the same % returns as previously because I’m still considering things on a long term average. A -35% return is unusual as is a +20% return. So I’m not going to beat myself up about any given years return, but rather focus on the long term plan. Keep living below my means and save a lot of my income.
Tomorrow I’m going to look specifically at what that -20% return from last year did to my retirement plans.
Posted by Tim Stobbs on January 9, 2009
It occurs to me often people consider the payback period when deciding weather to build a renewable power generation or solar hot water heater or geothermal system on their home. Which is a fairly standard way to determine if an investment is a good idea. Yet in reality a renewable investment actually is somewhat more similar to an inflation adjusted annuity.
By investing into something that will produce energy, you have managed to avoid paying for that energy now and in the future. So are prices for energy rise your investment keep producing with your previous dollars you put into it. So in general the investment is similar to an annuity as you put down a large lump sum payment to have a stream of savings in the future.
The reason I point out this difference is I’m realizing putting aside some cash or investing in renewables might actually be a great idea for early retirees that don’t expect to move for a long period of time. By investing some cash upfront in renewables you can pick projects that keep producing a rate of return that will keep mounting up savings as inflation ramps up your energy costs. For example, if you are getting about a 4% rate of return from your investment that will only increase over time as the energy you are off setting keeps going up in price.
From my limited point of view energy costs are only going to keep rising over the next twenty years or so. Why? In Canada there are been very little new power generation build that isn’t natural gas based in the last decade. ( And natural gas is one of the most expensive ways to produce power, but it has the advantage of being lower in CO2 emissions.) So you will see massive infrastructure overhaul in the next ten years to replacing aging power facilities and deal with CO2 and other emissions (SOx, NOx, Mercury, etc). Both items are going to cost a lot of money and some of it will be passed along to consumers. In addition using more renewable power requires some backup power which natural gas is ideally suited for because you can bring it on line fast. As such natural gas usage for power generation will only increase. So that will put more demand on the natural gas market and cause prices to go up there as well.
So that’s my idea for today. What do you think? Are renewables a good investment choice to avoid future costs? Or am I just dreaming?
