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Monday, October 20, 2014

Retirement Calculations – Part III

Posted by Tim Stobbs on February 11, 2009

Ok, upwards and onwards here.  Now some important consideration to my plan is having a paid for house.  Right now the plan is to go crazy about 2012 or so and pay off the mortgage in approximately three years.  The reason behind the payoff is to allow me flexibility when I’m coming up on the end to retire earlier than 45 if things go well.  Also it allows me more options if I can live on a reduced income, I might end up changing my mind and going for semi-retirement earlier than 45.

Now a question from Part I was “am I depending on downsizing my home to retire early?”  The answer is no.  I do intend to downsize but the money I make from that I’m planning to fund my ecohouse dream.  So in the end my plan will get the benefit of lower utility bills and a new place to live, but I’m not planning on any of that in this exercise other than lower maintenance costs.  Basically I’m treating it as a nice bonus.

So what happens now with the taxable account?  Well the reason this account is still in the plan is I literally won’t have enough contribution room in our RRSP’s or TFSA’s to shelter all the money.  So the idea is to keep dividend paying stocks in the taxable account as much as possible to keep the tax liability low, but towards the end I might also have to accept paying some tax in my plan.  I’m again combining my wife’s account and mine to make this simple.

Starting at $15,100
Adding $367/month at 5%
In 4 years I will have:$37,891

Then for three years I won’t be adding anything (when I’m killing off the mortgage), then it will grow to:$44,009.  Then for the last few years I now have a huge cash flow to save because I don’t have a mortgage.

Starting at $44,009
Adding $1467/month at 5%
In year 14 (I’m 45) I will have:$209,588

So if you add in yesterday’s total of $531,788, you end up with $741,376.  Now this number is important.  Any guesses on why?  Well if you add it to the house value you almost hit a million dollars, but that’s not what I’m getting at.  Still stuck?

Ok, I’ll give you a hand take my yearly income estimate of $30,000/year and divide it by the total and express it as a %.  The answer is 4.0%, which conveniently is considered the typically safe withdrawal rate of a portfolio in retirement and below my expected 5% rate of return.  Basically without any government benefits included yet I just won’t be able to just retire early at 45.  Instead I’ll be completely financially independent and that is with a fair number of conservative assumptions like I never get a raise at my job beyond inflation.

So at the end of Part III I’m facing the fact I might be able to retire earlier than I planned.  So tomorrow I’ll start looking at CPP and OAS and then on Friday calculate out my possible retirement dates.  It’s sad really, I liked “Free at 45″ it has a nice ring to it.  :)

Comments

8 Responses to “Retirement Calculations – Part III”
  1. That’s a fairly short period – the actual investment returns could vary quite a bit from the average in that time. What kind of asset allocation are you planning to invest in for the last few years?

  2. Dave says:

    I’m wondering why you wouldn’t plan on living off of the dividends rather then planning on withdrawing the principle – I’ve read Derek Foster’s books and others – live off the fruit, not the trees – essentially counting on zero capital gains, but a steady stream of income from dividend/trust income.

    I have similar goals, to maximize RRSP contributions and TFSA with dividend stocks. With these I’m going to apply for dividend reinvestment through my discount broker (Questrade) and hope for an 8-10% return (not overly conservative but still reasonable over the next 15 years)

    In my taxable account I am going to invest in index funds that are by nature buy and hold, just add to those when I can.

    I started reading your blog because your goals align very well with mine and I appreciate your insight into things I haven’t really thought about.

    Thanks for your thoughts.

  3. Julie says:

    Awesome.. I love your blog. re: ecohouses, I just saw the film “Garbage Warrior” – about a New Mexico architect who has been building sustainable houses for 30 years. It was an AMAZING film.. I highly recommend it..

  4. crowncandy says:

    When you run out of money maybe you can have “Broke at 55″ or “Working again at 55″

  5. shwgeek says:

    New to your blog so please allow me to ask topics you may have covered before.

    So I’m a little lost on how you included the house equity in calculating the 4% withdrawal rate…. assuming the house is owner occupied, do you have some mechanism for generating a cash flow to support your living expenses?

  6. Canadian Dream says:

    SP,

    Actually you bring up a good question. What happens if my returns drop to 3% during that last 7 years? Answer: ~$188,000. So ironically low returns are not a big deal since the majority of this money will be from my contributions. It will likely be lower in the end since I’ll be mostly into cash and other fixed income type investments. I’ll likely be heavy into cash and fixed income in the end. About 70% or so, I’m still playing around with the mix of what will work best.

    Dave,

    I’m not a big fan of living off just the income. I’m not interested in leaving a large estate, but if it happens this way I’m willing to live with it.

    Julie,

    Mmm, I’ll have to watch for that. Thanks!

    Crowncandy,

    How on earth will I go broke in 10 years with $750,000 portfolio when I’m living on $30K? Oh, for the record I’ll likely do some work when I retire (like keep writing), but my plan doesn’t require me to make any money at it.

    Shwgeek,

    I don’t mind the question at all. I’m not counting on my house to provide any income. All it has to do is provide shelter. The portfolio will provide the income in terms of interest, dividends and the occasion capital gains.

    Tim

  7. shwgeek says:

    Ah.. after rereading your post, I realize the 4% is off of the 3/4 mil in investments. The total million is just a “feel good” number then :-)

    I’m wondering where in Canada do you reside? Wanted to find out a bit about your expense numbers to gauge my own situation. FWIW, I’m near the tail end of your journey and planning to relocate back to the Toronto area.

    Just one comment in your previous reply to SP: you mentioned moving heavily into cash and fixed income near the end. Have you thought about how to combat inflation, especially if you plan on drawing for 40+ years?

  8. Canadian Dream says:

    Shwgeek,

    Regina, SK. And there are a few previous posts on some rough expenses numbers. Use the contact form if you have more specific questions.

    Actually that entire inflation thing needs a post of its own to deal with. I used to think like you do but after some research I’m not so sure anymore.

    Tim

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