Posted by Canadian Dream 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. 
Posted by Canadian Dream on February 10, 2009
So welcome to day two of this math crazy set of posts. Today we are looking at my savings plan for age restricted accounts, RRSP and TFSA. I’m assuming a few key points here. First my rate of return will be on average 6.5% (I’m picking a lower number because I’m expecting lower returns for a while) with a deduction of 1.5% for inflation (which should be fine for my lifestyle). So real return will be 5% compounded monthly. This might not be correct over the short haul, but I’m using the same number for all the calculations to even things out.
Also I’m basing all my values on my end of year net worth in 2008 to do this in years rather than months (with a few minor adjustments to account for recent fund transfers). I’ll be using this calculator again.
One final assumption. I’m assuming that all my pay raises for the next 14 years are only inflation matched. So anything beyond that amount I can spend as I want and not change these numbers.
So in order to track a few different pools of money I’m going to have to run a few different accounts all at once.
Age Restricted
First off there is the age restricted money which includes my pension (can’t use it until I’m 50) and my LIRA (I can’t use that one until I’m 55). To simplify things a little bit I’m rolling these into one pool. I won’t be adding to the LIRA so over the long haul it won’t matter much compared to my pension plan.
Starting at $8800 (LIRA) + $850 (Pension) = $9650
Adding $1039/month at 5%
In 14 years I will have:$271,464
Now I can’t use this for another five years so I’m going to just assume no new cash and let it grow for another five years. So by then it will be worth: $348,385 by the time I’m 50.
RRSP
Again I’m going to merge my wife’s RRSP and mine to create a single pool. Yes to do this right I should keep them seperate but that’s a bit too much effort at this point. Also note the amount added to these accounts looks small because my pension is eating up so much of my RRSP contribution room each year.
Starting at $18800 (Tim’s) + $8800(Wife’s) = $27,600
Adding $200/month at 5%
In 14 years I will have:$104,018
TFSA
Now here is where timing is a little more critical. I’m going to be maxing these out until for four years, then I’m going to stop for a few years while I pay off the mortgage. Then I’ll come back to these and max them out again. Again I’m merging accounts to keep things simple.
Starting at $0
Adding $833/month at 5%
In 4 years I will have:$44,161
Then for three years I won’t be adding anything (when I’m killing off the mortgage), then it will grow to:$51,291. Then for the last few years I max it out again.
Starting at $51, 291
Adding $833/month at 5%
In year 14 (I’m 45) I will have:$156,306
Ok, so I’m up to $531,000+ by the time I turn 45, that’s a nice looking number. I should note that I haven’t done anything with the taxable accounts yet. I’ll get to that tomorrow and discuss some other issues like paying off the mortgage.
Posted by Canadian Dream on February 9, 2009
Ok, it’s been close to a year since I sat down and crunched numbers on my early retirement plan. I’ve done a rough update, but I’m fairly curious where the numbers are now. So I’m going to run them again. Do to the length of this posts there will be no Green Spot this week. So with out further preamble let’s get started.
First off we need to figure out my baseline spending, or what I think I’ll be spending during my retirement years. In some ways this is fairly easy: current spending – mortgage (because I’m going to have it paid off) – work expenses. So it looks like this: $3040 – $1020 (principle and interest only) – $77 (gas and parking) = $1943/month. To make things easy I’m just rounding up to $2000/month or $24,000/year. In general I’m expecting my lifestyle to stay fairly close to what I do now, granted the kids will be mostly out the door at 45, but I’m just assuming my spending on them will just roll into my hobbies spending (currently about $160/month). I’m also assuming that being retired that I won’t be saving for my RRSP or pension or the kid’s RESPs anymore.
Yet, I need to add a few items to $24,000/year figure. First off I’m going to assume $1000/year in house maintenance and $1000/year in car depreciation and $1000/year in medical costs. So in total I’ll need $27,000/year.
Now I’m going to make one other assumption that could put things in a little doubt, because I’m not sure if I can do it. I’m going to assume I’m a very clever guy and managed to balance my RRSP’s and TFSA’s and taxable accounts to pay no income tax. The reality is this could take some work, but given my low income requirements it is entirely possible. Basic tax deduction is $10, 320 per person, so with a clean income split via spousal RRSP and pension spliting that totals $20,640, which leaves $6360/year to come out of our TFSA accounts to pay no tax. With TFSA contribution room of $5000 x 2 x 14 year = $140,000. So that $6360 represents a required yield of 4.5% which is fairly realistic.
Then to make things interesting I’m putting on an extra requirement of my travel fund of $3000/year from age 45 to 75. So that’s another $90,000 or so in savings required if you do the math. Yet if I look at it from a cash flow point of view at a 4% rate of return I need about $75,000 to generate $3000 a year. So I have two ways I could deal with this. Either simulate the larger draw on my savings during the first 30 years or just take off the extra off the top. I think for this exercise I’m going to do extra draw on my savings. It makes things more complex, but what the hell.
Oh, some general notes on this series of posts. All values are in 2009 dollars, so to achieve that I use real returns (which are just your normal return minus inflation), so all the return % may look low.
So how much am I going to have at 45? Well that we will calculate as I walk through my phases over the next few days and some other sources (OAS and CPP). Then on Friday I’ll run the numbers to see if this still looks like a good idea or what changes I need to make to my savings to have it happen.
