Posted by Canadian Dream on March 26, 2010
Early retirement is suppose to be this great thing. Do what you want when you want. Yet doing it does have some pitfalls that you need to watch out for and hopefully avoid a few of these.
1) Underestimating expenses. It’s amazing how during your working life you get use to your lifestyle that you tend to forget about certain items like health benefits, replacing your car, your water heater, roof … you get the idea. When your planning for an additional 20 years of retirement you better make sure you check your expense list twice. One way to plan for this is to make sure when you go into retirement that everything is new and/or that you have planned for an extra replacement money. At a minimum I suggest a $1000/year for each car and home you own.
2) Not having any margin of safety on your calculations. It’s nice to hope that things turn out just the way you plan, but let’s face it, life doesn’t work that way. So you better leave some wiggle room when doing the math. In my case I drop my expected rate of return by an extra 1%. Some people like to boost their expenses by an additional 10%. Either way works out fine, but you do want to have some cushion there.
3) Not enough diversification in your investments. In order to avoid having your retirement savings go up in smoke you need to make sure you can suffer some serious damage to your savings. The solution is to avoid putting all your nest eggs in one basket. You most likely want a conservative mix once you get near retirement, but not too conservative that inflation takes you down in twenty years. So you most likely want a high interest savings account, bonds/CD’s, perhaps a REIT and a mix of other equities in Canada, US and the world.
4) Forgetting about taxes. Knowing your Canada or US tax law is required to build a good portfolio as much as diversification. For Canadians you need to know about the three types of investment income (capital gains, interest, dividend) and how each is taxed.
5) Unrealistic expectations. You can’t travel the world and live in five star resorts and leave work at 30. Ok, perhaps one in 15 million can, but I know that isn’t me and most likely not you. So keep your dreams reasonable.
6) Cut off peak earning years. By leaving your working life earlier you cut off your peak earning years. So the earlier you leave the harder it becomes to pull off since you are losing more of your high income years.
7) Emotional considerations. Some people do all the math and planning but forget one thing. What are you going to do with all that time? So they end up bored and go back to work. My question is what’s the point of saving if you don’t have a plan for your activities in retirement! Early on in your planning you want to start considering this. After all you don’t want to forget about enjoying your life now and you also want to ensure you will continue to enjoy your life in early retirement.
So what pitfall are you most at risk of falling into? Or did you have another pitfall to add?
Posted by Canadian Dream on March 25, 2010
The Saskatchewan provincial budget came down yesterday and I can’t help but noticing a similar theme to the federal budget: knife wielding is now in fashion. Both budgets were focusing on reducing the civil service size and spoke of efficiency and doing more with less.
This is particularly interesting since in the Saskatchewan context since the unions have been dealing with an NDP government for decades prior which has typically been fairly union friendly. So I suspect as union negotiations for wage increases are going to find some very low offers and tough choices brought to them over the next few years from the current Saskatchewan Party government.
It is sort of an interesting twist on the entire auto sector bailout negotiation tactic of: take less or you all lose your jobs. For a while I suspected unions considered the public service a bit different from private sector since after all governments don’t go bankrupt. Well obviously with the crisis situations in Greece’s debt is showing what happens when you ignore a problem for too long. Government can in fact run into debt problems and when they hit that wall the cost cutting isn’t subtle or fair. It’s take a pay cut and the government still hacks services and jobs with an axe rather than a knife and then raises taxes.
I hope everyone, including non-union staff, has been paying attention. This is what happens when you have too much debt. You lose any easy choices and all that is left is the hard ones. So everyone has to start living in their means a bit more and using debt a bit less all the way from individual families to all levels of government. What of course is really interesting is we haven’t even dealt with those big cost items on the horizon of an aging population and health care. I suspect we will have an interesting decade or two in front of us.
Posted by Canadian Dream on March 24, 2010
I think just about anyone who works on an early retirement dream at some point thinks: why am I doing this? It’s taking forever. Am I EVER going to retire? I’ve know been down that line of thought enough times that I’ve learned a few things about myself and where that idea comes from.
You see I typically start to get impatient when I’m stressed out at work, busy at home and often close to some kind of interim goal sort of like right now. Both jobs have been very busy lately and as a result I’ve been often pushing off things at home so that is starting to build up. Then I’ll be checking the numbers at the end of this month to see if I hit one of my sub cross over points.
In reality I’m not impatient at my long term goal but rather impatient on my sub goal which is just being transferred to my long term goal by association. I think what is driving my nuts on this sub-goal is I know for sure I’ll hit it by the end of April, but I might hit it by the end of March. So the waiting is killing me as we are only a week from the end of the month.
Of course I find this vaguely amusing due to irony of me planning a goal that will take over a decade to reach and I get impatient over something that will occur in a week. I’m almost as bad as my kids at Christmas, but I suppose that we all need our little interim goals to keep going. No person can really handle a decade or two wait without something to keep us motivated along the way.
So what are you impatient for today? Did you have a goal that you are close to or perhaps just made?
