Posted by Canadian Dream on September 22, 2010
You may have noticed on this blog we seem to have a common theme for some of our writers. We are seeking early retirement, not to stop working, but rather to choose what to work on. Now that might confuse some people on why would you work if you don’t have to? Well that is sort of like looking at a murder.
With a murder there are various degrees of potential guilt which is based on the idea of intent. How you approach the act determines how much you will be punished for your actions. If the murder occurred as an accident, or in a fit of rage or with prior planning, determines how serious the crime is. The murder itself becomes the concluding act while the intent is the important part on finding the level of guilt.
Work is similar in the fact your intent determines the level of the crime. If you intent to hate your job, you will likely succeed regardless of the job. Also if you intend to be at the job just to make money, that is a completely different level of commitment from being at a job because you choose to be there but don’t need to be. So in the end I want to leave work based on dollars and do work based on what I like to do.
Yet that brings up an interesting question, can you like your current job more if you change your intent on why you are there? To be honest I have my doubts. Your current job likely has too much history and routine built into it to truly allow you a fresh start while still sitting at the same desk. If someone was willing, it might be an interesting experiment to see if when changing jobs your intent can help you like a job more.
I’ve notice that since I learned I don’t need my day job that my threshold of being able to ignore problems at work is lower. I’m much more willing (partly because I’m able) to consider leaving that job. In some ways it’s making me lazy when it comes to working out an issue. I fixate on leaving rather that dealing. So that makes me wonder what occurs when I don’t need any job at all? Will I still be able to care about a job?
Lucky for me I already know the answer is yes. I can care about a job. My work at the school board is a good trial of the fact since I have never considered leaving that job. It’s still somewhat new, but I can’t really see getting bored while I’m there. There is just too much to do even with a three year term. I care about the job because my intent was different when I took it. I didn’t care about the money, but instead I care about the goals of the work itself.
In the end intent may matter more than what you are actually working on. So what’s your intent with your job(s)? Do you find it matters a little or a lot with your job?
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Filed Under: Misc
Posted by Dave on September 21, 2010
Back in December, I wrote about how I was going to drive my car into the ground. From that point on, I have barely spent any money on the vehicle outside of oil changes and a minor (~$200) brake repair, making this year one of the cheapest, ownership-wise, that I have had (so far) with this car. It was my intention to get another 3 to 5 years out of this vehicle and basically roll it into the dealership or wrecking yard and get a bit of money for it (my last car barely made it to the used car dealership and they gave me $100). So, what changed?
Over the summer, my 27-year old wife decided she wanted to learn how to drive. The only hitch to this plan was that she did not want to learn how to drive my manual transmission, which is the reason why over the next 8 months (the time period that she will hold her G1 driver’s license in Ontario) we will be looking for a new car. Realistically, she could probably learn to drive the 5-speed that we currently have (and is already paid for), but the thought of it stresses her out and I would prefer her to be comfortable driving. One of the main reasons she has decided to get a driver’s license is there is a job she is interested in that is outside of any public transit route that will begin in late spring of 2011 and I am unwilling to drive her the 15-20 minutes to and from the location.
In response to this expense, over the past few months we have accelerated our car-savings plan, putting aside the rest of our savings goals. We are still maintaining an accelerated payment schedule on our mortgage, and think (as long as there are no major expenses that come up) we should have the necessary amount of money to get a new (or new to us) car in April or May of next year.
In addition to the monetary side of the car purchase, I have intensified the research side of buying a car. When I bought my last car, I was not that well-equipped at all. I basically found a vehicle that I liked and paid what the used-car dealer asked me to, with very little research other than a quick test drive around the block. This time, there will be significantly more examination of the purchase and more thought put into the care rather than buying the sportiest car I could find to match the amount of money I had in my bank account (I was 23 and slightly less mature at the time).
So, the bottom line is that I’m car-shopping over the fall and winter, which is both fun and expensive. I was hoping to not have to do this for a few years, but the payback is that I don’t have to do all the driving for our household, which offers something positive for this large expense.
Have you had any significant changes in your spending plans lately? How did you react?
Posted by Robert on September 20, 2010
A reader asked, in the comments on a previous post, why I don’t use the “conventional wisdom” of a safe withdrawal rate of 4%. I have given a lot of thought to producing income from investments, which I’ll lay out below. I’m going to ignore rental income from real estate investments, because I view that as a part-time job. People who do it, already understand it.
The safest, most secure option is an annuity. This is practically the same as buying a portfolio (or ladder) of bonds. The principal is guaranteed, the payments are guaranteed, and it’s set for life. An additional benefit, if the money is non-registered (outside of an RRSP), the taxation is smoothed over the life of the contract, producing a greater after-tax income than a portfolio of bonds. The income includes a return of capital, so that the income is guaranteed to last the rest of your life, then it’s all gone at death. This is perfect for someone who wants to spend their last penny the day they die. The last time I looked, the income represented about a 5% payout.
Another option is to buy a portfolio of growth stocks, then sell a portion each year to produce income in retirement. The first problem is how much can we sell without drawing down capital? Because the order of returns matters, only a low withdrawal rate is sustainable. Backtesting has shown that 5% will work about 75% of the time, and a 4% withdrawal rate is safe over 90% of the time. The second problem is demographic. If a large cohort (baby-boomers) all retire around the same time, who’s going to buy the shares they are selling? Possibly their children and possibly foreigners, but there is a chance for a supply/demand imbalance. The benefit of this strategy is that the capital is still available, either for lump-sum needs or to bequeath at death.
A hybrid approach is the Guaranteed Minimum Withdrawal Benefit (GMWB) offered by life insurance companies. Like an annuity, there is a minimum guaranteed payment for life. Like stocks, there is a chance of higher payments if the portfolio grows and a chance some capital could be left at death. In practice, the income offered is 5% and the fees are often over 3%, meaning that if the stock market doesn’t return over 8% consistently (again, the order of returns matters), there won’t be any increase or remaining capital. The retiree needs to choose whether or not the guarantees are worth the cost.
Another modification to the “all capital gains” method is to use “buckets.” In this scenario, a retiree would keep three to five years worth of income in cash or, better, government bonds. If the stock market turns down, the bonds are sold to fund retirement income. Later, when the stock market grows, profits can be used to fund the bond “bucket”. This adds some safety at the cost of lower returns on bonds than on stocks, but market can take longer than five years from crash to full recovery. It’s an improvement over all capital gains, but it’s not as safe as all guarantees.
The final option is to use dividends from stocks. The yield that can be achieved is probably 4% – 5% currently, but it depends on the market level. The risk is that dividends are not guaranteed and could be skipped or cut. The benefit is that there is also a possibility of capital gains to fall back on. Sometimes the market favours large, dividend-paying companies (and the current environment seems to be one of those times), and sometimes those companies fall from favour (such as the Nifty Fifty). Nothing is foolproof.
Many people will only use investment income to supplement a government pension (eg. CPP) and benefits (eg OAS) and possibly a company pension. In this case, guarantees are in place and are less necessary for income from investments. The approach that’s right for any given individual depends on the level of income required, the various sources of income in place and the degree of guarantees they need to feel comfortable. But in each of the above examples, 4% – 5% seems to be about the most income a retiree (who is never planning to return to work) can expect.
On a personal note, I’m happy to plan using the total amount of income I am currently receiving from investments. That’s partly because I bought during the market crash, when yields were high because share prices had fallen precipitously, and partly because I always plan to earn income through some form of work.
Are there other options for income from investments? Which ones do you feel most comfortable with?
