Posted by Canadian Dream on January 12, 2011
While on vacation last week with my wife we had a discussion on if I would be interested in buying one of those ‘classic’ pattern Hawaiian shirts. I flatly refused since I knew I would never wear the shirt off that island. Yet we did come up with an alternative idea that I should perhaps look for some swimwear if I could find a pattern that I wouldn’t mind owning.
So in the end I did find a new pair of swimming shorts and while trying those new shorts out on the beach my wife and I tried to puzzle out exactly how old my ‘old swimwear’ was. Best we can figure is I’ve had the same pair of navy swim shorts since about 2001. Which would mean I got about 10 years of use from those shorts. Ironically I didn’t even need to replace them as they were still in great shape, but I still recall I bought those shorts for about $20. The new shorts came in slightly lower at $15.
Therefore my old swim shorts have managed an average cost of about $2/year, which is a fairly good given the fact while I don’t swim daily in the shorts I do use them a fair bit over the summer. In order to keep up that average cost my new shorts will need to last about 7.5 years which may in fact be entirely possible.
So this got me thinking why don’t we do this for every piece of clothing we own? What would happen if you honestly wore a piece of clothing until it developed a hole or rip that could not be fixed. How long do you think your daily clothes would last for? Perhaps five years for higher use items and then up to a decade for less commonly used items. So overall if you buy a pair of jeans for $20 and they last for five years that would be a cost of $4/year. Then perhaps dress pants would last five years and cost about $30 to $40, which would run you $6 to $8/year. You get the idea.
If then you did that for each item you could likely build a basic set of clothes (not including outer wear or footwear which the cost will vary on where you live) for about $150 to $300/year. Which would mean you could be financially independent with respect to your clothes for the bargain price of $3500 to $7500 (based roughly on the 4% rule).
This isn’t to say everyone would like to do this, but it certainly give you something to think about the next time you go clothing shopping doesn’t it? So how often due you buy new clothes?
Posted by Dave on January 11, 2011
This is a guest post by Dave, who is also looking to retire no later than 45, but unlike Tim has no kids and doesn’t want any. Dave is from Ontario and is working towards his CGA certification.
I had a lengthy discussion with a family member this weekend that I think personifies the difference between my retirement plans and those of a conventional member of society. This family member was basically counting down the months they had until retirement (they are less than 3 years away) and I questioned them out loud why they just wouldn’t quit now (I was pretty sure they could afford it). They basically stated that their pension plan was “handcuffing” them to continue working and there were penalties to retiring early from the pension.
The discussion continued for a little while, but I could tell that we were not necessarily going to see eye to eye on this issue. I explained that my goal was to quit working as soon as I was able to afford it, whereas they were arguing that I would change my mind when I got older and money became more important. It wasn’t that I couldn’t see their side of the discussion, it was more that they couldn’t see mine – that I think I can find better, more interesting things to do with my time than work the rest of my life. I would rather give up a significant percentage of my income now and then later, live on less and do the things that I want to do (most of which do not cost very much money).
The bottom line of this discussion and with many people going into retirement is that they don’t know what their expenses will be. This family member believes that they need 60% of their current income, plus personal investments, plus CPP to live on when I’m almost positive that they don’t require much more than their personal investments. I know that my spending patterns may change over the next decade or so as I approach retirement age, but I don’t think these expenses will increase significantly (double or more for example).
Looking at the discussion I had in a different (and perhaps more morbid) perspective, this person is in their mid to late 50’s right now, planning on working for another 3 years. Current life expectancy is 81 years – I’m not sure I would trade around 10-15% of my remaining days working at a job I didn’t really want to do for money that I probably don’t even need. Time to me is significantly more important than money. I could find tons of stuff to do during the day instead of spinning my tires at a desk.
Right now, I’m happy with my job, but to a certain extent I still “need” it (or some money coming in). When I get to the point where I no longer need this or any job I don’t think I would be so willing to trade my time for money as there is only so much time out there to do the things I want to do.
How do you decide where your spending cut-off is? If you want to retire early there are probably some things that you’d have to give up that you could have had if you would have worked for another 15-30 years full-time.
Posted by Robert on January 10, 2011
This is a guest post by Robert, who lives in Calgary and works as a financial adviser. He is married, has three kids and plans to retire at age 35. Robert and his wife then plan to return to school and become teachers, eventually living and working overseas.
I occasionally have people ask me, usually in the context of financial planning, “So, how much do I need to retire?” I’m tempted to give the easy answer: $1 million, but that wouldn’t be honest. Instead, I always start my answer with: “It depends.” That probably feels like a cop out, but it’s entirely true.
How much do you spend in a typical year? This varies greatly from person to person. If we assume that a couple owns a home and has no mortgage, they can probably live on anything more than $1500 per month. And most people could realistically spend as much money as they have available. This question is almost always ignored in discussions about pension reform. Much hand-wringing attends headlines such as: “Canadians not saving enough for retirement,” or “2 out of 3 boomers worried about retirement.” How do we know how much Canadians will spend in retirement? My answer is that we don’t, since we haven’t asked them.
What will you do with yourself in retirement? Do you want to spend as much in retirement as you do now? Will you spend less on clothes, lunches and gasoline/transit by not going to work? Will you spend more on hobbies, social clubs and travel? In retirement, some people will spend significantly less. A rule of thumb sometimes used in financial planning is that 70% of pre-retirement income is adequate. That may be true, but some people may prefer to save more and spend significantly more.
How do you invest your savings? Whereas most people I’ve spoken with have little idea of how much they spend in a given month and many have never thought seriously about what their ideal retirement lifestyle will cost, most of them can tell you how they invest their savings. Some buy only GICs, and can expect less growth than those who invest in a mix of bonds and stocks (or mutual funds) and a different level of income (and part-time work) than those who invest in real estate. Investment choices dictate the level of return that can be expected and the amount, dependability and taxation of income available in retirement.
How long will you live? This is the hardest question of all, with no answer. If a retiree knew he would only live 12 months after retirement, and I’ve heard a number of stories where this was the case, he would blow it all. On the other hand, if a retiree expected to live past age 100, she would have more savings and be more conservative with her spending plans. Since we can’t know, we can only plan to never run out of money, then design a will to handle our excess assets, just in case.
Let’s look at a quick example. A couple wants to retire with $3000 per month of income (not including . We’re planning that this income will last as long as they live, so they require a sustainable withdrawal. They will have roughly equal income, or $18,000 per year each. This will attract almost no taxation. Suppose they invest in only dividend paying stocks, with a current yield of 4%. They plan to live on the income, without realizing capital gains except as a backup plan. $36,000 (total annual income) is 4% of $900,000, so that’s how much this couple will need to retire.
In the end, it doesn’t matter whether a person wants to retire at 65 or 55 or 45, if you want your income to last indefinitely. First, decide how much the ideal retirement lifestyle will cost. Next, determine how retirement funds will be invested, and plan a withdrawal rate accordingly. Then it should be a simple matter to find out how much capital is require to produce the desired amount of income. How much do you need to retire? If you don’t know, it’s probably $1 million.
