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.
A couple weeks ago, on this blog, a commenter asked how it’s possible to save enough money in 10 to 20 years of working to be able to retire young. He suggested that luck must be part of the equation, since he was skeptical that anyone could really save enough in that little time to no longer need to work. There’s a very simple formula that will prepare anyone to retire: earn, spend, save and invest. The more one earns and the less they spend, the more they can save and the better it’s invested, the sooner they can retire. Let’s look at how this works.
Part one: Earn a high income. Not every job has the potential to earn a high income, and certain jobs offer different potential in different regions or times. I started out earning less than $40,000 as a financial advisor, but averaged a little over $100,000 over seven years, including business profits and ownership. It’s not only dentists and lawyers that make good money. Tradesmen in northern Alberta make good money supporting oil companies, commissioned salespeople have theoretically unlimited earning potential, and business owners in any industry can make good money if their company is successful. While earnings six figures isn’t necessary, it’s sure helpful.
Part two: You only keep what you don’t spend, including taxes. Spending is the largest variable that affects a person’s ability to retire. It has a double impact, because the amount spent reduces how much is left for savings, and it also dictates how much needs to be replaced to be able to retire. The less a person can live on, the sooner they can retire and also the faster they progress toward accumulating enough to be able to retire. How much I spend month to month seems to vary between $3000 and $4000 for my family of five. Not ridiculously frugal, but not extravagant by any stretch. This means I saved (toward debt repayment and investment) around 50% of my income, after paying taxes. And I paid very little taxes, by making RRSP contributions and other tax-deductible investments and by making my interest tax-deductible (investment loan).
Part three: Pay off debt. I don’t think anyone should retire with debt, which is probably a big part of the reason most people can’t see retiring before 55 (if that early). Buying a house at age 25 with a 30 year mortgage puts you at age 55 before being mortgage-free. It seems very common to either “move up” to a larger house or borrow against the home to renovate. But this all assumes a traditional mortgage. I have never had a closed, fixed rate mortgage. I took my mortgage as a line of credit, which allowed me to pay back as much as possible, as quickly as possible. I then borrowed back for investment, which made the interest on that portion tax-deductible. I was lucky to buy before the real estate boom, and had a large enough down payment that I expected to pay it off in eight years ($165,000 debt, if I recall). I ended up paying it off in seven years.
Part four: Invest for growth and for income. I was fortunate to have some money to invest during the market crash of 2008-2009. Because I worked as a financial advisor / stockbroker, I was already following some individual companies. When a company I knew well dropped from $3.50 to $1.50, I invested $15,000. I sold at $2.55 three months later and reinvested in another company, which produced similar gains. A year later, I had $50,000 in the account. Since then, I’ve saved and invested more. I’ve also borrowed money to invest, given that interest rates are near historic lows, and given that I plan to sell my house (which will cover all debts) before moving overseas in 3 to 5 years. I have invested in dividend-paying stocks, which produce enough income to cover my monthly expenses.
If applicable: Kids. I don’t think it’s a given that I need to provide for my kids’ post-secondary education costs. They may or may not choose to go to university and they can work part-time or summers to pay for it. Having said that, I’ve saved every Child Tax Benefit and Universal Child Care cheque inside an RESP. For three kids, over six years, that’s worth over $50,000, including the government grants (CESG) paid into the RESP. Twelve years from now, I think they’ll have enough to make it easier to attend university, probably $20,000 (in today’s dollars) each.
Not everyone is able to retire young. Not everyone is able to meet the prerequisites of a high salary or wise investments. But everyone can focus on saving some of their income and paying off their debts, then investing for the future. Some people are “luckier” than others, but it takes wisdom and courage to grab the opportunities we are given in life. What opportunities have you taken advantage of? Are you on track to retire young? Or is it impossible for you?