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Friday, October 31, 2014

2012 Retirement Calculations – Part V

Posted by Tim Stobbs on November 30, 2012

So after four days of numbers you think I might be done, well mostly yes, but I did want to touch on a few other issues today in a wrap up post.

1) Backup Plans

As some people pointed out they feel my rate of return is much to high, which is totally fine.  Every person will pick different numbers for different reasons, which is partly why this is a plan.  I fully expect things to shift a bit as I go along and that is ok.  Yet on a risk management basis, what happens if the entire plan goes sideways? Do I give up?  Nope, here is where a few backup plans become very handy.

The biggest backup plan I have is the equity in my house, which I never used in my calculations.  While yes it is tied to one asset and not very liquid, so I do have the option to sell that at some point and use the cash to fund my living expenses if I screw up royally on these calculations.  That provides roughly a decade of living expenses.  Alternative scenarios include moving to a new house and putting in a rental suite to turn some of that equity into a cash flow or downsizing and investing in a house with very low utility bills (due to extra insulation, a solar hot water, etc) which while that doesn’t raise cash, it does lower expenses.

Some other backup plans include the fact my wife fully plans to phase out her work, when I assume she stops cold turkey.  So in reality she will be providing so extra income for a few years and likely have a higher CPP payout than I’ve estimated.  In addition, I’ve put our to work threshold so very low at $3000 a year for vacation, that I can see easily exceeding that which again provides some extra cash and likely higher than predicted CPP payout.

Perhaps one of the more up front risk management tools I have is once I am fully convinced I am financially independent I won’t quit immediately.  Instead I plan to work one more year from that point building up a slush fund of cash (which don’t show up in any of the calculations).  This pile should be big enough to keep me out of touching any of my investments for the first two or three years if required.  This then allows me to not sell any investments if I happen to hit a bad spot in the markets just when I stop working full time.

So the cumulative summary of all of these backup plans is I feel comfortable with if any of my assumptions fail.  Regardless of your plan I highly suggest you also have a few backup plans yourself.

2) The Really Short Way to Calculate Your Retirement Date

After four days of calculations and assumptions you might be wondering…how on earth do you expect the average person to do this for themselves?  In fact, I don’t assume they will do this complex of a set of calculations, so you might wonder if there is a short cut.  Good news, there is one.

I will apply the standard caution here, the more simple things get the less they cover for detail.  This is fine if you just want a quick estimate.  If that is the case, you use Jacob’s little formula for savings rate which he covered in his book Early Retirement Extreme, which is also covered in this post at MMM.

So all you need to figure this out is your current savings rate.  So take your annual savings (don’t forget to add in work pension contributions if any) and divide by your after tax income.  In my case that works out to about 66%.  Now look at MMM’s post, he has a nice table which tell you how long you have to save if you start from zero.  In my case the closest value is 65% which works out to 10.5 years.  Yet I’m not starting from zero, so I take my current investment net worth and divide it by my annual savings amount (or $175K/$48K = 3.6 years of saving done).  I deduct that from my 10.5 value to get 6.9 years to retirement. So according to my very quick calculation method I can retire at 41, rather than 42.  Which given the excess cash in my plan is likely fairly damn close estimate for being done in 2 minutes.

That is the very quick way to do these calculations.  Or if you like you can use Jacob’s original formula to plug in alternative rates of return or play with alternative savings rates.

Any questions?

Comments

5 Responses to “2012 Retirement Calculations – Part V”
  1. deegee says:

    Tim, I like how you include in your plan the building up of a slush fund. Not only will that keep you from touching your core investments, it will give you peace of mind that you can handle anything (within reason) unforeseen which may arise in your ER.

    Part of my ER plan also included a slush fund which was not cash but an investment in an intermediate-term muni bond fund. Yes, its principal is not as secure as cash, but I can tolerate that relatively small risk in exchange for getting more than next-to-nothing (mostly tax-free) I would get as cash in a bank account.

  2. deniz says:

    Could I just ask a couple of questions? Especially about pensions – is one allowed to begin claiming pensions at any age? Not social security obviously, but those from one’s job.
    Also, I think I’m doing the whole TFSA thing wrong :-) I put money into it, but it doesn’t seem to be linked to anything – stocks or mutual funds or GICs or what have you. How do I “direct” the money in the TFSA account?

    Thanks for providing such an informative blog!

  3. Dave says:

    Great series – it gave me a good framework for doing my own calculations. Also reminded me of all the government income sources I will be entitled to. Really, if you make it to 67 and own your house/vehicles outright (as you should), then the government entitlements will cover a basic lifestyle.

  4. Jon_snow says:

    Tim, your 5 part series has motivated me to do my own “audit” of my progress towards ER – I’ve got a few hours to kill while I’m on a ferry, so why not?

  5. Jacq says:

    As I’ve said before, I don’t think your rate of return projection is too optimistic. For example, see the real-life results of someone like Susan Brunner who also ER’d through wise investing:

    http://www.dividendninja.com/susan-p-brunner-interview-1

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