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Monday, May 1, 2017

Freedom 40 in 40 – Part VII

Posted by Tim Stobbs on January 21, 2015

Ah money, the beloved discussion point on this blog.  Today we will have a look at my plan around the money to leave my day job at age 40.  Perhaps the key thing here is to keep in mine I can’t possibly be fully financially independent at age 40, instead I’ll have to accept a semi-retirement option.  Which works just fine for me anyways.

So with that in mind I took at look at our spending and broke out what our baseline spending would be without including money for my wife’s Rider season tickets, gifts and donations, our annual vacation and half our normal spending cash per month (or $100 each per month).  The total for this came out at around $22,000 a year.

Then if take my investment net worth at the end of December 2014 of around $329,000 and add $4000 month for three years at 5% return you end up with: $537,000.  But then I still have four more months to save which should add another $25,000 to that total bring it up to $562,000.  Which at a 4% withdrawal rate would net me just over $22,000 a year.  Ya, I’m good right.

Uh, no.  There are a few holes that kick in around all of this.  First off, if I leave my day job at 40 I still have kids in the house who need RESP funds to pay for some school and I need some cash to cover their day to day costs.  Their RESP current has around $52,000 already in it.  I’m targeting having at least $80K in it.  Between our contributions and their grant money we put away about $434 per month.  So in three years we should have saved about $75K in total, which leaves me $5000 short.  Then we typically spend an additional $140/month on the kids for activities, clothes and other stuff that comes up.  So I figure I need to have that extra money for another 9 years or so at that point, which leaves me with another $15,000 hole.  So in total the kids are missing about $20,000.

Yet on top of that I still need to save about two years of spending for one of my backup plans which puts me in the hole for another $44,000.  So grand total I’m short on just the obvious stuff by $64,000, which if you divide that by 40 months would mean I need to save another $1600/month or $19,200 a year.  So in short, I’m screwed.  I can’t make this work with my current assumptions.  So is the dream dead? Not yet.

So what can I do to make this work?  Well this is where I step off my usual assumptions for a moment and consider a few adjustments like: am I comfortable with slightly higher failure rate of my plan if I go with a slightly higher withdrawal rate of 4.5%?  Given I plan to do some work for income anyway at this point, I would say yes.   Well working backwards then if you want $22,000 of income at 4.5% that means a starting pot of cash of at least $504,000.  Compared to my expected savings of $562,000, that cuts down my hole to just $6000.  Which is a lot more reasonable to save.

Another adjustment that I can consider is the fact I have always beat my assumption of a raise equal to inflation.  I only assume I’m contributing $48,000 a per year to the plan when in fact I routinely contribute over $50,000.  So in that case if I can push the upper end of my normal amount of contributions for the next 40 months I think I can average saving $5000/month.  At that rate I could potentially have just over $600,000 at age 40.  So if I back out my missing $64,000 and times the remainder by 4%, I get $21,444 a year which is almost on target (or a 4.1% withdrawal rate).

An additional factor also kicks in here.  My wife always planned to keep working for a while even after I left my job which I have never really added to these numbers.  So between her current work and some minor income from me we can easily bridge that missing spending money, vacations, gifts and her Rider tickets which comes out to about $8000/year.  This also provides some extra spin off benefits when it comes to collect our Canada Pension Plan as we won’t have a this huge string of zero income dragging down our benefit calculations.

But in general the margin on this plan is noticeably thinner so I may have consider cracking open the house equity to shore up the plan in the long term. Which I can live with as I did plan to downsize the house someday, but I might just consider doing it a bit sooner overall. Yet with our winters in Regina there is an additional motivation to move somewhere else in Canada. ;)

So overall I have several different ways I can try to make it work.  In the mean time, I need to save as much as possible push to average about $5000/month in contributions.  Then towards the end I need to see exactly where my numbers are falling out and determine if I’m comfortable with that level of spending and also what amount of work I’m willing to do to make up the short fall.

Questions?  By the way, this is also the end of this series…I return to my normal posting as of this Friday.

Comments

7 Responses to “Freedom 40 in 40 – Part VII”
  1. It sounds like you’ll have your basic costs covered. Your extra entertainment and extra education savings you can cover with your semi-retirement income. With your wife’s earnings not even factored in, I think you’re worrying a bit too much! It’s a great plan!

  2. Jacq says:

    Just a couple of questions…
    #1 – (IMHO) it is easier and more pleasant to increase income rather than reduce expenses (past a certain point and I suspect you’re at that point) – other than raises. Is this option not on the table?
    #2 – Were the $50k/annum (or 60k – not sure which it is) contributions based on a 4 day or 5 day work week?
    #3 – What does your wife want to do when she hangs it up too?
    Emily, I don’t think Tim is “worrying” – just modeling scenarios. :-)
    This is very similar to what I did back about ’07-’08 to figure out if I could stop working full-time. Then I ended up working TWO jobs in ’09 and a year of >60% gains, so you never know. ;-)

  3. JayP says:

    Just curious, is your $22K spending based on past experience or budgets? The reason I ask is because there always seems to be a lot of spending each year that we consider one-time items, unexpected, etc.

    Also are you adjusting that number for inflation?

    Love the blog and the detail of your plan. Just wondering.

  4. jon_snow says:

    Dunno. I preferred to work full time a bit longer in order to ensure that I didn’t have to work a “day job” ever again.

    For me, semi-retirement = part-time worker. Wasn’t interested.

    But it is clear you are a smart guy TIm…whatever you choose to do, I wouldn’t bet against your success.

  5. ernie says:

    I am stuck on the education fund.Very few degrees pay good wages today.Maybe im wrong.Refer to MMM article on jobs that pay over $50000 a year without a degree.I hear about all kinds of kids that have education that cost 40000 and can only find jobs that pay 25000.

  6. Peter says:

    I would not be playing with any calculations that assume a SWR over 4%. It is a big debate with no clear answer but there are many who do not think that even 4% is safe going forward.

    I also worry about the impact of zero income for a number of years on CPP. My plan is to retire at 51-52 at the earliest, I may consider part time work but if not what is the easiest way to calculate CPP in ER? I know there are a number of Calculators but none take this int account very well.

  7. Tim Stobbs says:

    Jacq – All good questions. #1 – I did consider it, but I’m not planning on jumping to consulting work. I determined the effort to make the switch wasn’t worth the payout given my compressed timeline. #2 Contributions were around $50K, I’m raising them up to $60K going forward. #3 My wife is working that out, which is partly why she doesn’t want to stop working cold turkey for a while. She actually loves her job so she isn’t in a rush to leave it.

    @JayP – I have about 2 years of detailed spending data right now. By the target date I should have a full five years of data. I intend to cross check my current assumptions prior to handing in my notice. The spending does see small increasing up for inflation and I discount my investment returns a bit to also cover it.

    @jon_snow – Oh, I agree semi-retirement can equal part time work. Depends on what you want more. More freedom sooner or full freedom later. I used to think more full freedom later, but have shifted that view over time.

    @ernie – Education fund is to help pay their education. I never planned to pay for it all. Also I agree the payoff of education is highly specific to picking a marketable skill. So I don’t care if my boys go to the trades route, in some cases it works better for people.

    @Peter – I understand the concern as I have read a good lot of the debates as well. I’m breaking enough of the underlying assumptions as is, so I’m not as worried if I end up slightly above 4%. I would never got with 5% for example, they is just too high. As to the CPP problem try using this one as it does a reasonable job on estimating: http://www.servicecanada.gc.ca/eng/services/pensions/cric.shtml?utm_source=campaign+URL&utm_medium=twitter&utm_content=000024,+20112013,+Eng&utm_campaign=Canadian+Retirement+Income+calculator

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