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.