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Wednesday, August 20, 2014

Capital vs. Cash Flow

Posted by Dave on August 19, 2014

An early retirement plan is an inherently risky thing to take part in. The risk in following through with the plan is that money will run out before you are readily able to make more of it, but there are still bills remaining to be paid. On the other hand, there is the risk (although less detrimental) that I could be one of those guys that drop dead at 52, while walking up a steep hill, or shaking my fist at a bunch of punk kids to get off my lawn.

My wife and I live fairly cheaply – beyond my golf habit and my wife’s desire for warm vacations, we really don’t have expensive lifestyles. Beyond the possibility of health problems causing significantly increased monthly expenses, I wouldn’t expect much in the way of lifestyle inflation to take place.

I like measuring sticks to show progress. In the past, I have written about slowly knocking off individual bills through investment returns – slowly taking chunks out of monthly expenses until they’re all taken care of (with a buffer). From my standpoint, it will be difficult to tell myself to keep working (especially on a full-time basis) at the point when all of my annual expenses are taken care of. The risk at that point will be that my investment portfolio gets wiped out and I’ll end up sitting in a dark, cold house eating beans and rice.

I’m sure I’ve read this somewhere else, but I’m not sure who to attribute it to, but living off a portfolio of 20+ diversified stocks and bonds does seem to be a lot less risky than my current dependence on a paycheque. Even though this pay has been continually deposited for over a decade, and I don’t expect it to end, it is dependent on me continually showing up and working for the next 10 or so years.

If I have adequate cash flow to cover my lifestyle at age 45, with enough of a buffer built in to cover major expenses within a diversified portfolio how much risk exists? If, for example, I have $750,000, yielding annual returns of $25k, and my household expenses are only $20k – should I work until I get to $1 million?

How long would you stay working? How did you arrive at your comfortable “exit number” ? Did you err on the side of caution, or plan on exiting the workforce as quickly as possible?

That’s Not How it Works

Posted by Dave on August 12, 2014

I recently made a significant golf club purchase, buying a last year’s model of a club that dropped over 50% in price (an R1, replacing my 9-year-old R5 for any golfers out there). Anyone familiar with golf will know that there will probably be a minimal change to my scores, but there is always the “new” thing coming out to entice a golfer. Like any junkie, I’m hoping this new club will fix the issues I’ve been having with my swing.

While at the golf course playing with one of my buddies, I was asked why I didn’t get the the newest model. Beyond the fact that I know there will be at best an improvement to my golf game, the cost of the newer, fancier club is almost 2.5 times higher than the one I got. My argument with the vast majority of these kind of frivolous purchases is that they are almost entirely unnecessary. Golf alone is kind of a ridiculous hobby to have, but it’s something I’ve done for 25 years and can’t see doing anything else in the summer.

My wife has been asked by co-workers in the past why she wouldn’t work on more of a part-time schedule, instead of working her current 40 hour work-week. Similarly, I get questioned about my moderate “cheapness” when it comes to using super-cheap golf balls or the use of “old” equipment.

While we have no debt, no major expenses, and a fairly cheap lifestyle. The way that we have achieved our financial goals thus far, and the way that we will continue to move closer to our final goal of financial independence is to keep our current path. Our path remains in making conscientious purchase decisions, and maximizing our earning potential over the next decade or so.

Much of my twenties was spent turning all of the money I earned into nothing all that useful to my future. My $150 golf club purchase that happened after 6 weeks of research and comparing prices pales in comparison to some of the toys I mindlessly threw cash at. I’m happier now, sticking to my financial plan and hopefully achieving financial independence. This plan doesn’t really work that well if I were to go back to my spending pattern I kept a decade ago.

Opting Out

Posted by Dave on August 5, 2014

My wife has been in her current job for about a year and a half. Her company has a 6 month probation period, after which she was eligible for benefits – health, disability and life insurance. When her probation period ended, we talked about the type of insurance that she would be getting and compared it to what we currently had. I have been at my place of work for over 10 years now, and I have excellent benefits, including disability, and some life insurance to round out the package given to me.

The way my company’s insurance works (which is probably identical to how everyone else’s is set up) is that you can either be eligible as a single person, or as a family. Family insurance covers 2 or more people, which kind of peeves me off, being a “family” of two, and paying as much as someone with 4 children, but that’s a whole other discussion.

When we looked at what my benefits were covering, what my wife’s potentially would cover, and then looked at actual usage of benefits over the past five years, it didn’t make sense to have two insurance plans. Her plan was going to cost us approximately $500 per year, which we thought could be spent better someplace else in our budget.

I’m usually all for insurance of all kinds. I have CAA, I have probably too much life insurance for us, I pay for a decent amount of car and house insurance and in the past have taken out liability policies for things like weddings and other large parties I’ve “hosted” where things could get litigious. Even with my healthy love for insurance, I couldn’t see double-paying for a lot of stuff we haven’t used or would ever require. My wife requested that she be opted out of the group plan and signed the appropriate paperwork saying that if she ever wanted back in, she would be required to have a medical exam.

Last month, on a normal audit of benefits, it was found that opting out shouldn’t have been provided as an option. We requested documentation stating why she was previously allowed to not be involved in the group plan, but now was being “forced” to do so. At that point, the insurance company made a “one-off” decision to allow her to stay out of the plan.

These are the kind of financial decisions that do take a lot of thinking about. The risk we are taking is fairly minimal, that being a lack of insurance coverage vs. the cost of being over-insured.

My preference would be to have all of the money my employer is currently paying for the remaining benefits plan to be paid to me, so that I can do with it what I want to do. I would rather be able to choose between a super-upgraded private benefits plan or have no benefits at all and invest or spend the money.

Would you have kept the secondary plan? Do you carry private health insurance?