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Sunday, July 24, 2016

What Do You Tell The Kids?

Posted by Tim Stobbs on July 12, 2016

Dee asked a few questions the other day with respect to kids and early retirement.

How old will your kids be when you retire? I remember my mom retired for my last year of high school and I had to get myself up and to school while she slept in. She did let me use her car to get there, though, so that part was nice. Do your kids anticipate any particular feelings about your retirement?

The first question is rather easy, so let’s address that first.  My oldest will be 13 at the time while my youngest will be almost 10.  So they won’t be really young, but that will be in that lovely stage just before teenagers.  So on the plus side they will be mature enough to explain the entire concept to them if I want, but I’m not sure I will.

I have to admit I’m a big concerned about my kids thinking we have lots of money.  We live a comfortable life right now, but we don’t act rich.  Yet I do worry about telling them straight out that their Mom and Dad have a million dollar net worth. I’ve seen odd things happen to kids who think their parents are rich.  Like for example: a lack of motivation, a sense of entitlement or just plain old arrogance regarding money that isn’t theirs.

While my wife and I haven’t firmly decided on what to tell them yet, I’m leaning towards the truth, but in a context that makes more sense for them.  I don’t have an exact speech in mind but it would likely be something like:

Hi guys, we need to talk.  Dad is leaving his current job on [insert date here].  But that’s okay, since we have got a lot of savings we don’t have to worry about paying for groceries .  Dad is going to change jobs to writing.  You remember his book downstairs, well I want to make more of those.  So my new job will be writing books.  I will work from home just like Mom does from now on, so I will be here when you leave and get home from school.  Any questions?

Of course I will play it by ear a bit.  It depends a bit on how much they already know.  It’s not like I actually hide my retirement plans or anything, but at the same time I don’t put it in their face.

Now some people may assume by telling them my job will be writing, that I’m lying to them.  I personally don’t see it that way, as writing will be my job.  I just don’t worry about making much money at that job and all my deadlines for work will be entirely self imposed (until I sell a book to a publisher and then I have to meet their deadlines).  I do love to write, so I will be doing that regardless of anyone paying me.  Like you know, right now, writing this post for you. ;)

Alternative Realities

Posted by Tim Stobbs on July 8, 2016

So deegee asked an interesting set of questions the other day:

What would your “number” be if you and your wife were to fully retire and generate zero income (instead of the combined annual $12k) for the next ~5 years? And what would your “number” be if you planned to reduce your WR to 3%, with versus without the added $12k income?

In essence, I took this to ask what were my other alternatives to my given course of action?  Which is a very good question as I did actually consider several different scenarios.  After all, plans never work out perfectly so it is good to know your potential fail points.

In no particular order, here are a few alternative realities I considered in my plan.

  • Skip the part time work and just fully retire for both of us. Our savings target would rise to $666,000 and that would require me working an additional 13 months at my current job.
  • Skip the part time work for me by saving an additional $30K upfront.  That would take about six more months.  I have to comment on the fact I did seriously consider doing this, but in the end realized I would rather do more part time work later to get our full time work sooner. Also I’m aware I will likely end up exceeding our $550,000 threshold by a fair amount, so I might end up more towards this scenario anyway.
  • What happens to your savings target at 4% or 3% withdrawal rates?  At 4%, we would need $600,000, assuming the entire part time work scenario.  While at 3% that jumps up to $800,000, again assuming part time work.  I discounted the 3% as it seemed like overkill, but I did consider my initial scenarios at 4%.  Actually what ends up happening due to the part time work is we do drop our withdrawals down for a period of time allowing the money to continue to grow.  The modelling is not exact, but at one point I estimate we will only be taking out only 1%.  Of course, the flip side is our higher withdrawal rate is between 4 to 4.5% initially after I leave work (it floats a bit depending exactly on our final savings amount).
  • What if the markets deliver below 4% returns for a few years?  Honestly, that is the reason we have included some part time work during the initial five years.  It provides a buffer to our withdrawals which should allow the money to grow during that time.  If not, as I previously mentioned I’m okay to downsize the house and tap into some of our house equity (up to $75K).
  • Why only $6K a year for each of you for part time work income? It’s really just a number that works overall.  I wanted something low enough to be easily achievable so that put us at something below $10,000 per person.  After that we looked at my wife’s daycare income to the house and it ends up being around $6000/year.  So I decided to give myself the same target.  The reality is that number is an average over the five years, so we totally have the option of taking in more one year and less on another.  So depending what I do, I might make $12,000 for a two years, then drop down to $2000 for the rest.  The number doesn’t matter in a year, as long as the average is getting achieved.
  • Why not just work longer and be rich?  I honestly did look at this one just for fun.  Had I kept an normal retirement age of 65 I would have in excess of $5 million assuming we kept a similar pace of saving going forward.  Which at a 4% withdrawal rate would give us a spending limit of $200,000 annually or over six times what I currently spend.  It’s so overkill it isn’t even funny, it’s ludicrous.

Well I hope you enjoyed this tour of other realities, but hopefully this gives you an idea of my thought process to get to our current plan.

Home Renos Vs Early Retirement

Posted by Tim Stobbs on September 10, 2014

So Tina the other day had an excellent question regarding renovations and saving for early retirement:

How do you prioritize early retirement goals and home improvement? I have paid off my mortgage years ago and don’t plan on moving for many years, if ever. We have two small children and plenty of room in our home. However, the basement isn’t finished although it isn’t used that often we could do some great things with it. Aside from efficiency upgrades and cost saving renos( windows/ metal roof) we haven’t done a lot aesthetically. I’m conflicted about making Plans with hubby that could cost hundreds or more when it could be put towards ER. On he other hand, we are not spendy people in other areas and if I’m going to stay in this home for 20 more years why not deck it out? How do you determine what’s worth doing when your not planning to sell?

Home renovations are an interesting spending category since they tend to blend the practical spending with the fun spending, so at times its hard to separate out which is the emotion spending versus what is actually required.

For example, your sink tap is getting old (over 25 years) and while it isn’t leaking you know they don’t last forever.  So if you decide to replace it, do you just buy the cheapest thing you can find? Do you do it yourself or hire someone?  Do you buck up a few dollars to get a much nicer looking one? Or do you replace all the taps at once to make sure they match?  Where the hell does ‘need’ and ‘want’ start in that mess of decisions?

To help clear the air a bit on this I tend to divide my decisions into two camps.  The first is house maintenance – this is required to keep up my homes functional requirements.  The second is upgrades and aesthetics – which is more about making my family and I comfortable and happy.

When it comes to house maintenance I fall back on my engineer training which similar points out proper maintenance of key systems is almost always cheaper than running something into the ground and doing emergency work.  So when stuff gets old and needs work, or can be replaced by something significantly more efficient I usually just buck up and spend the money.  For example, when our furnace inspection noticed a hairline crack in one the pipes a few years back, I just asked for cost estimates on replacements rather than repair costs since the furnace was almost 25 years old.

To keep costs in check I do shop around for parts and will often try to fix something myself or get a friend to show me how to do something.  I also know when I’m out of my depth – I NEVER touch anything with natural gas (furnace or water heater) or rewire my basement (but I will change a light fixture).  I also keep in mind when some jobs are just too time consuming like dry-walling a large area so I’ll contract those out.  For example, it the job would take me like 50 hours to complete and a contractor can do it in like 25 hours, if you work out the hourly rates I can typically still go to my day job, pay income tax and still hire the contractor for cheaper than my time to do it.  Do it yourself isn’t always the answer.

To keep this easier on the cash flow I tend to space things out where I can.  So next year I’ll do the singles on the roof, a few years after that I’ll do the water softener, then the year after that the water heater…you get the idea.  You might even want to just create a home maintenance savings account and put in a set amount each year, like $1000, and just let it build up for when you need it.

Now that second camp of the upgrades and aesthetics is a bit more difficult. So I tend to fall back on some happiness research that points out a few key points about changing things around you.

  1. You will revert to your baseline happiness after the upgrade.  New flooring might sound wonderful, but within six months I can almost guarantee you never think about it.  Your “new” floor will fade into the background, and it will simply become your floor again.  Don’t underestimate this fact.
  2. Constance annoyance can reduce your happiness.  Seeing that ugly pile of shoes in your front closet every day and digging through for two minutes to find your pair might drive you nuts for just two minutes a day, but it is EVERY day.
  3. Planning for something can produce the same amount of happiness as actually doing something.  So it is entirely possible, to plan your renovation for six months and enjoy it just as much as that first week after you finish it.

So my conclusion on most home upgrades are useless for your long term happiness and frankly can be dangerous as they can fall into an addiction cycle where you always need to be spending on your home to get you next renovation ‘high’. (see point #1). So granite counter tops are useless for 99.99% of the population in terms of happiness, but according to HGTV its almost required in a house today. Ironic right?

So does this mean you should never do an upgrade? Of course not, which brings me back to point #2, daily annoyances.  You should consider upgrades or renovations that will help relieve your daily annoyances but keep in mind the solution to many of  your problems is simply: you have too much stuff for the space you live in.  So rather than adding space, get rid of your crap first, then organize what is left and then perhaps do an upgrade id it still isn’t working.

Case in point, my shoe disaster example above.  Rather than assume you need a closet organizer or a renovation to double the size of your front entry closet, consider putting your winter boots into storage over the summer and remove half of the mess.  Then a few shoe racks to help organize what is left.  Boom, easy happiness for a fraction of the cost of a larger closet.

Of course with all of this said you still might have a spouse with an irrational desire for cork flooring in the kitchen (thwack of my spouse hitting me upside the head), which while the floor does need to be replaced you don’t have to use cork.  This isn’t a huge problem, but I recommend you take point #3 into account here.  Do a lot of research and planning before you start your renovation to confirm you are making the best decision for your family.  A way to help this along is to put a preset amount of money aside every month and then do the renovation when you can pay for the entire thing in cash.

In our case, we spend a lot of time at home and decided the flooring upgrades made sense for us.  So I did a lot of research of cork flooring systems and finally found a company out of Vancouver that sells product for about half the cost of Rona or Home Depot.  We got samples and argued about what finish to get for like three months and then my wife decided to push off the renovation for a year and visited her baby niece in Newfoundland last winter.  Yet now it is installed and we are happy with the results.  I also milked being happy planning this for several years.

More minor aesthetic upgrades I tend to pay with spending cash (which is our personal pool of money to spend on anything we like).  For example, my wife was in Winnipeg last weekend and picked up $250 of stuff from IKEA for me.  It was all my spending cash, which I chose to save up and spend on some new glass door shelves for the living room (to upgrade our 14 year old cheap student shelves which had been painted at one point years back).  I wanted to replace that shelves since I spend more time in that room than anyone else.  But again I saved for like six months prior to doing this and thought long about what sort of shelves I wanted in that room.  Again I milked the planning cycle to ensure my decision was well thought out and enjoyed the happiness of planning for the upgrade.

In the end for us, we tend to have early retirement savings firmly as priority #1 in the world, but we do put some money aside for other projects.  There isn’t a point saving every dime for early retirement if you don’t enjoy your life now, so yes do some home upgrades if you want for purely aesthetic reasons.  It is ok, just keep that amount a reasonable amount for your family.  Perhaps even set it as a fixed percentage of your spending towards discretionary items like vacation, home upgrades and entertainment.  That way, if you do really want granite counter tops you can do it, you just might have to have a frugal vacation for two years to make up the difference.  Find a way that works for you.

So how does your family handle home upgrades?  I’m wondering how others handle it.