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Saturday, November 22, 2014

You Might Be Saving Too Much

Posted by Tim Stobbs on November 14, 2014

Despite the fact a large amount of people aren’t saving enough for retirement there also tends to be a minority that save too much.  In some cases, it really is on purpose but for others I would wager that they don’t understand some of core assumptions that go into using the 4% rule.

For those who aren’t as familiar with the 4% rule it is a rule of thumb that came out of the Trinity Study which determined a safe withdrawal rate for a 30 year period using historical market returns.  By it very design it is a conservative number, but in addition there were several other conservative assumptions underlying those results including:

  • You never earn one dime of income from any other source ever again (no part time work, no selling stuff you no longer use, no winning a 50/50 draw that you bought a ticket to support a charity or get a bit of a inheritance from your parents…nothing).
  • You never receive any money from government benefits such as Canadian Pension Plan or Old Age Security.
  • You never adjust your spending during an economic down turn.  If the stock market crashed like 1929 again you would keep spending the same amount.
  • You also never adjust your spending downwards despite the fact Statistics Canada proven this does happen with older people.
  • And your withdrawals per year increase in lockstep of the Consumer Price Index…regardless if you actually need that much of an increase.

Ok, I get for a study you have to make assumptions, but something else tend not to realize about the results is that extending that 30 year period to a total number of years sampled (ie: infinite time frame)doesn’t really effect the results that much.  If you can can handle the 1929 crash at 4% and keep on going along just fine there won’t be much of an adjustment pushing that out over a longer period of time.

So I literally cringe when I hear people planning their retirements with a 3% withdrawal rate, high inflation and assuming no government benefits at all.  You are so overkill at that point it is insane to me.

Let’s break down my experience to date with those assumptions:

  • Have I ever made money other than my primary job? Um, yes, and likely even last week if I looked into it.  Do I plan to do this in the future? Um in my case I’m going to do a lot of writing and hell may even sell a few books while at it.  So that assumption doesn’t hold water in reality.
  • Have I ever received money from the government? Yes, every month I get money which we put in our kid’s RESP accounts.  So granted yes the amount you get might go up or down, but in the end you gain from some tax changes and loss on others every year, but you always get something which is more than nothing.
  • Have I ever adjusted my spending in reaction to a given situation? Mmm, let’s recall I had $9000 in renovations to a structural beam in my house and a 10 week premature baby at the same time…did I adjust my spending: OF COURSE I DID! Bloody hell, do I look like an idiot?  That’s common sense to stop buying the extras when you are in temporary crunch.
  • Have I ever adjusted my spending down over time?  Uh, yes, after buying all the major things for my home I really don’t need to keep buying new stuff when the old things are working just fine.
  • Have I ever adjusted my spending less than the CPI in a given year?  Yep, because the CPI include crap that I no longer pay for like mortgage payments.

So just to recap none of those assumptions hold water in my real life so why the hell would you go MORE conservative than that?!?!  Ugh.  Therefore in summary, might I suggest those people that are being additionally cautious evaluate why they are doing it? The 4% rule is very conservative by its design so adding to it is like putting up a small fort in front of the great wall of China, it just looks ridiculous and doesn’t do anything (other than keep you working longer, but I don’t understand why that would be appealing).

Actually in my case I’m giving serious consideration to using 4.5% withdrawal rate for my next round of retirement calculations since most of the assumptions don’t apply well to me.  I’m willing to take on some additional risk.

So what withdrawal rate do you use?  Why did you pick that value?

It Doesn’t Take Much (Hopefully)

Posted by Dave on November 4, 2014

One of the things that I’m concerned about when it comes to both retirement, and in general getting older is my health. To a certain extent, most health issues that could happen are pretty random. I’m able to reduce the probability of having some of the issues that come with aging by eating right and staying active, but realistically there is always a chance that I could drop dead at 41 from an unseen heart attack.

Rather than be over-concerned with my own mortality, I’m working on the basis that I will stay reasonably healthy with no debilitating illnesses into the foreseeable future. From my perspective, this seems to be the only way to live. If I thought I had say 10 years left, I might as well diet on all of the foods that I try to avoid and spend all of my evenings on the couch, instead of going to the gym 3 or 4 days per week and eating mostly boring foods all of the time.

One idea I read this week from Mark’s Daily Apple *was to include one mile of running into your day.  1 mile is 4 times around a regulation track, which is a good chunk of running, but not enough to really kill you if you’re totally out of shape.  This distance is not really enough to cause significant joint damage, while at the same time giving a pretty good cardiovascular workout.  From my viewpoint as a fairly lazy person, this is the exact type of workout that I can get into as a “better than nothing” activity.  You can get the whole thing done in somewhere between 8 and 15 minutes.  If you add in a few minutes for recovery, you can be back to your “regularly scheduled life” pretty quickly.

I’m sure everyone is like me, concerned with losing mobility as they age. I have family members who have health issues in their 60s who are no longer able to do the things they want to do. I would prefer to do as much as I can to prevent this, deterioration – leading up to the later stages of my life. Whether or not it will be effective is yet to be seen. Eating a reasonable diet, exercising consistently, and trying to keep as healthy as I possibly can.

The whole idea of being able to retire early is to be able to enjoy as much free time as possible. A lot of the stuff for now is physical in nature (golf, walking, and making myself tired in the gym). I’m hoping I’ll be able to do similar stuff until I drop, and I’ll try my best to stay that way, 1 mile at a time.

* – I would recommend Mark’s Daily Apple to anyone interested in their health.  Although the site at times gets a little on the “preachy” side towards the “Primal” (Paleo) lifestyle, it does have a lot of interesting ideas, recipes and stories that has held my interest for the past few years.



Ensuring Stability

Posted by Dave on October 7, 2014

Dave is also looking to retire no later than 45, but unlike Tim has no kids and doesn’t want any. Dave is from Ontario and is working towards his CGA certification.

I am generally a pessimist. I almost constantly assume that the worst is going to happen, which is the reason I am probably over-insured and also the reason why I have a much higher level of savings sitting around doing nothing than is perhaps necessary. My wife would probably classify me as a “Debbie Downer” (Youtube has some very humourous Saturday Night Live clips that may have been brought up in my house as examples).

Sometimes though, I do sit back and look at how lucky I am. Yesterday, I had a great day. I woke up a little earlier than I should have, after a late night of playing board games. I came home, “researched” for my NHL pool that I will probably lose at for the 15th straight year. I also found some reasonably priced “Book of Mormon” tickets to see over the winter, which I’ve wanted to see for a while. Finally, I made plans to cook a big turkey dinner for my wife and I and some friends next weekend, which I’m looking forward to. In all, it was a great day for me. I have a bunch of stuff to look forward to in the short and long-term and got to trash talk my friends during the hour and a half that the hockey pool took.

So, although I’m a pessimist I really like my life. I wake up most days looking forward to what I get to do that day, even at work. To that end, next week I’m ensuring that there are no significant changes to my family situation, by removing my ability to procreate. I’m positive I don’t want kids, and my wife is adamant in her desire to remain childfree. I have volunteered to do this for our “family” because it is much less invasive, and is supposed to heal much easier for guys than girls (which I guess I’ll see).

I have no interest in changing my lifestyle, and neither does my wife. We don’t want to have to concern ourselves with worrying about birth control for the next twenty or so years. For me and my wife, this permanent decision makes sense – it’s really just one less thing to have to worry about for the two of us, so we can carry on with the good times.

I thought as a childless 34 year-old, there would be a bit of a cross-examination by either my nurse practitioner or doctor. Both basically asked “are you sure?” and “you know this is permanent, right?”. I went for my consultation in June, and booked the operation for after golf season, next week. I’ll be taking a couple of days off work to play video games and heal up.

Sorry for the possibly “Too Much Information” health post, I would say that it aligns with my future plans, leading up to retirement. More specifically, it solidifies my childfree status – as long as the surgery works. While I think Early Retirement is more than possible with kids, for us, it would make it much more difficult to even think about making it work 10 years from now.