A big free cash flow into the house I have to admit is very nice.  Our goals seem that much closer when you are pushing through the mortgage at a break neck speed.  Actually we are doing it so fast that we decided that any extra cash flow into the house would be used for fun stuff.  So this has resulted with my wife is having a bit of problem, which to be honest I think most people would like to have.  She has to pick a new client for the daycare where money really isn’t an issue.

Therefore as she does interviews and looks for parents that seem nice and will have a similar parenting style to our own. Yet more importantly she watches the interaction between our kids and theirs.  If the kids play well together the odds of getting accepted increase hugely.  Yet now she has run into a problem.  She likes two families and their kids a lot, but their care requirements are different.  One option is two kids three days a week, the other would be one kid for five days a week.

I think in an attempt to find some difference between the two cases we discussed the money side of the equation, which at one point I summed it up nicely “Depending on how soon you want to renovate the kitchen, you would pick one over the other.”  Her response was “I don’t really care about renovating the kitchen that much.  I’ve lived with it for almost four years, what’s another couple of years?”  Then at that moment a thought stuck me: this is the kind of discussion you have when you are financially independent.

Our basic needs are covered and we are making fine progress to our goals so any extra money is just that extra money.  If we want to do something that is nice to have, like renovate the kitchen, we can do it.  Yet we also have the luxury of letting my wife choose to work less if she wants.

In the end, this just proved to me an interesting point.  I think we are the right kind of people to retire early or be financially independent.  We consider money in our decisions but we are not driven by it.  Happiness is usually a more important factor.

Has anyone else been in this situation where you were picking a choice not really based on money for a small business?  What did you choose?  Perhaps you can help my wife with her decision by telling your story.

Are you all confused yet?  My wife had mentioned she was a bit unsure where the hell this series was going so I thought a time line might help sort things out.

• Age 34 - Mortgage paid off, shift payoff money and mortgage payment over to savings.
• Age 39 - Complete semi-retirement savings.  Now $18,000/year will come from investments to cover the basics like food, property tax, insurance the bills (power, natural gas, water, phone).  I quit my day job and do something else.  Between my wife and I we need to make only $9,000/year to cover the rest of our typical expenses.
• Age 39 to 60 - Continue to work part time and assume I spend any extra money that we earn in excess of $9000/year.  The reality is we don’t have to do that.  If we find we are regularly making much more than that and not spending it we could then put the money back in the retirement pool and shift over to full retirement earlier than 60.
• Age 60 - File for CPP and move into full retirement.

Today we are going to focus a bit on two parts of that time line: 39 to 60 and then 60+.  Now the first section of 39 to 60 will be hard to predict since I’ve tried to build things to be as flexible as possible.  I might end up working full time for a year on a project and then stop working for three afterward.  Or I might just work part-time for that entire period.  The point is the ability to do just about anything as long was we are making a bit of income.

Regardless of how we do it it should help rise up our CPP payments since I won’t have this string of $0 income years that have typically dragged down my benefit.  To play it safe I’m going to assume that we only get about $6000/year by taking CPP at 60 for both of us (my typical full retirement calculation).

So then at age 60 I’ll still have that $18,000 a year from investments, plus $6000 from CPP for a total of $24,000/year.  Which leaves me a little short from 60 to 65 (I’ve typically assume spending around $27,000/year).  So I can eat into my principle for a bit, which won’t be bad only about $15,000 in total.  At age 65 we both can get $6000 each from OAS for a total of $12,000/yaer, but I’m playing it safe and assuming we only get half of that or $6000/year for both of us.  So at 65 we should have an income of right around $30,000 a year in full retirement.

All in all it’s a workable plan.  Yet there is one little interesting fact in all of this.  I could just keep working from 39 until 42 and have the money build up to produce about $27,000 a year in investment income.  Then I’m not required to work at all from 42 onwards.  To be honest it’s not a bad idea.  I’m just not sure what I’m going to do.

I think it will heavily depend on how I feel about my job when I turn 39.  I might want to keep working or just reduce my hours to three days a week.  Or I might be sick of it and ready to move onwards.  The point is that last year or two of work just prior to retirement are your big compounding years, if you can hang on at all or don’t tap into that money it makes  a huge difference to your final portfolio value.  So choose carefully, the results will carry forward for a long time.

Alright in the interest of time I’m going to make a simplifying assumption here.  I’m going to assume that I don’t have much of a problem pulling money out of taxable and tax sheltered accounts once I semi-retire (ie: I can pull enough from my non-locked in/taxable accounts to hold off until I can need to pull  money out of my locked accounts).  So that way I can just pile all the money into one number as I sort out how much will I have at 39.  Please note that all my calculations are in present dollars, so all investment returns have been reduced by 1.5% to adjust for inflation.  I’m aware that official inflation is higher than that over a longer time frame, but my personal inflation rate is usually less than that.

Another thing I’m going to do is adjust my start time slightly forward to this summer.  Why? Because the final mortgage payment will occur about the middle of summer.  So it makes everything then occur on a nice neat yearly basis.  So as of Jan 1, 2010 I had about $100,000 in investments/savings.  Adjusting for my pension contributions and RRSP contributions till July 1, I will add in $5000.  Then to simulate growth on that I’ll add another $2500.  So my starting value of investments is $107, 500.

I will grow that forward at 5% for two years at $1250/month in contributions, which puts me at around $150,000.  I went with 5% since I’m not changing my investments during this time. At which point the mortgage is paid off.  So now rolling all that money over that I used to put on the mortgage means I can save in total $3965/month.  This doesn’t include my school board income.  Yet my school board term doesn’t expire until late that fall, so with that in mind I’ll just adjust my starting point up by $6000.

So growing $156,000 at 4% for five years at $3965/month I end up with $453,000.  I reduced this to 4% to cover off a significant shift over to fixed income in the portfolio that will occur during this time.  Now that value of $453,000 is actually highly significant.  Since I’m only taking out $18,000/year in this scenario, that would mean I can take that every year from my stash of money and never drawn down the principle as long as my returns stay at 4% + my personal inflation adjustment.  Nice eh?

Tomorrow I’ll try to wrap this scenario up as I link up the semi-retirement phase to full blown retirement when I turn 60.   Please let me know if you have any questions.  I’ll try to include answers in the post tomorrow or the comments on this one.

For long time readers you are well aware that about once a year I sit down and recalculate how much I need to retire.  Basically I update my assumptions and find out if I’m any closer.  Given that this year I’m looking a bit more at the semi-retired option I’ve decided to run this scenario instead.

So first off you need to determine what kind of lifestyle you want in retirement since that drives your expenses and that is one of the key numbers in these type of calculations.  For me that is fairly easy since I rather like my life now.  I just wish I had more time.  So I’ll use my current spending as a baseline.

So on a monthly basis that is $3266, but I need to adjust that number.  First off I won’t have a mortgage payment, so I’ll deduct $1276.  That pushes me down to $1990/month.  Then for this scenario I’m still planning to work so all I want covered is my bills, property tax, food, gas, regular spending on kids (but not RESP contributions) and insurance costs.  Basically any spending money I want or vacations will have to come from working.  Also any new cars or home improvements will also be coming from my working income.  Good motivation don’t you think?  So with that in mind I can drive the monthly spending down to $1500 or $18,000/year.  This is much cheaper than my usual full-retirement calculation that has me at about $27,000/year plus any yearly vacation cost.

So overall I’m on the hook for working enough to raise $9000/year after taxes from some kind of work and then a bit more for a vacation.  Yet that includes me and my wife, so given right now my wife can clear about $6000/year from the daycare this should be very easy to pull off between us both.  I don’t mind doing some work, but I don’t want to be chained to a full time job.

Now given this is a new scenario I’m doing some crude guess work about how long I think I need to work full time to pull this off.  I know I will currently pay off my mortgage about the middle of 2012, so obviously I need to work to that point in time.  After that I’m taking a stab that I’ll need to keep working for another five years.  So overall that will put me at 39 when I shift over to semi-retirement (if I’m wrong I can always redo the numbers at a higher age).

I’m also going to be a bit conservative on this number crunch and assume I don’t seek a second term with the school board (also I have no idea if I’ll still want to do it at that time), so after my mortgage gets paid off in 2012 that extra money will stop flowing into savings.

On Wednesday we will pick this series up again and find out where some of this money is coming from to pull this off.

I am an impatient person.  I read approximately 30 to 40 personal finance blogs a week and a lot of the writers are further along in their financial goals then I am, and it frustrates me sometimes that I’m not there yet.  I am approximately 6 years away from paying off my mortgage.  The payments being made now amount to approximately 40% of  our net pay do not seem to be making much progress towards the final goal of being debt free.  I would love to be three years ahead of schedule now -  it seems like I’m just slogging along making minimal progress.

I know that I am making progress towards my long-term goal, but emotionally, it seems to be taking forever.  I know that comparisons are not really all that useful, but it’s hard not to do it, with a lot of my “recreational” reading focusing on personal finance.  Reading stories about how Tim doesn’t need his day job anymore and how Jacob at Early Retirement Extreme is spending most of his days in his early 30s sailing it’s frustrating to know I am about 7-10 years away from even thinking about these goals, let alone achieving

I have a couple of options to speed up my plan, including:

1. Getting a higher paying job.
2. Further reducing spending.

I don’t really want a different job, and I have a feeling that if I were to earn more, my dollar per hour would probably stay close to the same (I would have to work more hours).  I think my quality of life would be reduced working more and in the end it would really only reduce my time to retirement by maybe a year or so.

As to further reducing spending, there’s not much more I could reduce.  As you can see from this post my budget is pretty tight as it stands, and there is really not much more that could be removed.  Unless I can come up with a pretty good argument, I think there may be a revolt from my spouse as I have been told that the way we are doing things is not “normal”.  I don’t think for example, we could spend less on food without having to give up some of the fresh food and nutrients that are important to us.

With neither of these options entirely attractive, I think that I basically have to be patient and allow the plan I have set up to (hopefully) come to fruition.

Do any of you have “Finance Envy”?  Do you wish you could be further ahead towards your goals then you are currently?  How do you keep your end goal in mind when it’s 15 years away?

**On another note - GO CANADA GO !!**(The Olympics have been on this long weekend at our house about 16 hours a day).