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Sunday, February 26, 2017

A Million Isn’t What It Used to Be

Posted by Tim Stobbs on February 6, 2017

I sort of find it bit odd that people have a fixation on being a millionaire.  While it sounds like a lot of money you have to keep in mind that over the years inflation keeps dragging down that benchmark so it gets more and more diluted as being a lot of money.  After all I had to even look up what is a millionaire and there isn’t even a standard definition.  Anyone with a million dollar net worth technically counts, including myself.

Pardon? Yep, I don’t really pay attention to the millionaire target other than it happens to be roughly around my retirement amount.  Yet I also tend to ignore our true net worth as it includes our kid’s RESP account balance, rather than what I post on the blog where I leave the RESP balance out.  Yet the other day while I was on Mint cleaning up our transactions from over the holidays I happen to look down at our true net worth and was a bit shocked to see a seventh digit.  So without really meaning to or even paying attention we drifted over that imaginary line in the sand.

Of course the issue is people still tend to consider a millionaire rich, when in fact, as I noted above it becomes less and less meaningful as time goes on.  For example, my father retired roughly ten years ago now.  Let’s pretend he had exactly a million saved, even with a modest degree of inflation over the last ten years that money would be worth $1,177,655 today.  So even if I wanted to retire I would technically be doing it with less money than him.  The further you go back the worst this gets, so 20 years ago a million would now be worth $1,433,667 when you adjust it for inflation.  So in general the older you are the more likely you are to think a millionaire is something impressive.  So your grandparents might find that impressive, but your kids won’t really care at all.

But on a functional level in your everyday life it is utter meaningless.  It really just is a number or a line in the sand that mainly for popular culture references gets a lot more attention than it should.  After all, what happened the day after I found our we were a millionaire? I went to work.  Yes, totally anticlimactic.

Yet on the other hand, getting here is a big deal.  As there is only 1,117,000 millionaires in Canada (according to this story) out of population of 36.4 million or just 3% of the population.  So crossing that threshold tells you that you really are well off compared to the majority of people.  But I don’t consider us rich.  Perhaps well off, but not rich.  After all ‘rich’ is highly subjective.

Another problem with the word millionaire is it ignores the quality of your assets.  After all there are a number of millionaires in Toronto and Vancouver just based on home equity, but selling a home isn’t easy or quick.  Thus some people think the term should only be used with those with investments of $1 million or more excluding home equity.  Which is sort of a logical but doesn’t tend to ignore the popular culture references which dominate the word: millionaire.  Beside the banks solved that issue years ago with the term: High Net Worth Individual.

In the end, a millionaire title is a bit of fun, but I don’t take it too seriously.  If nothing else, it tells us we are heading the right direction for my retirement plans.  So what do you think of the term millionaire? Useful or meaningless?

Other People’s Fear

Posted by Tim Stobbs on January 16, 2017

Well as I  enter the last year of my full time working career (I hope), I’m starting to notice a new emotion in other well meaning people around me: fear.

After all I have already told some of my family members a bit of what I’m planning on doing.  It’s not like I blog under another name so they could always find out the details anyway, so I’ve open to my family with my plans at least in general terms.  I usually don’t bother getting into too much detail in the more extended family.

Yet now when I’m mentioning I could be done before the end of this year, it suddenly becomes real for those around me and I get the usual well meaning concerns like:

  • Are you sure you have enough saved?
  • What happens if you don’t get a part time job?
  • What will you do with unexpected expenses?
  • Maybe you should work just one more year?

Of course I short of do an internal giggle at these questions as I have already asked myself those exact questions.  After all this whole leaving you job thing to live off your investments is a bit like jumping off a cliff.  You can’t stop it once it’s started so you need to be very sure on what you are doing before leaping off.

Depending on the person I will try to answer those questions, but of course I realize that with some people I can give all the answers they want, but I can’t stop another person’s fear.  By the way the answers are:

  • Are you sure you have enough saved? I’m mostly sure.  I can’t be completely positive because of the number of variables involved, but that is okay since I already have a number of backup plans in case things don’t turn out.
  • What happens if you don’t get a part time job?  Short term this isn’t a problem as I’m saving our expenses for the first six months.  Longer term I have lots of options for bringing in some extra money and keep in mind I don’t need this money for anything immediate like groceries.  It’s for vacations.  Worst case, if things go very badly I can go back to full time job for a few more years to build up more money.
  • What will you do with unexpected expenses?  The same thing I do now.  Pay them from the emergency fund or put them on a line of credit to spread out the impact.  Also depending on what happens, like something breaking in the house  I will have a lot of time to fix some things myself.
  • Maybe you should work just one more year? I’ve considered that and I may do it if for example the stock market does another 2008 crash or other horrible event occurs.  I’m willing to be flexible if things happen and adjust my plans accordingly.  After all I’m not locked into this plan until I provide official notice of my retirement at my job.

I like to hope the fact I’m very calm when discussing these things helps put people at ease, but ultimately they have to find the source of their own fear and face it.  I can’t do that for another person.  I can merely help them discuss the issues in their heads and put them a bit more at ease.

Perhaps the one thing that gets people is I’m aware of the flaws in my plan.  I fully admit I may not have enough saved to head into semi-retirement.  But I don’t want to live a life based on fear of the unknown.  I’m willing to try out something new and see what happens.  Yes things can go wrong, but they can also go right as well.  In the end, I live in a world of hope rather than fear.  Time will tell if that is a smart point of view or not.

Overly Optimized Spending

Posted by Tim Stobbs on January 10, 2017

As many of you already know I have a very optimized plan when it comes to us spending our money each year.  I don’t spend more than I have to on my water bill, we borrow books from the library prior to buying them and will gladly spend money on buying a wine kit to brew at home instead of buying a bottle from the store.  Over all this results in us having a very good life on far less than most people would for a similar lifestyle.  Our spending is highly optimized to our particular wants and needs.

So for years I’ve generally considered optimized spending a strength of our plan after all when you are reducing your spending the you have more money for savings each month and you also can reduce your overall retirement goal.  For example, if you need $1 million to retire with a $40,000 per year expenses, if you drop your expenses to $30,000 you only need $750,000.  So you don’t have to save that extra $250,000 in the first place.  I always considered this a good thing.

Except when it isn’t.  Oddly enough I came across the idea it can also be a weakness to your retirement plan.  Which I thought was a bit silly at first until I realized what they were getting at (sorry I don’t recall where I read this or I would link back to the source).  Having overly optimized spending also means you don’t have much fat in your budget to cut as the core spending (like your property taxes, home heating, power or water) takes up a greater percentage of your overall budget.  It also means any jumps in those core expense have greater impact on your budget as you have less optional spending elsewhere that you can cut to cover it.  After all, when you are overly optimized you already cut most of the optional spending out years ago.

So let’s compare two cases to demonstrate this:  let’s say family A is spending $40,000 a year and they retire with $1 million saved.  Then the stock market drops 40% and inflation spikes so their core spending goes up $1000 per year.  So being reasonable people they look to cut $1000 per year out of their spending (or 2.5% of their yearly budget) and they go after a few things they haven’t optimized before and make up the difference.  Then we have family B with $30,000 a year spending and only $750,000 saved.  They have the same event and $1000/year increase in core spending from inflation.  Now they have less to cut in the first place and they have the added bonus of the increase being a higher percent of their spending at 3.3% of their yearly budget.  Over all family B’s ability to cut spending is more limited and the increased core spending dollar amount has a greater impact overall.

Hence the point that overly optimized spending can also be a weakness during your early retirement beyond being a help to get you their sooner.  So how do you deal with this issue?  Well me personally I don’t plan on changing my plan because of this, but I would suggest the idea of making sure you do have some buffer in your budget.  You might not really need that buffer most of the time, but even if you don’t use it initially that extra money could be spent on a one off event later on if you aren’t using the buffer.  For example, take an extra trip every five years if you aren’t using that buffer amount.  The size of that buffer is a personal choice and will shift with how much slack you have in your overall budget.  The more optional spending you have, the less buffer you may need and vice versa.

So do you have overly optimized spending?  What would you do to resolve the risk of higher inflation and a lower market?