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Saturday, December 3, 2016

The Art of Failure

Posted by Tim Stobbs on November 30, 2016

It’s about 8pm at night right now and I don’t want to be writing this blog post….yet I’m still typing, so what the hell?

I’ve learned that I’m extremely good at being a failure when I set my mind to something as such despite the fact I was seriously thinking of turning on the TV instead of typing out this post I decided to sit down anyway.  Why?

Because of a few things.  First off I told my wife I still needed to write today so if I had not turned on the computer I would have to explain my failure to her.

Then I also made the mistake of leaving this particular action until the end of the day despite it being important to me to write on daily basis.  In my case, I am a total morning person so putting things off until the end of the day almost guarantees the fact I will have very little willpower left to do something.  So I just barely gathered enough willpower to sit down with my laptop.

I almost manage while writing this to get distracted by various other things like looking at the books I’m currently reading…maybe I should read just one chapter and then finish this post.  Ugh, that is a bad idea if my hands leave this keyboard for just about anything they won’t be coming back.

But I’m thirsty after eating the chips that were beside me as I booted up my computer…don’t blame the chips, they were the compromise to turning on the computer in the first place.  Little rewards can be useful when my willpower is sinking fast.

Now I wonder if I shouldn’t just screw this post and give up, but now that I’m about 300 words or so into this mess of a post I might was will keep pushing on.

You see there is a rythme to getting things done for me.  If I start something the odds are extremely high I will get some work on it done.  How much varies, but in the end there is some sort of progress on the item in question.

So perhaps you are wondering why you are still reading this mindless drivel as it leaks out of my brain and onto the screen….because this is exactly how most people feel about their retirement planning.

Yep, we would rather watch TV, eat chips, get a drink, read a book…or insert your favorite delay tactic here than actually spend a few hours a year thinking about our retirements.  That is particularly scary since in literally you can do a quick health check on your plan in just a few hours.

How?  Well I tend to not do all my planning at once as I even get tired of it.  So I break it up into more manageable parts like:

  • Do I need to rebalance my investments?  If yes, I do the math to figure that out and go make the transactions in our investment accounts.
  • Has my spending significantly changed from last year?  Here I log into Mint Canada and run the previous two years as summaries and compare the results.  If it has changed by more than 5%, I need to understand why?  And will that continue in retirement?
  • Has my wants changed for my retirement?  Do I have different hobbies than last year?  Do I enjoy them more and if yes, do I need to adjust my spending projection in retirement to compensate?
  • What I did wish I spent less money on?  What do I wish I spent more money on?  Can I make any adjustments now to make those happen?
  • Am I happy with my life?  Is yes, great.  If not, what is causing the problems?  Is it too much stress, a bad relationship, or being stretched too thin by doing too much?  How could I fix those items now?
  • Is my retirement goal still reasonable?  Or have things changed that I should adjust my priorities?  Do I want to save more for my kids education?  Do I suddenly love my current job and am not in a hurry to retire?
  • What skills do I need to develop prior to my retirement?  How can I work on those skills now?
  • What major purchases do I want to get done prior to retirement?  Do I have an older car I want to replace, or house renovations to finish?  Have I included the costs for those in my plans?
  • How is my health?  Do I feel good about my weight?  Should I be working in more exercise in my week?  Or have my pants gotten tighter in the waist and I need to stop eating so many damn chips at 8:20pm at night?

Obviously this isn’t an exhausted list, but at least it gives you an idea of what to start thinking about.  You don’t have to do it all at once, but at least try to do some retirement planning…oddly enough it might help out your life right now as well.

Taking Money Out – The Breakdown

Posted by Tim Stobbs on November 24, 2016

Well I think it is finally time for me to walk you all through my plan to take money out of our investing accounts.  After building them up for years, reversing the flow is going to feel very odd but at the same time I do have to get used to it.

Now in passing I mentioned that I’m using a mixed approach to funding our lifestyle with our investments.  We aren’t going to depending on just part-time work, government benefits, dividends  or capital gains but rather all of them.  I want a diverse flows of money coming in to provide some buffer in the event the stock or bond markets tank in a given year or if a given company stops paying their dividend.  The other somewhat complicating factor to this is the amounts we take out from each of those accounts will vary through time as I have previously discussed.

Overall our annual goal is to have $30,000/year for spending. Of that I expect my wife’s work will cover $7200/year of the target. Then our current TFSA and taxable portfolio is producing around $9100/year in dividends.  Both of those I expect to be stable inputs for the next five years which gives us $16,300/year in total or 54% of our spending target.

Next up is the Canada Child Benefit (CCP), which for the first 24 months or so won’t be a big deal since that money will be invested in the the family RESP account (as per what happens right now).  Our target is to hit around $80,000 in the RESP and so far it is currently at $68,000, so that 24 month estimate might even be shorter than that.  For the first 20 months or so after I leave my job that won’t be a big deal since the amount will be just around our RESP investing amount, but after our first full year of low income our CCP will increase dramatically the following July.  Combined with GST/PST rebate it will jump to around $12,000/year.  Yes THAT high, so after finishing topping up the RESP account that money will flow into the general income for the household and another 40% of our spending target for a few years when the kids are around.

So for you keeping score you might realize that between the CCP, the dividends and my wife’s work that accounts for $28,300/year of our target or 94.3%.  Yet that period of time won’t last that long as our oldest son will hit 17 and that income will drop off, but that does give us a nice two or three year window for the investments to keep growing which should help us bridge to my wife being able to quit (when she is ready).

Now anything not funded from the above will be taken out of capital gains from our RRSP accounts.  And due to the basic tax deduction, if I don’t use it for work in a given year or even if we don’t need the money, we still plan to take the money out.  Why?  Because it will end up being a tax free withdrawal from our RRSP and if we don’t need the money it will just get flipped over to the TFSA account if there is room.  The amount we need to take from here will shift up and down depending on the other items above.

Then finally on top of all of this is our slush fund which is money put aside for vacations, home renos and car replacement.  We plan to start with $20,000 in that account and then any work I end up doing will fill it back up.  In the event the slush fund starts getting too big we may just make a lump sum contribution to our TFSA accounts and boost our dividend payout.  Yet somehow I don’t think that will happen, but who knows what I end up doing to earn money.

So in summary that $30,000 spending target comes from:

  • Dividend income $9,100
  • Wife’s job $7,200
  • CCP benefit varies from $0 to $12,000
  • RRSPs varies from $1,700 to $13,700

And the above doesn’t include vacations, house renos or car replacement which I will fund via my work and our $20,000 slush fund.  Then of course all of the above doesn’t include the $12,000 I’m putting aside to pay for the first six months so I can have a completely guilt free detox period after leaving work.  And long term as the CCP payments increase we will let the investments grow to replace my wife’s income and allow us to bridge into full retirement (if we want to).  Oh and we will adjust our spending to our actual inflation rather than the CPI (as long as it doesn’t exceed my 4.5% withdrawal from our investments overall target). And we still have that $15,000 emergency fund beyond all of the above.

To help you visualize all of this here is my projected investment net worth for the next few years based on 4.5% real return on investments (click to make bigger).  That little dip early on is me taking out the $12,000 detox money all at once.

Investment Projection Nov 2016

I’m FI

Posted by Tim Stobbs on November 22, 2016

Yes, it has happened.  I’ve hit the mathematical point of financial independence (FI).  In short, my investment income will exceed my portion of the expenses and my job is completely optional.  You see I knew this point was coming very soon, it was really just a matter of what month it occurred.  The second our investment net worth exceeded $507,000 my job became redundant, I don’t really need to be there anymore to pay the bills. So you may be thinking I should break out a bottle of bubbly and cake to celebrate, but I’m not because here is the fine print: I’m financially independent, but my wife isn’t.

WHAT?!?!?

Okay calm down while I explain things a bit.  First a bit of history, I’ve known my wife for my entire career and we have an agreement since the start of our marriage (way back in 2000).  Since I stood to earn the most out of both of us, my career ended driving where we lived in our relationship.  I’m the main reason for moving cities and my wife then picks up a job where ever we end up.  Of course she gets input to every move, but ultimately I’m to blame for all of them.  The flip side of this was the fact we knew early on I would be the one to earn more and thus we have never bothered with the idea of splitting the expenses 50/50, separate bank accounts or other such nonsense.  The money is rather ours and we work together despite the fact I’m currently putting in roughly nine times what my wife does.

So the fall out of this particular situation is getting me to FI has been the longer part of the journey, so getting here is a big deal.  My wife’s portion to get to her to FI is MUCH smaller and here is the other major factor, she doesn’t plan to quit anytime soon anyway.  After all, she is self-employed only works a few hours a day and is very picky about her clients and likes her job.  So why would she quit?  She is basically semi-retired already (or working part time, depending on how you view that half filled glass as empty or full).  I’m just trying to catch up to her.

You might have noticed our investment goal is $550,000 or higher, which is higher than the current investments.  This is because we need to put enough money aside that the money can keep growing while my wife continues to work and hit full retirement in the medium term (~ 5 years).  As I mentioned before, I’ve shifted goals to semi-retirement and thus I actually don’t need to be fully FI for both of us prior to leaving work.  Of course I do need enough investments that we can get there in the longer term and any other expenses I see on the immediate horizon.

So now the question is how much padding do you want in your calculations?  Our $550,000 number is the floor amount (which includes an emergency fund  for living expenses – $15,000 in the even the markets drop like 10% or more in a year) and now I’m just debating how many other expenses I want to pre-save prior to leaving my day job.  The list includes the following:

  • Big Vacation Fund – $10,000 (we plan to take the kids to Disney in the next year or two)
  • Renovation Fund – $5000 (money to fund various projects I want to tackle in the house)
  • Car Replacement Fund – $5000 (a start to saving for the next car)

After that I’m basically looking a bit more and deciding on what to call it, perhaps the ‘Worry Fund’. It’s sole job is to give me a bit more of cushion to put at ease all the little worries in my head that include but are not limited to: sequence of return risk, lots of stuff going wrong in the same year (like a new water heater, car repairs, travel for a funeral and house insurance claim), not getting a ‘fun job’ for a while after I leave my day job, unusual expenses that I didn’t plan on like a sharp increase to taxes or utility bills and what ever other horrible scenarios my sub-conscious can come up with.   The amount of this fund keeps going up and down as I work through various exercises and potential outcomes.  On the extreme side, the worry fund could be as low as $0 as I really don’t need it.  Yet on the other side it could be $50,000 if I want to cover everything.

The real answer I expect won’t be entirely logical, but rather emotionally driven by answering: do I feel I have enough?  Also tied to this decision will be: how much am I enjoying my job right now?  I sometimes think there is a sword fight in my head between these two concepts and to the victory goes the control of my early retirement notice.  Yet I finally came up with something simple to help me decide: I will save enough to cover the first six of my early retirement so I can be completely guilt free break after I leave work.  Cost $12,000.

So there my final target number to leave work is: $582,000.

The Stuff in Your Head

Yet perhaps the oddest thing I realized about hitting FI…it’s only a number.  My life won’t change because of it.  It does empower me to make additional decisions, but it of itself isn’t an agent of change.  No choir will sing when you get there, no rainbow will appear, you likely won’t quit work right away because you want some additional security before leaving your job.

What it does allow is you to change how you view your world.  Is work something to endured or something you choose to do?  You can decide which one you want to believe.  Do I continue at my current job or find a different one immediately? I can decide.

Yet the biggest change for me will be I’m giving myself permission to dream more about what I want my life to look like after leaving my day job.  You see for a while here I decided that dreaming too much about that was painful.  It was too far off and it just made me depressed if I spent too much time thinking about the future rather than living the present.  So now that I’m FI, I know it isn’t too long to the early retirement (ER) part of FIRE and I’m starting to think in a bit more detail about:

  • How much structure would I like in my days?  I think I want to avoid the alarm clock but having some guidelines wouldn’t be a bad idea to start with.  Going completely without any structure to my days may be too big of a shock.
  • Do I want to plan any projects for right after I leave work? A few moderate ones.  I won’t mind a to do list that I can tackle as I see fit.  So some days I may only get one item done, other may be more and others may have nothing done…no one forcing me to productive anymore.
  • How much alone time does my wife want?  After all she works from home and spends up to five hours a day by herself, so having me around all the time might be a bit of shock.  So we need to discuss this.
  • What new things do I want to do? Take a course in something new, or get involved helping out a different organization…or choosing nothing at all for a few months.
  • Just how much writing do I want to do? Does my hobby turn into a full on second career or just stay a hobby but with more time? I don’t know yet.

Yet I’ve noticed since hitting FI I’m allowing myself to actually process my emotions about coming up to ER.  I’ve had the odd dreams that are filled with feelings of being unsure of myself, tossed into a new situation and of course fear.  Fear?!?! YES fear! It is scary to leave behind the world you know and move onto something else.  Change always brings some fear.  Yet below that there is this deep relief, the tension of life is fading away and the end of a very long journey is getting close and the excitement of a new journey to start.

I don’t know exactly how this will turn out, but I’m curious to see where it goes.  Thanks for joining me on the ride so far (and reading to the end of the REALLY long post).