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Saturday, January 31, 2015

Saving Contributions 2014

Posted by Tim Stobbs on January 23, 2015

So this week I should have finished maxing out one of our TFSA already.  If you recall in December’s net worth update I pointed out I put some of that money aside.  Then by Feb we should finish off the other TFSA account contribution for the other account.  So where do I put the money for the other 10 months of the year?

Well you see that is actually turning into a small issue as I’m running out contribution room on where to put it.  We made an effort last year to finish off as much as my RRSP contribution room as possible into my wife’s spousal RRSP.  Now the only tax sheltered account contribution room we will have left is about $20,000 in my wife’s name.  So I have to play around with the tax implications of her buying RRSP in her name as she doesn’t make much money per year so I’m not sure if the tax savings are really worth it.  After all if we drive her income to zero with RRSP contributions, I don’t know if her basic income deduction will transfer to me…I’ve literally never tried that before.  So if anyone knows, I would appreciate some advice.

So we will be back to non-registered investment accounts at some point in the year, which is just fine. Overall I expect by age 40 we should have approximately $100,000 in non-registered savings (give or take a bit). The longer term plan for the non-registered money is fairly simple, after I stop working at my day job I will drawing down the non-registered accounts first and also move what we can over to our TFSA accounts for anything that produces taxable income (like a GIC).  The idea is to keep our income tax bill as low as possible so we will likely keep dividend paying companies in the taxable accounts and any cash savings will eventually end up the TFSA (even if they don’t start there).

Perhaps the only thing I’m debating in my head is where do I open up the non-registered accounts?  On the one hand I like to keep our fees low and the other hand there is a certain ease of access if I put the accounts with our existing bank.  So I’m curious what other people have done and why did you pick that option?

Freedom 40 in 40 – Part VII

Posted by Tim Stobbs on January 21, 2015

Ah money, the beloved discussion point on this blog.  Today we will have a look at my plan around the money to leave my day job at age 40.  Perhaps the key thing here is to keep in mine I can’t possibly be fully financially independent at age 40, instead I’ll have to accept a semi-retirement option.  Which works just fine for me anyways.

So with that in mind I took at look at our spending and broke out what our baseline spending would be without including money for my wife’s Rider season tickets, gifts and donations, our annual vacation and half our normal spending cash per month (or $100 each per month).  The total for this came out at around $22,000 a year.

Then if take my investment net worth at the end of December 2014 of around $329,000 and add $4000 month for three years at 5% return you end up with: $537,000.  But then I still have four more months to save which should add another $25,000 to that total bring it up to $562,000.  Which at a 4% withdrawal rate would net me just over $22,000 a year.  Ya, I’m good right.

Uh, no.  There are a few holes that kick in around all of this.  First off, if I leave my day job at 40 I still have kids in the house who need RESP funds to pay for some school and I need some cash to cover their day to day costs.  Their RESP current has around $52,000 already in it.  I’m targeting having at least $80K in it.  Between our contributions and their grant money we put away about $434 per month.  So in three years we should have saved about $75K in total, which leaves me $5000 short.  Then we typically spend an additional $140/month on the kids for activities, clothes and other stuff that comes up.  So I figure I need to have that extra money for another 9 years or so at that point, which leaves me with another $15,000 hole.  So in total the kids are missing about $20,000.

Yet on top of that I still need to save about two years of spending for one of my backup plans which puts me in the hole for another $44,000.  So grand total I’m short on just the obvious stuff by $64,000, which if you divide that by 40 months would mean I need to save another $1600/month or $19,200 a year.  So in short, I’m screwed.  I can’t make this work with my current assumptions.  So is the dream dead? Not yet.

So what can I do to make this work?  Well this is where I step off my usual assumptions for a moment and consider a few adjustments like: am I comfortable with slightly higher failure rate of my plan if I go with a slightly higher withdrawal rate of 4.5%?  Given I plan to do some work for income anyway at this point, I would say yes.   Well working backwards then if you want $22,000 of income at 4.5% that means a starting pot of cash of at least $504,000.  Compared to my expected savings of $562,000, that cuts down my hole to just $6000.  Which is a lot more reasonable to save.

Another adjustment that I can consider is the fact I have always beat my assumption of a raise equal to inflation.  I only assume I’m contributing $48,000 a per year to the plan when in fact I routinely contribute over $50,000.  So in that case if I can push the upper end of my normal amount of contributions for the next 40 months I think I can average saving $5000/month.  At that rate I could potentially have just over $600,000 at age 40.  So if I back out my missing $64,000 and times the remainder by 4%, I get $21,444 a year which is almost on target (or a 4.1% withdrawal rate).

An additional factor also kicks in here.  My wife always planned to keep working for a while even after I left my job which I have never really added to these numbers.  So between her current work and some minor income from me we can easily bridge that missing spending money, vacations, gifts and her Rider tickets which comes out to about $8000/year.  This also provides some extra spin off benefits when it comes to collect our Canada Pension Plan as we won’t have a this huge string of zero income dragging down our benefit calculations.

But in general the margin on this plan is noticeably thinner so I may have consider cracking open the house equity to shore up the plan in the long term. Which I can live with as I did plan to downsize the house someday, but I might just consider doing it a bit sooner overall. Yet with our winters in Regina there is an additional motivation to move somewhere else in Canada. ;)

So overall I have several different ways I can try to make it work.  In the mean time, I need to save as much as possible push to average about $5000/month in contributions.  Then towards the end I need to see exactly where my numbers are falling out and determine if I’m comfortable with that level of spending and also what amount of work I’m willing to do to make up the short fall.

Questions?  By the way, this is also the end of this series…I return to my normal posting as of this Friday.

Freedom 40 in 40 – Part VI

Posted by Tim Stobbs on January 19, 2015

Today we are going to look at skills which is a form of independence that is under used by many.  After all if you can do it yourself, then you don’t often need to call in someone else to fix minor stuff and that can save you a boatload of money over the years.  The side effect of this is you also tend to have a bit more pride in your possessions since you can handle things yourself.

Skills are a very subjective area to discuss, so to help that along I’m outlining my basic criteria for evaluating my skills.  First off I’m going to say that some skills really don’t have much money saving potential, instead you do them because you actually enjoy it.  Others on the other hand aren’t fun at all to you, but save a lot of money.  You need to find the balance between these to sets to make your life enjoyable.  It’s okay to keep your skills limited to just basic repairs in an area that you don’t enjoy and then expand your skills in areas that you do enjoy.  For me I’ll be using the following scale:

  • None – Not skilled at all in this area.
  • Low – Can do minor things, but lack any ability to do complex tasks.
  • Moderate – Progressing towards more complex tasks.
  • Advanced – Could get others to pay me to do that skill.

The following is my crude skill list of things that have have occurred to me and my self assessment of my current skills level.  A cautionary tale on this list…I tend to assess myself lower than my peer group would for a skill set. I know I don’t have it all down, but it should help me figure out what I want to improve.

  • Cooking – Advanced
  • Wine Making – Moderate
  • Gardening – Low
  • Landscaping – Low
  • Interior Design – Moderate
  • Painting (Walls) – Moderate
  • Plumbing – Low
  • Electrical – Low
  • Carpentry – Low
  • Floor Installation – Moderate
  • Cleaning – Moderate
  • Car Maintenance – Low
  • Car Repair -None
  • Organizing – Moderate
  • Arts: Writing – Fiction Moderate, Non-Fiction Advanced
  • Arts: Editing – Moderate
  • Arts: Painting – Low
  • Software Troubleshooting – Moderate
  • Hardware Troubleshooting – Low
  • Computer Coding – None/Low
  • Publishing – Moderate
  • Organization Governance – Moderate
  • Office Software Usage – Moderate
  • Sewing – Low
  • Retirement Planning – Advanced
  • Investment Planning – Moderate
  • Data analysis – Advanced
  • Researching – Moderate

 

So in general I am happy with that list but a few areas that could be helpful to develop are plumbing, electrical and carpentry. So in the next year I would like to either do a project or help on one in each area. Otherwise I am fairly happy with that list.

So what skills do you want to develop?