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Wednesday, November 26, 2014

What They Need to Hear

Posted by Tim Stobbs on September 17, 2014

I was talking to a co-worker the other day who was worried about how her report would be received, since my particular group in the company gets to lead investigations into incidents that occur elsewhere in the company.  We basically get to stick our noses in, find out what went wrong and make recommendations on how to improve things for the company (but we don’t assign blame).  To sum it up, I said “Did you tell them what they needed to hear?  Remember we aren’t here to tell them what they want to hear.”  I hoped that helped, but in reality that phrase sums up a good part of my career.

I’ve never been an ass kisser at work, I just can’t be bothered.  That isn’t to say I’m not thoughtful or polite on how to bring up difficult subjects, but I will always tell people my truthful assessment of the situation.  I figure they pay me a lot of money to think on their issues, they very least they can to is hear the results.  So I know some people don’t particularly like me because I don’t tell them what they want to hear, but I do think the vast majority of people respect me for being honest.

So with that in mind, might I offer a point of advice to people.  The average saving rate in Canada is currently just under 4% and has been as high as 5% in the last few years.  If you continue to save at that rate, you will effective never retire without government help.  What?!?  Why because if you save only 5% of your pay it will take you 66 years to be fully financially independent with no government help (see here for a table of values).  So even if you started at 18, you could be financially independent at 84.  Yes, you are fucked.  Well let’s say, you are bucking the trend and putting away a nice 10% of your pay.  Sorry you still have to work for 51 years, so you will be ready to retire at 69.

The long story short on this, if you want a half decent retirement age (like about 60), you need to save at least 15% starting when you were 18.  That folks is the floor of the saving rate you should have, you shouldn’t go any lower.  Yes, I can hear the screams “But I can’t save that much?!?!?” Actually, you can, you are just choosing to do other things.  If you truly want off this treadmill of work, you need to start saving more immediately.

Of course, that assumed you started at 18.  If you are a 55 year old boomer with crap all saved (oh, and by the way those values don’t include any home equity as savings…so a paid house is required above that).  You are beyond fucked and up the creek without a paddle.  Do you feel that panic settling in, do you want to turn away and bury your head in the sand a bit more?  Good, then you are human, but perhaps let’s give you the good news.

There is of course an alternative.  You need to get your ass to the other end of that table of savings rate, because you can save 80% of your pay you can retire in just 5.5 years, so even if you are age 55 or 60, you can still save enough to have a basic level of comfort.  The trick here is you need to give up your currently lifestyle.  You can’t spend 95% of what you take home anymore, so prepare for some radical discomfort in the short term.  Downsize your home to something half the size NOW, stop buying anything beyond consumables (like food) NOW, sell that second car NOW….I assume you are getting the idea.

Now for your second piece of good news, all of this reduction of spending doesn’t have to impact your happiness much in the long run.  Pardon?!? Yes, I’m being honest here and you can go check out the research, but in fact only 10% of your happiness comes from your circumstances.  So it is entirely possible to be at least 90% as happy as you are now on a fraction of your current spending.

So that is your trade off 10% reduction in happiness to have a worry free retirement starting in just five years.  I know what I would pick, what about you?

A Perspective From the Wilderness

Posted by Dave on September 9, 2014

I spend a lot of my life dealing with really small details. My entire work life is spent analyzing and reviewing numbers and coming to conclusions which I report on and defend to my employer. I enjoy this kind of detailed work, which I feel achieves something at the end of the day, solving number puzzles and coming to conclusions based on the evidence I reviewed. My financial plan is much less detailed, but still entails (at least the planning level) quite a bit of minor details.

This past week, I spent 4 days in the bush with 8 other guys. Over these 4 days, I was up to 40 kilometers away from civilization, only reachable by canoes and leg power. I love these trips, which I’ve taken almost every year for the last decade. I seem to always come back to “the world” completely exhausted, but with a much different view on life.

In the bush, everything the 9 of us need for the period we’re in the wilderness, we need to carry on our backs, whether it’s water filtration systems, food, first-aid supplies, or shelter. We hauled seven 70 pound backpacks and 4 canoes on treks between lakes, around waterfalls, and over beaver dams to ensure we could survive in a comfortable manner. This kind of trip forces a focus on the daily event ahead, rather than planning too far into the future, which is the reason I think I love the trip so much. There’s no way I can be overly worried about work, or house stuff, or whether what I’m doing with my money is the best thing I could be doing. All that really matters at the moment, is pulling water with the paddle, or moving the pack with my feet.

I’m sure everyone would benefit from some level of rough living, to provide a bit of change of perspective from their everyday life. I live fairly sparsely, when compared to most people in my North American demographic. There is a realization when you have none of that “stuff” around you, or even any use for the vast majority of your worldly possessions that these things you’ve purchased are nothing more than “for fun”. This kind of realization allows for more appreciation of what I do have, and makes me think more about the “Wants” on my list.

It’s trips like these and the realizations that come from them that allow me to maintain my current path towards early retirement. The realization that I don’t need more stuff, I just need to be able to afford the stuff and activities that are most important to me, along with (more importantly) the time to enjoy them.

Is there anything you do that keeps your financial plan in-line?

Long-term Insurance

Posted by Dave on August 26, 2014

One of the things that I enjoy when I write for Tim’s site is the feedback I get from readers on my financial plans. While I joke around, for the most part I’m a guy who kind of pretends to be a grown-up, who kind of has his stuff together enough to discuss my plans of early retirement. I enjoy the exchange of ideas that has happened between myself and everyone who takes the time to comment on some of the schemes I have put forth.

Leaving the workforce 20+ years before “normal” retirement age is something that not very many people have done in the past, or if they did, it wasn’t really written about widely. Not many people know if the plans they set out will work in the long-run, because the long-run takes so long to test for. I can run my average investment returns through prediction machines and compare the returns against all sorts of potential expenses. I can have a certain amount of assurance that the financial “plan” I have in place will work out okay in the long-term, but who knows? I may go broke and be scrambling for any type of job I can find 5 years after I quit work for the last time – this is the major risk of this kind of plan.

My wife and I both know the risks that may come from exiting the workforce early, and have discussed the possibility of insuring that we have enough money to make it through. One of the possibilities we’ve talked about is working at a subsistence level, in order to allow our investments to compound for another 5 to 10 years.

Given our low annual budget, it might be a good time to learn a new kind of trade – whether it’s an actual trade, or just something interesting to do. Given the fact that we won’t have debt or savings requirements, we could live a basic paycheque to paycheque lifestyle, while gaining a bunch of free time in a semi-retirement stage.

We just don’t know how any of our financial plans will turn out though. I have no idea how my current investment plan will work out over the next 10 years pre-retirement, or the 50 years after retirement. I can be pretty sure we’ll be okay with the goal we have, but a few extra years of compounding might be beneficial, for very little “pain” on our end, besides having to get to a job sometimes. The benefit from this type of arrangement is that we could spend with comparative “reckless abandon” compared to the savings rate we are employing these days.