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Sunday, February 26, 2017

The FI Irony

Posted by Tim Stobbs on December 19, 2016

After the long hard work to get to Financial Independence (FI) I’ve realized something fairly ironic about it.  You see I just spent the last ten years of my life working on saving, investing and planning so that in the future after FI I can spend less time on saving, investing and planning.  What the?!?!

In the beginning when you start on your path to FI there seems to be a million decisions to be made.  You have to decide on ways you want to save money like do you take your lunch each day or do you buy it up to one day a week?  You have to decide what investment strategy is best for me?  Can I choose more than one strategy?  Then you have to come up with the retirement plan?  How much do you need to save?  When do I want to leave work and then what do the numbers tell me about leaving work?

I’m starting to realize that once you actually get here to FI that it’s a lot less work.  After all you have already made all your investment decisions now you only have to spend a minor amount of time on maintaining them.  So of course there is a bit of planning on how you will take out the money from your investments but once that is done again you done the work all you have to is keep up the process and make the odd adjustment.  All the saving I’ve done is also largely completed, now I’m actually just saving the last cash reserves for my plan so in fact there is very little to think about other than moving money from chequing to the savings account once a month or so.

If effect, once you reach FI you are resting because of all your previous work on your decisions.  You life is now highly optimized to your priorities so your spending is more of a habit than an effort.  Your investments make money without you doing much of anything.  And you make minor tweaks to your plan because you already gone over it at least a hundred times by now.

Perhaps this is why so many personal finance bloggers upon getting to FI drop off in their frequency of posts, they feel they don’t have anything left to say.  The decisions are all done, the results are in, so what more is there to talk about.  Aren’t you all lucky I’m obsessed with psychology? I plan to keep writing for a while on the entire mental transition in my semi-retirement.  After all getting here to FI is one thing, adjusting to the early retirement side of the world is entirely a different thing.

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