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Thursday, October 30, 2014

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.

All The Time In the World

Posted by Tim Stobbs on August 21, 2014

If you ask any aspiring early retiree why they want to retire early the answer is often about freedom.  Yet another common answer is related to time.  We want the major of our time to suit our own purposes, which seems very similar, but in some ways is a bit different.

Time is really a subjective experience, it goes fast or slow depending on how we view it. Work can feel like it was twice as long was it really was or when you are enjoying what you are doing hours can vanish in what seems like minutes.  Also feeling busy comes out of your perception of time as well.  So if you have that awful feeling of being frantically busy, keep in mind that it is mostly in your head.

The major issue with our time beyond our basic perception that there isn’t enough of it.  Which ironically exists only in our head.  So the other way to look at the world is just reverse your basic perception and think to yourself: I have all the time in the world.  I know that sounds incredibly nuts, but if you do start adjusting your basic thoughts about time you tend to take those odd moments and actually enjoy them.

For example, I was recently driving home later in the evening and the clouds turned that perfect pink colour in the sun set and it for a moment reminded me of one of my favorite Monet paintings.  So I looked ahead and behind me on the road to confirm no one was near me then I enjoyed the view for a few seconds.  I took the time to enjoy the moment.

The other major thing to take back your time is to restructure what you are doing with it.  So often we end up trying to cram way too much stuff into our days and feed that feeling of being frantically busy.  So the solution to this is be honest with yourself and develop so priorities and stop trying to do it all.  Cut out 80% of the crap you were doing with your time and you will suddenly have lots of time to do the last 20%, which is often the most meaningful anyway.

So for me this meant I stopped writing endless to do lists.  Instead feeling guilt over things I thought I should be doing I’ve realized that if I just write down the few most important things I need to do in the day I can typically manage to get all those items done and feel better about things.  I accept I might forget the odd thing, but mainly I’m just forgetting the crap that would just stay on the list for weeks and not get done.  So how important is something if I can safely ignore it for weeks: the answer is not at all.

I also got honest with myself and stopped trying to do too much at once.  I realized that relaxing is just as important as doing something for long term health.  So yes I do a few items on a weekday after work and then I typically spend the last few hours relaxing reading a book or watching a movie with no guilt at all.  I stay in the moment of what I choose to do and actually enjoy it more.

In the end, you don’t need to retire to get more time.  You have enough time right now if you allow yourself to use it and accept you can’t do it all.  Even with an extra 52 weeks of 40 hours you aren’t going to be able to do it all. So start adjusting your life now to enjoy your time.

So how do you make yourself feel less busy?  Or what have you stopped doing that wasn’t that important?

Capital vs. Cash Flow

Posted by Dave on August 19, 2014

An early retirement plan is an inherently risky thing to take part in. The risk in following through with the plan is that money will run out before you are readily able to make more of it, but there are still bills remaining to be paid. On the other hand, there is the risk (although less detrimental) that I could be one of those guys that drop dead at 52, while walking up a steep hill, or shaking my fist at a bunch of punk kids to get off my lawn.

My wife and I live fairly cheaply – beyond my golf habit and my wife’s desire for warm vacations, we really don’t have expensive lifestyles. Beyond the possibility of health problems causing significantly increased monthly expenses, I wouldn’t expect much in the way of lifestyle inflation to take place.

I like measuring sticks to show progress. In the past, I have written about slowly knocking off individual bills through investment returns – slowly taking chunks out of monthly expenses until they’re all taken care of (with a buffer). From my standpoint, it will be difficult to tell myself to keep working (especially on a full-time basis) at the point when all of my annual expenses are taken care of. The risk at that point will be that my investment portfolio gets wiped out and I’ll end up sitting in a dark, cold house eating beans and rice.

I’m sure I’ve read this somewhere else, but I’m not sure who to attribute it to, but living off a portfolio of 20+ diversified stocks and bonds does seem to be a lot less risky than my current dependence on a paycheque. Even though this pay has been continually deposited for over a decade, and I don’t expect it to end, it is dependent on me continually showing up and working for the next 10 or so years.

If I have adequate cash flow to cover my lifestyle at age 45, with enough of a buffer built in to cover major expenses within a diversified portfolio how much risk exists? If, for example, I have $750,000, yielding annual returns of $25k, and my household expenses are only $20k – should I work until I get to $1 million?

How long would you stay working? How did you arrive at your comfortable “exit number” ? Did you err on the side of caution, or plan on exiting the workforce as quickly as possible?