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Tuesday, September 2, 2014

Free at 40

Posted by Tim Stobbs on July 31, 2014

As long term readers on this blog know I started planning my retirement to be ‘Free at 45′, yet the reality has been that target has been slowly dropping for a number of years.  The last official calculation I did back in 2012 (see the series on the side bar under Popular Posts) came out with me being able to leave work at 42 with cash to spare.

So I’ve had this idea in the back of my head, could I be ‘Free at 40′ instead?  After all things have been going really well and I wondered how different would that look like if I decided to go for it.  So I did look into it and I’ve decided I really like the idea, even if it means some significant changes to the original plan.

The major shift that occurs if I do Free at 40, is the fact I go that early I’m much more in the realm of semi-retirement rather than closer to full retirement as with the original Free at 45 plan.  I’ve always had some work for me in these plans the question as always been to what degree do I feel comfortable depending on future work income.  The Free at 45 plan only used work income to cover vacation spending or other purely fun items.  The money wasn’t needed to pay any day to day expenses.

Yet as I grown I’ve come to realize I don’t really mind doing some work, as long as it isn’t too much.  So I am willing to trade some future work at part time to cover off some expense if it means I can get out of full time work sooner.  So for the longest time I had trouble finding where I could be comfortable on depending on some work income.

In the end, I approached the solution backwards, I picked the age of being done work at 40, or just under four more years.  If I do that I estimate I can save approximately $600,000 by that time, which is about $100,000 less than my original $700,000 in the Free at 45 calculations.  Which on a yearly basis, means I’m short about $4000 a year than my original budget (so all the other costs like food, property tax and all the house bills would be still fully covered from investment income).  In practical terms, the amount is the money I would be saving on an annual basis to eventually replacement my car and future house repairs.

So a solution to provide some buffer on those amounts is to save a slush fund for approximately five years or $20,000.  Thus giving me the ability to cover any immediate expenses the may come up.  I’m still also attached to my backup plan of having a few years of living expenses in a second slush fund to allow me to avoid taking money out of my investments in a few really bad years.  This would require another $50,000 to be saved.

These slush fund may very well be in place when I turn 40 since I typically do better on my savings and investment returns than I predict.  If not, I estimate I could save those in just over six months, which would turn free at 40 into free at 40.5…I think I can handle six months if required.

So you might be wondering why bother with Free at 40, when Free at 41 would likely be damn close to the original plan?  Because in short, I’m sick of making excuses to keep working full time.  I’m ready now to move on and do different things with my life and the only reason I’m sticking around at the moment is to save money.

I noticed in life it is easy to make small amounts of money doing things so some dependence on income doesn’t scare me. I’m tired of finding reasons to stay working full time when more often than not I’m noticing how things can turn out just fine anyway.  Humans are extremely good at adapting to our circumstances so I don’t fear doing this at all.  I will still have a good life.

So what do you think of ‘Free at 40′?  Brilliant, insane…somewhere in between?  I welcome all feedback on this idea.

Black Swan Events

Posted by Tim Stobbs on July 21, 2014

Three doors door down from my parents cabin a natural disaster has struck, the slope that nine cabins sit on is unstable and now slowly falling into the lake. This isn’t anyone’s fault and in fact the entire event would have been impossible to predict as a perfect storm of conditions occurred to cause it to happen.  In short the flood of 2011 cut the toe of the slope, then the recent heavy rains saturated the soil and raised the water table which lubricated a shale seam and presto you get a slow moving landslide on a slope that hasn’t moved in 60 years prior.

Now losing your cabin at the start of the season sucks, but the real shit hit the fan for the cabin owners when they started to look at their insurance coverage.  This is apparently classified as an “Act of God” thus in all likely hood their insurance on their properties are nil and void.  Ugh, but you may think they could get something from disaster relief from the government.  Well so did I until it was pointed out that only covers primary residences, not second homes like cabins.  So in the end, they have no cabin and also no means of getting a dime of compensation from anyone.

If that isn’t a black swan event for those people, I don’t know what is.  So the owners of these cabins are getting out what they can and trying to accept that rebuilding isn’t an option unless you happen to be sitting on a far bit of cash.  Needless to say this has also freaked out my parents who are just down the road from this.  It also likely means that my father’s retirement project to rebuild the cabin (which is almost at the drywall stage) could end up falling into a lake or not (so far their property is stable).  They just don’t know what will occur in the long term (at least in their case the cabin is their primary residence so they could get some money).

The point is tale is you can’t plan for everything.  With retirement planning we tend to pretend we can cover all our bases when in fact they are very real situations that can occur that you can not predict, defend against or even do anything about when they occur.  In short, shit happens.  So what can you do?  Really not much other than have a robust plan with some slack in it.

The other lesson I learned on this entire disaster is you can’t depend on your equity of your vacation property in your retirement plan.  Actually in fact, any house equity isn’t a stable long term investment as you local market can go to hell just when you need to sell.  So I would suggest never being at a point to depend on it, which makes me feel good about my choice not to include the house equity in our retirement plan.

So have you ever seen a black swan event?  What happened and how did the people cope with it?

A Change in Finances

Posted by Dave on July 2, 2014

My wife and I currently have almost completely separate finances. We each have our own share of bills that we pay every month, and our own share of savings that we’re “expected” to contribute, but beyond that, we don’t really have any other financial expectations about each other.

We’ve been together for about 8 years now, and this is how our financial situation has worked, and will probably work for the foreseeable future. We don’t really have any shared expenses – I think if we had kids or a dog, or something shared beyond actual bills, it would be more useful to have something like shared accounts or pooled finances.

Retirement will necessarily force a change our finances, moving from our almost completely separate financial lives, to almost fully integrated in about 10 years when we’ll start tapping into our savings and investments. This shift will change things significantly.

At this point, I’m not all that sure how our accounts will look when we retire, but there will be a bit of a change in the way that our finances are run. Right now, we have an “allowance” for ourselves, which I tend to spend on beer and golf (paying to walk around and get frustrated), and my wife spends on wine and semi-disposable “girl clothes”.

From discussions with friends, my wife and I will be about 20 or so years behind mixing our finances together. I’m not too sure how much of a shift this will actually cause, as the combined finances will mainly be used to pay bills, which will happen automatically. It will be how we equitably deal with the remaining funds that will be the major shift in our financial life. I’ll have to get used to “our” money being used for what I would think is a frivolous purchase, while my wife will probably roll her eyes at me paying to wander around and sweat for an afternoon.

This kind of thing is what we’ll have to discuss quite a bit before our salaries stop and start drawing on our combined savings. A “wait and see” approach seems like it wouldn’t be a good idea – we might have different ideas on how our end retirement would work, which would cause some issues in our early retirement years.

How significantly do you think your financial relationship would change with your partner on retirement?