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Friday, November 28, 2014

You Might Be Saving Too Much

Posted by Tim Stobbs on November 14, 2014

Despite the fact a large amount of people aren’t saving enough for retirement there also tends to be a minority that save too much.  In some cases, it really is on purpose but for others I would wager that they don’t understand some of core assumptions that go into using the 4% rule.

For those who aren’t as familiar with the 4% rule it is a rule of thumb that came out of the Trinity Study which determined a safe withdrawal rate for a 30 year period using historical market returns.  By it very design it is a conservative number, but in addition there were several other conservative assumptions underlying those results including:

  • You never earn one dime of income from any other source ever again (no part time work, no selling stuff you no longer use, no winning a 50/50 draw that you bought a ticket to support a charity or get a bit of a inheritance from your parents…nothing).
  • You never receive any money from government benefits such as Canadian Pension Plan or Old Age Security.
  • You never adjust your spending during an economic down turn.  If the stock market crashed like 1929 again you would keep spending the same amount.
  • You also never adjust your spending downwards despite the fact Statistics Canada proven this does happen with older people.
  • And your withdrawals per year increase in lockstep of the Consumer Price Index…regardless if you actually need that much of an increase.

Ok, I get for a study you have to make assumptions, but something else tend not to realize about the results is that extending that 30 year period to a total number of years sampled (ie: infinite time frame)doesn’t really effect the results that much.  If you can can handle the 1929 crash at 4% and keep on going along just fine there won’t be much of an adjustment pushing that out over a longer period of time.

So I literally cringe when I hear people planning their retirements with a 3% withdrawal rate, high inflation and assuming no government benefits at all.  You are so overkill at that point it is insane to me.

Let’s break down my experience to date with those assumptions:

  • Have I ever made money other than my primary job? Um, yes, and likely even last week if I looked into it.  Do I plan to do this in the future? Um in my case I’m going to do a lot of writing and hell may even sell a few books while at it.  So that assumption doesn’t hold water in reality.
  • Have I ever received money from the government? Yes, every month I get money which we put in our kid’s RESP accounts.  So granted yes the amount you get might go up or down, but in the end you gain from some tax changes and loss on others every year, but you always get something which is more than nothing.
  • Have I ever adjusted my spending in reaction to a given situation? Mmm, let’s recall I had $9000 in renovations to a structural beam in my house and a 10 week premature baby at the same time…did I adjust my spending: OF COURSE I DID! Bloody hell, do I look like an idiot?  That’s common sense to stop buying the extras when you are in temporary crunch.
  • Have I ever adjusted my spending down over time?  Uh, yes, after buying all the major things for my home I really don’t need to keep buying new stuff when the old things are working just fine.
  • Have I ever adjusted my spending less than the CPI in a given year?  Yep, because the CPI include crap that I no longer pay for like mortgage payments.

So just to recap none of those assumptions hold water in my real life so why the hell would you go MORE conservative than that?!?!  Ugh.  Therefore in summary, might I suggest those people that are being additionally cautious evaluate why they are doing it? The 4% rule is very conservative by its design so adding to it is like putting up a small fort in front of the great wall of China, it just looks ridiculous and doesn’t do anything (other than keep you working longer, but I don’t understand why that would be appealing).

Actually in my case I’m giving serious consideration to using 4.5% withdrawal rate for my next round of retirement calculations since most of the assumptions don’t apply well to me.  I’m willing to take on some additional risk.

So what withdrawal rate do you use?  Why did you pick that value?

The Passion Career

Posted by Tim Stobbs on November 12, 2014

I’ve told this story a few times before, but perhaps a short recap would be useful.

Once upon a time there was a young boy who dreamed of being a writer for living, but upon getting to high school and learning how little that could pay (in fact there was a recent story on that saying the average writer in Canada only makes about $12,000/year) he decided to instead leverage his math and science talents into a degree in Chemical Engineering instead. Somewhat unsatisfied with his career choice he became obsessed with the idea of early retirement or financial independence which would let him then switch back to his dream job of being a writer with out needing the money from it. He figures he could do all of this by his 40th birthday or so.

While this seem sort of practical way to do things to me it doesn’t acknowledge that until very recently I always doubted that I could be a writer. Self doubt in my ability to write has always haunted me and despite any success to the contrary I always thought writing for a career was more fantasy than reality for me.  That is why perhaps I would write posts here, but often ignore my writing other projects.

So while I like the idea of the career advice of follow your passion I tend to be a bit wary of it since I find people easily confuse excitement for passion. In fact I just recently read something that I thought nailed the difference between the two. People that found their passion in their work life don’t talk about how exciting, challenging or stimulating the work is but rather they speak in terms of meaningful, significant and fulfilling their work is.

I find writing fulfilling to me. I’m more complete when I have done some writing, but I also understanding writing a book is a LOT of work. For example, so far this month I’ve written 19,000 words on my novel and I can assure you the majority of it wasn’t exciting. In fact, long stretches of it are making me sit down at my desk and slog through a scene that I need in the book but I’m not even that interested in writing at that moment in time.

I find there are a lot of ‘want to be’ writers in the world. They love the idea of writing as a career in their fantasies, but often don’t actually finish a manuscript. They end up burning through their excitement in the first five chapters and then facing the long painful climb to finish the book they give up. I get that since I’ve done it numerous times myself.

Yet when I speak to actual writers who do this for a career they often comment on working six days a week, the horrors of having an editor or agent rip your beloved book to pieces, and the the tough work keeping up social media and other means of promoting their work. Being an actual writers means you get fulfillment from your work even when the entire process can be painful and you know won’t get easier as you go along.

So yes, go for passion in your career if you want, but please do keep in mind the difference between passion and excitement.  To be successful in just about anything requires doing work that isn’t always exciting.

What are your thought on doing your passion for career advice? Pointless, a dream, possible or just difficult to do?

What to “Sacrifice”?

Posted by Dave on November 11, 2014

The basic premise of any retirement plan, whether it’s at 70 years or 35 years is to abstain from spending today, so there is money left at some future date. The difference between early and a more “advanced” retirement is the level of savings over the accumulation stage of life. My wife and I have chosen 45 as our goal, as our savings rate when we started this plan seemed to allow this to work out.

As people who have read this blog know, I have a few non-frugal hobbies that I enjoy, and my wife loves to travel, also not a really cheap thing to do. These are things that we want to do, knowing that they would be a significant hindrance to our early retirement plans. In order to balance off these relatively expensive activities, we have to give up other “grown up” things.

One of the major things we’ve given up is a “nice” house. We have lived in our house for almost 6 years now and have really done nothing to it. There’s a pretty long laundry list of things we’d like to do to our house that would update our current living situation from “student chic” (builder grade everything from the late 90’s) to something much nicer.

We like the small changes we have made – some new flooring to go over the plywood that was here when we moved in, and some paint that we applied shortly after that. Our next “major” purchase (which should be exciting) will be some matching blinds that will allow us the option of privacy in the kitchen in the evenings (the old blinds fell off and we never replaced them). We would like to take out a load-bearing wall to open up our closed-off first floor, but that would mean giving up a year’s vacation, and right now, that doesn’t seem worth it, for now – especially with winter coming.

When I write posts like this, I realize that these are particularly first-world problems – what “cool” stuff are we trading off in order to not have to minimize the number of years I have to work? These are really small issues to have, but still is a topic of conversation in our house. We are fortunate to have good paying jobs that even afford us the option of weighing these kind of choices.

Realistically, if we cut out doing everything that cost us any money, we could retire in a very small number of years, especially if our retirement plans continued with a really frugal way of life. Our issue, and the reason why our retirement plan is taking us 15 years instead of 5 is that we like the “extra” stuff.

What have you given up to achieve early retirement? How did you decide what expenses to keep?