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Friday, July 29, 2016

What Do You Tell The Kids?

Posted by Tim Stobbs on July 12, 2016

Dee asked a few questions the other day with respect to kids and early retirement.

How old will your kids be when you retire? I remember my mom retired for my last year of high school and I had to get myself up and to school while she slept in. She did let me use her car to get there, though, so that part was nice. Do your kids anticipate any particular feelings about your retirement?

The first question is rather easy, so let’s address that first.  My oldest will be 13 at the time while my youngest will be almost 10.  So they won’t be really young, but that will be in that lovely stage just before teenagers.  So on the plus side they will be mature enough to explain the entire concept to them if I want, but I’m not sure I will.

I have to admit I’m a big concerned about my kids thinking we have lots of money.  We live a comfortable life right now, but we don’t act rich.  Yet I do worry about telling them straight out that their Mom and Dad have a million dollar net worth. I’ve seen odd things happen to kids who think their parents are rich.  Like for example: a lack of motivation, a sense of entitlement or just plain old arrogance regarding money that isn’t theirs.

While my wife and I haven’t firmly decided on what to tell them yet, I’m leaning towards the truth, but in a context that makes more sense for them.  I don’t have an exact speech in mind but it would likely be something like:

Hi guys, we need to talk.  Dad is leaving his current job on [insert date here].  But that’s okay, since we have got a lot of savings we don’t have to worry about paying for groceries .  Dad is going to change jobs to writing.  You remember his book downstairs, well I want to make more of those.  So my new job will be writing books.  I will work from home just like Mom does from now on, so I will be here when you leave and get home from school.  Any questions?

Of course I will play it by ear a bit.  It depends a bit on how much they already know.  It’s not like I actually hide my retirement plans or anything, but at the same time I don’t put it in their face.

Now some people may assume by telling them my job will be writing, that I’m lying to them.  I personally don’t see it that way, as writing will be my job.  I just don’t worry about making much money at that job and all my deadlines for work will be entirely self imposed (until I sell a book to a publisher and then I have to meet their deadlines).  I do love to write, so I will be doing that regardless of anyone paying me.  Like you know, right now, writing this post for you. ;)

Alternative Realities

Posted by Tim Stobbs on July 8, 2016

So deegee asked an interesting set of questions the other day:

What would your “number” be if you and your wife were to fully retire and generate zero income (instead of the combined annual $12k) for the next ~5 years? And what would your “number” be if you planned to reduce your WR to 3%, with versus without the added $12k income?

In essence, I took this to ask what were my other alternatives to my given course of action?  Which is a very good question as I did actually consider several different scenarios.  After all, plans never work out perfectly so it is good to know your potential fail points.

In no particular order, here are a few alternative realities I considered in my plan.

  • Skip the part time work and just fully retire for both of us. Our savings target would rise to $666,000 and that would require me working an additional 13 months at my current job.
  • Skip the part time work for me by saving an additional $30K upfront.  That would take about six more months.  I have to comment on the fact I did seriously consider doing this, but in the end realized I would rather do more part time work later to get our full time work sooner. Also I’m aware I will likely end up exceeding our $550,000 threshold by a fair amount, so I might end up more towards this scenario anyway.
  • What happens to your savings target at 4% or 3% withdrawal rates?  At 4%, we would need $600,000, assuming the entire part time work scenario.  While at 3% that jumps up to $800,000, again assuming part time work.  I discounted the 3% as it seemed like overkill, but I did consider my initial scenarios at 4%.  Actually what ends up happening due to the part time work is we do drop our withdrawals down for a period of time allowing the money to continue to grow.  The modelling is not exact, but at one point I estimate we will only be taking out only 1%.  Of course, the flip side is our higher withdrawal rate is between 4 to 4.5% initially after I leave work (it floats a bit depending exactly on our final savings amount).
  • What if the markets deliver below 4% returns for a few years?  Honestly, that is the reason we have included some part time work during the initial five years.  It provides a buffer to our withdrawals which should allow the money to grow during that time.  If not, as I previously mentioned I’m okay to downsize the house and tap into some of our house equity (up to $75K).
  • Why only $6K a year for each of you for part time work income? It’s really just a number that works overall.  I wanted something low enough to be easily achievable so that put us at something below $10,000 per person.  After that we looked at my wife’s daycare income to the house and it ends up being around $6000/year.  So I decided to give myself the same target.  The reality is that number is an average over the five years, so we totally have the option of taking in more one year and less on another.  So depending what I do, I might make $12,000 for a two years, then drop down to $2000 for the rest.  The number doesn’t matter in a year, as long as the average is getting achieved.
  • Why not just work longer and be rich?  I honestly did look at this one just for fun.  Had I kept an normal retirement age of 65 I would have in excess of $5 million assuming we kept a similar pace of saving going forward.  Which at a 4% withdrawal rate would give us a spending limit of $200,000 annually or over six times what I currently spend.  It’s so overkill it isn’t even funny, it’s ludicrous.

Well I hope you enjoyed this tour of other realities, but hopefully this gives you an idea of my thought process to get to our current plan.

June 2016 – Net Worth

Posted by Tim Stobbs on July 4, 2016

The following is an update of Tim’s plan to retire early in 2018.  Please note we are mortgage free.

Our ultimate goal between investments and the home equity is a net worth of around $1 million.  The investment part of that target is $550,000 (or higher).

Investments

Accounts

RRSP $49,800
LIRA $14,900
TFSA $73,710
Pension $140,240
Wife’s RRSP $78,870
Wife’s TFSA $59,060
Wife’s Taxable $37,980
High Interest Savings Account $1860

Investment Net Worth $456,420 (increase of $1630 over last month)

Home Equity

Estimate $375,000

Spending

Last Month $6267

About $4500 of that was property tax and house insurance.

Trailing Last 12 Month Average $2445 (or $29,350 for the last 12 months)

Results

PF Score: 28.3 {Target 31}

Net Worth ~$831,420

Commentary:

Well given the gloom of the Brexit, I really expected this update to be worse, but the markets have mostly recovered from the shock and we managed a slight increase overall.

Spending was high for the month, but historically that is ALWAYS the case for June as it is the double doom of property taxes and our house insurance are due at the same time. Yet overall the trailing 12 months is staying in our target range of $30,000 or less.

Any questions?

June 2016 investment net worth

(click to make bigger)