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Tuesday, September 30, 2014

What They Need to Hear

Posted by Tim Stobbs on September 17, 2014

I was talking to a co-worker the other day who was worried about how her report would be received, since my particular group in the company gets to lead investigations into incidents that occur elsewhere in the company.  We basically get to stick our noses in, find out what went wrong and make recommendations on how to improve things for the company (but we don’t assign blame).  To sum it up, I said “Did you tell them what they needed to hear?  Remember we aren’t here to tell them what they want to hear.”  I hoped that helped, but in reality that phrase sums up a good part of my career.

I’ve never been an ass kisser at work, I just can’t be bothered.  That isn’t to say I’m not thoughtful or polite on how to bring up difficult subjects, but I will always tell people my truthful assessment of the situation.  I figure they pay me a lot of money to think on their issues, they very least they can to is hear the results.  So I know some people don’t particularly like me because I don’t tell them what they want to hear, but I do think the vast majority of people respect me for being honest.

So with that in mind, might I offer a point of advice to people.  The average saving rate in Canada is currently just under 4% and has been as high as 5% in the last few years.  If you continue to save at that rate, you will effective never retire without government help.  What?!?  Why because if you save only 5% of your pay it will take you 66 years to be fully financially independent with no government help (see here for a table of values).  So even if you started at 18, you could be financially independent at 84.  Yes, you are fucked.  Well let’s say, you are bucking the trend and putting away a nice 10% of your pay.  Sorry you still have to work for 51 years, so you will be ready to retire at 69.

The long story short on this, if you want a half decent retirement age (like about 60), you need to save at least 15% starting when you were 18.  That folks is the floor of the saving rate you should have, you shouldn’t go any lower.  Yes, I can hear the screams “But I can’t save that much?!?!?” Actually, you can, you are just choosing to do other things.  If you truly want off this treadmill of work, you need to start saving more immediately.

Of course, that assumed you started at 18.  If you are a 55 year old boomer with crap all saved (oh, and by the way those values don’t include any home equity as savings…so a paid house is required above that).  You are beyond fucked and up the creek without a paddle.  Do you feel that panic settling in, do you want to turn away and bury your head in the sand a bit more?  Good, then you are human, but perhaps let’s give you the good news.

There is of course an alternative.  You need to get your ass to the other end of that table of savings rate, because you can save 80% of your pay you can retire in just 5.5 years, so even if you are age 55 or 60, you can still save enough to have a basic level of comfort.  The trick here is you need to give up your currently lifestyle.  You can’t spend 95% of what you take home anymore, so prepare for some radical discomfort in the short term.  Downsize your home to something half the size NOW, stop buying anything beyond consumables (like food) NOW, sell that second car NOW….I assume you are getting the idea.

Now for your second piece of good news, all of this reduction of spending doesn’t have to impact your happiness much in the long run.  Pardon?!? Yes, I’m being honest here and you can go check out the research, but in fact only 10% of your happiness comes from your circumstances.  So it is entirely possible to be at least 90% as happy as you are now on a fraction of your current spending.

So that is your trade off 10% reduction in happiness to have a worry free retirement starting in just five years.  I know what I would pick, what about you?

Ready for Hibernation

Posted by Dave on September 16, 2014

I spend most winters doing almost nothing. Last winter was incredibly long and brutal, and rather than making any social plans, we generally just looked outside and returned to our couch to watch Netflix. The upside of this kind of empty social calendar is that I was able to accumulate quite a bit of spare cash that was a huge help when we made our final payment on our mortgage. In addition, I made it through a pretty good chunk of books I wanted to read (at a pace of about 2 per week) with all the free time I had.

After an extended break, my wife and I made up for our lack of visiting and social interaction over the summer. I golfed around 25 rounds over the summer, we went to cottages, and re-did our backyard patio. All of this stuff was budgeted (as best as it could be with some unplanned stuff that came up). We still have some savings left right now, but I’m almost ready for a break from “society” again.

One of the benefits of having only one main hobby that I’m really into is that it’s easy to budget for. I know the start and stop date, as well as how much money I have available to take part in it for the summer. Now though, as my golf savings have waned, I’m ready to start building up for next year again (it also didn’t help that I just lost in my “final” tournament of the year).

I’m not sure how long my interest in golf will remain. I’ve been playing for almost 25 years now, and can’t see my interest in being constantly annoyed and confused while playing decreasing too much in the next decade or so. I realize that the ~$1000 I spend on this hobby could be used to invest into my retirement. Additionally, I realize that $1,000 at a 4% withdrawal rate in retirement will cost me about $25,000 in additional savings at retirement to fund the hobby, all so that I can bang a ball around some chemically assisted manicured lawn.

So, after a really busy summer, my wife and I are both looking forward to recharging our batteries over the cooler weather months. I’m hoping to be able to get some minor home renovations done, which will finally make our basement a usable portion of our house. Financially, I can re-fill my “fun money” savings account to play again next year, which will hopefully be before the middle of June, like this year.

It’s these times of years that I realize that by choosing an Early Retirement Stream, I can’t do everything – I can do most activities I want to do, but there are definitely limits if I want to make my Financial goal a reality.

Home Renos Vs Early Retirement

Posted by Tim Stobbs on September 10, 2014

So Tina the other day had an excellent question regarding renovations and saving for early retirement:

How do you prioritize early retirement goals and home improvement? I have paid off my mortgage years ago and don’t plan on moving for many years, if ever. We have two small children and plenty of room in our home. However, the basement isn’t finished although it isn’t used that often we could do some great things with it. Aside from efficiency upgrades and cost saving renos( windows/ metal roof) we haven’t done a lot aesthetically. I’m conflicted about making Plans with hubby that could cost hundreds or more when it could be put towards ER. On he other hand, we are not spendy people in other areas and if I’m going to stay in this home for 20 more years why not deck it out? How do you determine what’s worth doing when your not planning to sell?

Home renovations are an interesting spending category since they tend to blend the practical spending with the fun spending, so at times its hard to separate out which is the emotion spending versus what is actually required.

For example, your sink tap is getting old (over 25 years) and while it isn’t leaking you know they don’t last forever.  So if you decide to replace it, do you just buy the cheapest thing you can find? Do you do it yourself or hire someone?  Do you buck up a few dollars to get a much nicer looking one? Or do you replace all the taps at once to make sure they match?  Where the hell does ‘need’ and ‘want’ start in that mess of decisions?

To help clear the air a bit on this I tend to divide my decisions into two camps.  The first is house maintenance – this is required to keep up my homes functional requirements.  The second is upgrades and aesthetics – which is more about making my family and I comfortable and happy.

When it comes to house maintenance I fall back on my engineer training which similar points out proper maintenance of key systems is almost always cheaper than running something into the ground and doing emergency work.  So when stuff gets old and needs work, or can be replaced by something significantly more efficient I usually just buck up and spend the money.  For example, when our furnace inspection noticed a hairline crack in one the pipes a few years back, I just asked for cost estimates on replacements rather than repair costs since the furnace was almost 25 years old.

To keep costs in check I do shop around for parts and will often try to fix something myself or get a friend to show me how to do something.  I also know when I’m out of my depth – I NEVER touch anything with natural gas (furnace or water heater) or rewire my basement (but I will change a light fixture).  I also keep in mind when some jobs are just too time consuming like dry-walling a large area so I’ll contract those out.  For example, it the job would take me like 50 hours to complete and a contractor can do it in like 25 hours, if you work out the hourly rates I can typically still go to my day job, pay income tax and still hire the contractor for cheaper than my time to do it.  Do it yourself isn’t always the answer.

To keep this easier on the cash flow I tend to space things out where I can.  So next year I’ll do the singles on the roof, a few years after that I’ll do the water softener, then the year after that the water heater…you get the idea.  You might even want to just create a home maintenance savings account and put in a set amount each year, like $1000, and just let it build up for when you need it.

Now that second camp of the upgrades and aesthetics is a bit more difficult. So I tend to fall back on some happiness research that points out a few key points about changing things around you.

  1. You will revert to your baseline happiness after the upgrade.  New flooring might sound wonderful, but within six months I can almost guarantee you never think about it.  Your “new” floor will fade into the background, and it will simply become your floor again.  Don’t underestimate this fact.
  2. Constance annoyance can reduce your happiness.  Seeing that ugly pile of shoes in your front closet every day and digging through for two minutes to find your pair might drive you nuts for just two minutes a day, but it is EVERY day.
  3. Planning for something can produce the same amount of happiness as actually doing something.  So it is entirely possible, to plan your renovation for six months and enjoy it just as much as that first week after you finish it.

So my conclusion on most home upgrades are useless for your long term happiness and frankly can be dangerous as they can fall into an addiction cycle where you always need to be spending on your home to get you next renovation ‘high’. (see point #1). So granite counter tops are useless for 99.99% of the population in terms of happiness, but according to HGTV its almost required in a house today. Ironic right?

So does this mean you should never do an upgrade? Of course not, which brings me back to point #2, daily annoyances.  You should consider upgrades or renovations that will help relieve your daily annoyances but keep in mind the solution to many of  your problems is simply: you have too much stuff for the space you live in.  So rather than adding space, get rid of your crap first, then organize what is left and then perhaps do an upgrade id it still isn’t working.

Case in point, my shoe disaster example above.  Rather than assume you need a closet organizer or a renovation to double the size of your front entry closet, consider putting your winter boots into storage over the summer and remove half of the mess.  Then a few shoe racks to help organize what is left.  Boom, easy happiness for a fraction of the cost of a larger closet.

Of course with all of this said you still might have a spouse with an irrational desire for cork flooring in the kitchen (thwack of my spouse hitting me upside the head), which while the floor does need to be replaced you don’t have to use cork.  This isn’t a huge problem, but I recommend you take point #3 into account here.  Do a lot of research and planning before you start your renovation to confirm you are making the best decision for your family.  A way to help this along is to put a preset amount of money aside every month and then do the renovation when you can pay for the entire thing in cash.

In our case, we spend a lot of time at home and decided the flooring upgrades made sense for us.  So I did a lot of research of cork flooring systems and finally found a company out of Vancouver that sells product for about half the cost of Rona or Home Depot.  We got samples and argued about what finish to get for like three months and then my wife decided to push off the renovation for a year and visited her baby niece in Newfoundland last winter.  Yet now it is installed and we are happy with the results.  I also milked being happy planning this for several years.

More minor aesthetic upgrades I tend to pay with spending cash (which is our personal pool of money to spend on anything we like).  For example, my wife was in Winnipeg last weekend and picked up $250 of stuff from IKEA for me.  It was all my spending cash, which I chose to save up and spend on some new glass door shelves for the living room (to upgrade our 14 year old cheap student shelves which had been painted at one point years back).  I wanted to replace that shelves since I spend more time in that room than anyone else.  But again I saved for like six months prior to doing this and thought long about what sort of shelves I wanted in that room.  Again I milked the planning cycle to ensure my decision was well thought out and enjoyed the happiness of planning for the upgrade.

In the end for us, we tend to have early retirement savings firmly as priority #1 in the world, but we do put some money aside for other projects.  There isn’t a point saving every dime for early retirement if you don’t enjoy your life now, so yes do some home upgrades if you want for purely aesthetic reasons.  It is ok, just keep that amount a reasonable amount for your family.  Perhaps even set it as a fixed percentage of your spending towards discretionary items like vacation, home upgrades and entertainment.  That way, if you do really want granite counter tops you can do it, you just might have to have a frugal vacation for two years to make up the difference.  Find a way that works for you.

So how does your family handle home upgrades?  I’m wondering how others handle it.