Posted by Canadian Dream on January 20, 2012
A large part of my financial success over the last three years has been the fact I’ve been working more than one job. When you have multiple streams of income coming into a household saving more just gets easier as those incomes keep going up. After all my basic spending hasn’t increased all that much despite the fact I’ve been earning more.
Yet 2012 marks a big decision point for me going forward. Do I try and run again for re-election this fall as a school board trustee or let the term close out and focus more on writing? After much internal debate over the holiday season and planning I’ve made a big decision.
First off, I should provide some context for this. Let me first say, being a politician at any level is likely one of the hardest jobs there is. If you do your job right, things work well and you likely don’t get one ounce of credit. Then other times you do the right thing in your mind and you might even come out looking like a villain in the media. Regardless of that, you also get to miss a lot of time with my family attending meetings. Not to mention you never had all the facts and frankly you often aren’t a expert in that area at all when you make a decision. In a nut shell, there are significantly easier ways for me to earn money with a lot less stress. In fact I can fill out one form at my day job and get an instant 10% raise for less time than I put into my board work. So the following decision isn’t about the money.
Yet despite the public abuse at times, I feel like I did get some things done over my last 2.5 years on the board like finally get a focus on student achievement and I still have things I would like to finish. As such I will step up and try to run for a second term this fall during the next election. Even if this means a four year term this time, I will to serve if the public will have me.
Posted by Canadian Dream on January 18, 2012
Are you sitting down? Yes, then good. If not, you might want to pull up a chair. I’ve got a confession to make. You know that 4% safe withdrawal rate that me and other early retirement bloggers go on and on about, which is suppose to be the amount you can safely pull out each year and not run out of cash over a 30 year time frame. Well it turns out that most of the assumptions used to model that don’t really apply in real life (for full details, you can read this long, but excellent article). The real truth of the matter is that a ‘safe withdrawal rate’ isn’t a constant at all but rather another variable.
What?!?! Then how do you model that into your retirement plans? Simple, you can’t. Depending on the situation your ‘safe withdrawal rate’ can range anywhere from 1.8% to 25%. This all depends on several factors like the amount of fees you pay on your investments, the rate of return on your investments and the sequence of those returns, and your personal rate of inflation. In a nut shell you can’t model it yourself because it becomes a circular reference, which you might be familiar with that error if you have ever had to do complex modeling in Excel. In a nut shell you series of references to other variable results in your last object referring back to your first object, you end up with a closed loop that can’t be solved.
So if you can’t model it why are you telling me about it? Ah, that is the right question. I mention this fact because in reality, when you are actually living on your savings in your early retirement period you shouldn’t have a constant withdrawal rate. Instead you should ramp it up and down depending on those factors I already mentioned. So in today’s current context with low returns, low interest rates and slightly higher inflation you should consider lowering your withdrawal amount below 4%. Then when you hit some good years like those leading up to 2008, you can take an extra vacation if you want.
This really isn’t that hard as people already do this in real life prior to retirement. If you lose a job, your spending doesn’t keep going out at the same level. You adjust your spending to your lower income as much as you can to ride out the bad times until your income level comes back up. Yet doing this requires you to have some fat in your budget to cut back on, if you purely rely on cutting back spending. The other alternative is to increase your income by getting some short term work or selling a non-income producing asset such as your vacation property.
So the lesson in all of this is you don’t want to retire early on the absolute lowest point of your spending, you want to in fact have a bit of fat or safety margin in your plans. This is somewhat obvious risk planning, but you might be surprised how often the obvious isn’t really seen by people. So please have a few backup plans when you retire early including some extras in your budget. That way you can cut back during the lean times if you need to.
Posted by Dave on January 17, 2012
This is a guest post by Dave, who is also looking to retire no later than 45, but unlike Tim has no kids and doesn’t want any. Dave is from Ontario and is working towards his CGA certification.
I think that one of the main things that people would question about a retirement plan where you retire at age 45 is how you could afford to do this? Economically speaking, there is a significant opportunity cost to retiring in your 40’s, which in the past has been prime income-earning years. In my case, I could be giving up hundreds of thousands of dollars in income that I very well might need at some point (for whatever reason). Not only that, but in order to retire, I have to save a significant portion of my income – giving up on a lot of “stuff” and experiences that this income could buy.
The riskiest part of retiring early is outliving the savings that have been accumulated. It would be very undesirable to be in my mid-eighties and find out that I have very little money left. The potential for bankruptcy is something that needs to be examined prior to leaving the workforce and something I will have to monitor while I am no longer bringing employment income in, as I would not like to live off of cheap cat food in my retirement years. 
For me, I will accept this risk. I would like to control my own day, rather than having to go to work in order to pay my monthly expenses. I would rather do what I want to do. This freedom is worth a lot to me and I am willing to give up my prime earning years, as well as “stuff” now (a second car, a bigger/fancier house, an 80 inch television) to be able to do what I want to do from my 40’s on.
The risk of running out of money can be mitigated by (a) saving enough in the first place and (b) ensuring that money withdrawn from investments is done so safely, which depending on what you read is around 4% per year. Additionally, as long as I monitor my budget compared to my investment earnings, I would hopefully be able to curtail some expenses in order to stay retired and not have to re-enter the workforce.
On a whole, the goal of early retirement is still fairly small-scale, when you look at the population as a whole. Most people haven’t put much thought into it, and if they do happen to stumble across someone like me (in my experience) tend to dismiss the goal and are quite skeptical on whether I can do it or not.
If you’re on an early retirement path, how do you deal with the potential risks that come with exiting the workforce at a relatively young age? Are you comfortable taking this risk?
