One piece of standard advice that I just hate is that you should keep an emergency fund of three to six months worth of expenses. I personally don’t have one, instead I keep a unused line of credit that can cover about five months of expenses.
Why do I avoid an emergency fund? I plan for an entire year’s worth of normal expenses in advance, so having the car insurance or Christmas come due is hardly a surprise. I save a set amount each month into my high interest savings account and pull out the money for those yearly expenses when the come up. That way I’m not having too large of a sum of money sitting around, uninvested and losing its value to inflation but I do have a large enough fund to help cushion those unexpected expenses.
As for a true emergency, I have used the line of credit before and found it worked out fine. After our baby was born ten weeks early, we had a lot of unexpected expenses (hotels, food) including the replacement of one of the main structural beams in our house for $9,000 and the car lease buyout for $8,000 (the story on the lease is an entirely new post). The total damage was about $22,000 in three months. So after maxing out the line of credit and stripping down every penny I had saved in non taxable accounts I was still $5000 short. So I took an offer of help from my parents and took out a loan from them for $5000 to be paid back in 8 months.
In 12 months I had manged to pay off the entire debt, which given the size of the emergency I feel is a perfectly acceptable time frame. So depending on your own situation, you may be better off with a $0 emergency fund.
Well it appears I inspired the Canadian Capitalist to dig out his pencil and do some calculations on his early retirement. He came up needing $1.36 million to leave the working world at age 55. Which to me proves assumptions are everything when it comes to retirement calculations. So for full disclosure on my previous posts (Part I, Part II and Part III) here is what I assumed.
1) That I will collect CPP at age 60 and that I will generate no more CPP contributions after I turn 45.
2) That OAS will exist in some form or another program will take it place to ensure I don’t starve to death as a senior when I turn 65.
3) That all my calculations were done in today’s dollars.
4) Which is why you will notice my assumed rate of return was around 5% for most of my calculations. To date my RRSP has been around 8% interest, so I cut out 2% for inflation and left 1% as a buffer for things to go wrong, except for my wife’s investment account, since it is structured as being more aggressive.
5) I only used a 4% safe withdrawal rate on my work pension calculation. The reason is that the 4% rate is intended to be used for those who want to preserve most of their capital. For my early retirement, I intend to use up almost all of my capital. So for my RRSP’s I assumed a 5% withdrawal rate.
Those are all technical assumptions, which can very from person to person depending on your comfort level with the government and your investments.
The single biggest factor in determining all those numbers is: what do you want to have for an income? For me I chose a very low number compared to a lot of people’s comfort level ($25,000/year for two people). Yet that number is perfect for me. My current lifestyle is very cheap for the most part. I like to garden (which reduces food costs), cook(again reduce food costs), read books (free from the library), write (ok there is some power cost to run the computer) and watch movies (again mostly from the library, but also borrow from friends). My low number offers me something that can’t be bought otherwise: time.
So if you plan a retirement with golf every day and trips around the world every three months you will need a lot of money, but if your looking just for more time with friends, family and to develop new hobbies or revisit old ones you might want to have a look again at the high income number.
I know that if I retire at 45 that I will be taking a risk, that the markets could crash or the government cuts my benefits. Yet, the reward for that risk is another 10 years of good health to do what I want is worth it to me.
As I was doing my estimates for retirement, it occurred to me that I was planning to retire exactly as my kid will be in post secondary education. So how can I do both? Simple I don’t plan to pay for my kid’s entire education.
It’s not that I’m not going to help, but I didn’t have my entire education paid for, so why would I pay for all of my kid’s education? I personally found that when my parents stopped paying the bill my spending dropped by about $2000/year. It forced me to question my spending habits and really made me think “Do I really need to buy this?”
I personally found the easiest way to fund a RESP for my kid is to take the Child Tax Benefit and that $100/month from the Federal Government and pour it into a RESP to receive the Education Saving Grant . In my case, that works out to $120/month of government’s money that is then topped up to $150/month. So it costs me nothing until the kid no longer qualifies for the $100/month at which point I will continue to fund that amount in every month.
As to where to put the money. I suggest you read the following from the Canadian Capitalist, which is a great post with links to many helpful resources.