Investing Plan 2014

Retirement savings has taken a bit of a back seat this year due to the fact that I'm in the middle of my Masters and my income has dropped. None-the-less I had a nice little sum $6,443.96 that I had saved up in the previous year sitting in my savings account ear marked for retirement.

My knee jerk reaction was to dump it into my RRSP (which has a whole bunch of room in it now that I no longer have a pension) and celebrate my tax return. But, after some wise words from my father, I got out a tax calculator and ran the numbers. (By the way I often use this one.)

As summarized in the table below, if I wait until 2015 when my income will return to $70,000 I'll be in the 31% tax bracket and will see a tax return of $3,426.50. On the other hand if I contribute this year with a $42,000 income I'll be in the 24% tax bracket and I'll see a return of $2,656.50. In other words, waiting a year to fill up my RRSP I'll see an extra $770 on my tax return.

Taxable income	$70,000.00	$42,000.00
Taxes paid	$14,924.00	$6,339.00
Marginal Tax Rate	31.15%	24.15%
RRSP contribution	$11,000.00	$11,000.00
Tax Return	$3,426.50	$2,656.50

In the mean time my $6,443.96 of retirement savings have been moved to my TFSA and invested. The breakdown is as follows - 55% in a Canadian Stock Index, 15% in a US Stock Index, and 30% in an International Stock Index. (The International Stock Index doesn't include US companies.) I've left bonds out of the equation this go around because my TFSA also holds the money I've saved for a car, which is invested in a Canadian Bond Index and the money I've saved to make extra payments against my mortgage which is sitting in a high interest savings account. As a result the total risk for my TFSA is only moderate. 

Retirement Goal

I've been hemming and hawing over putting a new financial goal in place now that I have my car savings and my emergency fund fully funded. So I've decided to bite the bullet and go ahead and make a retirement goal. It's not set in stone by any means but it does give me something to shoot for.

If you take a read through my other retirement posts you'll see I'm not sure what my life circumstances will be when I am ready to retire (or even when I'll be ready to retire!) So I'm assuming that I'll want to retire when ever I am financially able and that I will just need to support myself.

I currently spend about $1,400 per month on average, I'll plan for a slight increase in that amount since I may want a car and some travel money. In retirement I will shoot for $1,700 per month net, which is $20,400 per year net. With current tax rates in my province that would mean I need to gross $24,480 per year in investment income. I also need to have my house (worth $191,000) paid off.

If my withdrawal rate is 4%, then I'll need $612,000 in savings to generate my desired monthly income. In other words between my house and my savings I will need a net worth of $803,000 to retire. My current net worth stands at $143,975.97.

It's hard to get time lines because I'm not sure what to expect in terms of raises but my investment calculator makes 40 seem like a reasonable age to be ready to retire. In order to make it a SMART goal I'd have to say:

I will be able to retire when I am 40 because I will have my house paid off ($191,000) and I will have $612,000 in savings.

Retirement
Goal:  $803,000 by November 2029
Current:  $143,975.97

17.9%

Retirement - Making my own Pension Plan

Following yesterday's post I'd like to address the monitory side of a readers comment.

"Keep in mind that the earlier you retire the more you have to save because you'll have a larger number of retired years to budget for. There's always the option of semi-retirement - getting a low stress part-time job where you get out of the house, have that social time and financial reward but leave behind the stress of a full-time career. Just something to think on.. "

Actually I will need the same amount of money no matter when I retire.  Allow me to explain.  

When I was in the military life was pretty sweet.  I had a defined benefits pension plan which guaranteed a certain sum every year until you died based on how much you earned just before retirement and number of years of service.  It was even indexed with inflation.  The pension plan would only fail if the government collapsed, which is unlikely.  

Upon leaving the military I knew that the chance of seeing a pension was remote which led me to the conclusion, I needed to make my own pension plan.  I need a pot of money that will sit in investments and allow me to live of the interest while never touching the principal.  It is generally accepted that 4% is a safe withdrawal rate, you can read why here.  

If, as I planned in my Early Retirement post I saved $700,000 on top of a paid off house I could safely withdraw $28,000 per year or $2,333 per month with out ever touching the principal.  The real kicker is that my current cost of living is roughly $1,440 per month.  So if I save $700,000 before retirement I could do any of the following:

a) live it up and spend an extra thousand dollars a month (unlikely)
b) take care of a lot of kids during my retirement (very likely)
c) watch my net worth grow ever month as I live on only a portion of the interest (very likely)

It will probably end up being a combination of b and c.  Oh, and for those of you who are wondering, $432,000 is enough to generate $1,440 per month of interest.  Personally I like the flexibility that my very big safety margin gives me.  

Have a question?  I'd love to hear it!

Retirement - The non-money side

One of the things I love about blogging is getting reader feedback.  It gives me something to think about . . . which is one of the reasons I blog in the first place.  Which is why I really enjoyed getting the following comment.  

"Keep in mind that the earlier you retire the more you have to save because you'll have a larger number of retired years to budget for. There's always the option of semi-retirement - getting a low stress part-time job where you get out of the house, have that social time and financial reward but leave behind the stress of a full-time career. Just something to think on.. "

I've been thinking about the above reader comment which was posted on Early Retirement article.  The comment has two aspects, the numbers side which I'll get to at a later date and the question of what I would do when retired.  It is true that a low stress part-time job (like being a kayak instructor or a camp councillor) gives you both meaning, social interaction, and a sense of purpose and for a lot of people is a great idea.  Personally I'm planning on taking on a high stress full-time job that costs me money instead of making it.  

In other words I want to be a parent.  Specifically I would like to be an adoptive parent.  Financially I would like to reach a point that for my retirement the number of children that I raise is limited by my energy and time not by finances.  I believe that this would give me an amazing challenge and a deep sense of fulfilment.  I am not deluded into thinking that it will be easy or that it will be all happy days, both the things in this world worth doing are seldom easy.  

Have a question?  I'd love to hear it!

Investment Proportions

I've finally done it.  All the hemming and hawing is done and I've come up with a plan for my retirement portfolio.  It stands as follows:

25% - Canadian Bond Index Fund
10% - US Stock Index Fund
20% - International Stock Index Fund
45% - Canadian Stock Index Fund

Which means I have 30% of my portfolio in foreign markets, 75% in Stocks and 25% in Bonds.  I am planning on keeping this ratio until at least halfway to retirement at which point I will start slowly moving towards a higher percentage of fixed income.  All of the Funds that I chose follow well known and established Indexes.

I chose this set up because:

- It will be 10+ years before I need to touch this money (perhaps as long as 40 years depending on how long I feel like working)
- I have a moderate to high risk tolerance, which means that I won't sell if my portfolio suddenly drops
- I have no desire to try and beat the market, I would prefer to match it
- If the economy in one area of the world plummets I have investments in other parts of the world*

*Of course all the markets in the world could plummet at the same time, the earth could also be hit by a meteorite, the odds though are fairly low.

Have a question?  I'd love to hear it!

Early Retirement.

The next scenario I am considering is Early Retirement.  Of course this means a lot of different things to a lot of different people.  For the sake of this article it's me retiring as soon as possible while maintaining my current standard of living.  (Which is quite frugal compared to most folks but it works for me.)

Over the next four and a half years I will be concentrating primarily on paying off my mortgage.  Meaning that my contribution rate to my retirement savings will stay at $359 per month.  While earning 7% interest and taking into account the current value of my savings $21,395.72 I can expect to have a retirement portfolio of $51,600 when I'm done paying off my mortgage at the age of 28.

Then things get interesting.  Since I no longer have mortgage payments to make I will have a fair bit of money each month to play with.  Anywhere from between $1,200 per month to $1,900 per month depending on how much of my mortgage I am paying directly from my pay check and how much I am paying from other sources of income.  (See original mortgage plan here.  Though it is due to be updated.)  Looking at my monthly budget I am confident that most, if not all of the $1,900 will come from my monthly pay check.  However, I will go slightly conservative and say that loosing my mortgage payment will free up $1,779 monthly.

At that rate I will have the $700,000 (plus a paid off house) that I need to retire 15 years after my mortgage is gone.  At this point I will be 43 years old.

The advantage of this plan are that I will have the freedom to retire relatively young, certainly before the age of 45.

The disadvantage of this plan is that the budget does not allow for kids in my life either before or after retirement.

Retirement - Traditional

I don't know what I'm going to do for retirement.  (See why here.)  But I thought I'd start ball parking numbers and roughing out plans to try them on for size.

The first possible retirement plan is the traditional one.  Work to the age of 65, then take the typical quiet retirement, visit friends and family, take the occasional trip and spend a lot of time reading and sewing.

I don't see a whole lot changing from my current lifestyle so I took a look at my monthly budget and subtract the areas I'll no longer need, namely Savings, Debt Repayment, Mortgage Payments (mortgage will be long payed off), and about half of my Transportation budget.  I could live quite comfortably on $2,000/month.  If I want to see $24,000 per year after taxes that will mean that I'll need $28,000 before taxes according to this site.  At a safe withdrawal rate of 4% I'll need a total of $700,000 for a traditional retirement.

I currently have $21,395.72 set aside for retirement savings.  I add an additional $359 a month (which will increase with inflation) and I expect to earn 7% after inflation over the next 40+ years.

I will assume that I will see no help from the government and that I will not have a pension, since the company I work for now does not have a pension plan.

That all taken into consideration I should retire with the hefty sum of $1,500,340.79.  More than double what I will need to survive on.  In other words at the moment, even though I don't have a company pension I should be in excellent shape to retire by the time I am no longer able to work.

Have a question?  I'd love to hear it!  

Financially Self Sustaining

True to my post yesterday I have been trying to broaden my horizons by reading areas of personal finance which I had not give much thought to before.  One of the concepts which peaked my interest was that of Early Retirement Extreme.  For those not familiar with the concept it is the idea that by reducing unnecessary expenditures you can save (and invest) the lion's share of your earnings and thus retire in 3-8 years.

Naturally I spent the next two days running numbers and seeing how this system would work for me.  I came to the following two conclusions:

If I downsized my house I could in all likelihood live comfortably on $7,000-$9,000 a year.

Early Retirement Extreme is not for me.

Why not?  The simple fact of the matter is that living on such a budget would not allow for me to foster and adopt kids, which for me is huge.  The idea of spending a large portion of my life in relative solitude holds no appeal to me.  I would rather work longer and have a house full of children.  There is also the fact that the more that you fly in the face of social convention the less likely you are to be approved as a foster/adoptive parent.  I understand where this comes from so, for the moment, a tiny house is out of the question.

So instead of shooting for Early Retirement Extreme I will be aiming for what I have chosen to call Financial Self Sustainability.  The idea behind FSS is that losing my income would not affect my ability to support myself.  I would be able to keep a roof over my head and food in my stomach by living off my investments.  It would mean downsizing to a smaller house (and using the equity in my current house) and it would mean no kids.  But I could survive.

How much would I need to be FSS?  It breaks down like this:

Housing
One time costs - Land: $20,000-$30,000 in my local area
                        - Tiny house $25,000 based on the Tumble Weed Tiny home that I like, though I could potentially go lower.

Monthly costs - Utilities, taxes, and maintenance: $300

Transportation
Monthly costs - $150

Life
Monthly Costs:
Food - $100
Cell - $30
Internet - $50
Health Insurance - $23.52
Clothes - $10
Misc - $10
Yearly expenses (like fees to maintain my RN's status) - $50

Total one time costs - $55,000
Monthly costs - $723.52 = $8,682.24

Since I would not want to withdraw more than 4% of my portfolio per year I would need to have investments equaling $104,400 to generate an income of $8,700 per year.  Add to that a one time costs of $55,000 and once I have hit a net worth of $159,400 I will be FSS.

My current net worth is $134,800.06.  Which is a shortfall of only $24,599.94.  In other words I am 84.6% of the way there.

Until I started writing this article I didn't know that I was that close.  Needless to say I am pleasantly surprised.  Of course unless I am awarded a scholarship, approximately $20,000 of my net worth will be magically (via a lot of hard work) transformed into a Master's Degree over the next 2 years.  So at my current rate of savings ($1,660 per month) I should reach FSS in 27 months.  Which I will naturally track with one of my nifty sidebars.

Have a question?  I'd love to hear it!

Retirement Planning

I will admit that I find planning for retirement to be quite a challenge at the moment.  Unfortunately it’s not the technical stuff that stumps me.  I can explain the difference between RRSPs and TFSAs, the role of inflation, and how to make an investing plan.  

The problem that I have is rather fundamental.  Most well written retirement planning books that I have read start out with a simple question; what is your retirement going to look like?  You take what you want to be doing during retirement, and assign a dollar value to it.  Then you figure out where you are in your savings and make a plan to get from where you are to where you want to be.  Simple right?

The problem is I don’t know what my retirement will look like.  I don’t know if I’ll have a spouse or kids, or where I’ll live.  I’m not even certain at what age I want to retire.  I can come up with where I am but even the working years don’t have a plan.  I don’t know if I’ll work for the same company for my career, I don’t know if I’ll end up with a pension.  I don’t even know at what rate my pay will increase. 

That said I am a big believer in saving early on, so I’m saving for retirement anyways.  I set aside about $350 a month for retirement savings.  That is 10% of my take home pay, which is generally the recommendation from experts (such as the author of “The Wealthy Barber” and Gail Vaz-Oxlade).  While I could save more, for the next 5 years I am concentrating on making my mortgage disappear. 

In the meantime $350 a month is being added to the $22,000 that I am to receive instead of a pension for my military service.  If I continue to save at my current rate and assume 7% return on investments; then at 55 I will have $708,000 in retirement savings, and $1,484,000 if I wait until I’m 65.  (Actually probably a bit more because my 10% contribution will increase as my pay increases and I plan to reinvest any tax benefits.) 

That said I fully expect my plan to be revised as my life changes.  The first point of revision will be in 5 years time when my mortgage is paid off.  At that point I can adjust my plan and step up savings if I want since losing my mortgage payments will free up $1,500 a month. 

Have you got a retirement plan worked out?  

The Mortgage Plan

So the master plan is to have my mortgage gone by November 8^th 2017.  I chose that date because that is the day that my 5 year term expires.  I have a pretty good interest rate at the moment, 3.09%, which will likely go up once my term expires.  Why the big rush?  Well to start with I don’t like paying interest.  Add to that the desire to own my entire home not just a portion of it to the freedom it would give me not to have mortgage payments and you probably see the attraction too.  So can it be done?  Lets take a look. 

Outstanding balance Feb 17^th 2013 - $149,085.90

Original monthly payment - $646.62

Current required payments (thanks to the allowed 10% increase) - $711.28

Actual monthly payment (current payment can be doubled up each month without penalty) - $1,422.56

Current savings towards extra payments - $5,744.67

March 2013 – Nov 2013
Budgeted for Mortgage	$646.62	$5,819.58
10% Debt Repayment	$359.00	$3,231.00
Long Term Disability	$860.00	$7,740.00
Other	(Veterans Disability Payment + Current Savings)	$25,744.67
Monthly payments	$1,422.56	$12,803.04
10% Lump Sum		$15,200.00
Difference		+ $14,532.21

Outstanding balance Nov 8^th 2013 - $124,386.33

Required payments (thanks to the allowed 10% increase) - $782.40

Actual monthly payment (required payment can be doubled up each month without penalty) - $1,564.80

Savings towards extra payments - $14,532.21

Nov 2013 – Nov 2014
Budgeted for Mortgage	$646.62	$7,759.44
10% Debt Repayment	$359.00	$4,308.00
Long Term Disability	$860.00	$10,320.00
Other Savings *Unused car payment $	$14,532.21 $200/mnth	$16,932.21
Monthly payments	$1,564.80	$18,777.60
10% Lump Sum		$15,200.00
Difference		+ $5,342.05

*I hope to continue without a car as long as practical and affordable.  By Nov 2013 I should be able to divert $200/mnth from my transportation budget as I will have $10,000 put aside to buy a car. 

Outstanding balance Nov 8^th 2014 - $93,966.72

Required payments (thanks to the allowed 10% increase) - $860.64

Actual monthly payment (required payment can be doubled up each month without penalty) - $1,721.28

Savings towards extra payments - $5,342.05

Nov 2014 – Nov 2015
Budgeted for Mortgage	$646.62	$7,759.44
10% Debt Repayment	$359.00	$4,308.00
Other Savings Unused car payment $ *Unused Emergency $ *Unused Travel $	$5,342.05 $200/mnth $190/mnth $150/mnth	$11,822.05
Monthly payments	$1,721.28	$20,655.36
10% Lump Sum		$15,200.00
Difference		- $11,965.87

* By Nov 2014 my emergency fund should be fully funded allowing me to divert $190/mnth from life to my mortgage.  With travel I’m planning two big trips in the next 2 years after which most of my travel budget can go to my mortgage

Outstanding balance Nov 8^th 2015 - $72,656.47 (this is the first year I will not be able to make the full 10% lump sum payment)

Required payments (thanks to the allowed 10% increase) - $902.70

Actual monthly payment (required payment can be doubled up each month without penalty) - $1,805.40

Savings towards extra payments - None

Nov 2015 – Nov 2016
Budgeted for Mortgage	$646.62	$7,759.44
10% Debt Repayment	$359.00	$4,308.00
Other Savings Unused car payment $ Unused Emergency $ Unused Travel $	$0 $200/mnth $190/mnth $150/mnth	$6,480.00 I will only have $1,545.62 to put against the mortgage monthly
Monthly payments	$1,805.40	$21,664.80
10% Lump Sum		$15,200.00
Difference		- $18,317.36

Outstanding balance Nov 8^th 2016 - $56,060.08 (this is the first year I will not be able to make the full monthly payments and the 10% lump sum payment)

Required payments (thanks to the allowed 10% increase) - $992.97

Actual monthly payment (required payment can be doubled up each month without penalty) - $1,985.94

Savings towards extra payments - None

Nov 2016 – Nov 2017
Budgeted for Mortgage	$646.62	$7,759.44
10% Debt Repayment	$359.00	$4,308.00
Other Savings Unused car payment $ Unused Emergency $ Unused Travel $	$0 $200/mnth $190/mnth $150/mnth	$6,480.00 I will only have $1,545.62 to put against the mortgage monthly
Monthly payments	$1,985.94	$23,831.28
10% Lump Sum		$15,200.00 *$1,909.99
Difference		- $20,483.84

*If I succeed in making all my extra payment options the last year I would only need to make a 10% lump sum payment of $1,909.99

Outstanding balance Nov 8^th 2017 - $38,946.90

Hmm.  $38,946.90 left over, what a pesky number.  We’ll talk about what I intend to do with that tomorrow.