Friday, December 29, 2006

Retirement Trip Wire aka: The Mortgage

While looking at my mortgage balance recently, I realized that I have a small problem with my retirement plans. I want to retire when I'm 45, which is about 16 years away. The problem is my mortgage amortization is currently at 19 years, so I have to either accelerate the mortgage pay down by three years or live with the payments for three years in retirement.

I've never liked paying interest, so I think I'm going to try to find a way to accelerate the pay down by three years. Currently I have maxed out my semi-monthly payments with my current mortgage, so I have to wait until three years to pick a shorter amortization or start applying lump sum payments to it. I'm not sure which way I'm going to do it.

So like all good plans, I'm finding some holes in my plan to retire at 45. So far I don't think I'm past the point of saving the plan, but this has proven to be a bit more of a challenge that I first thought.

Year End Check Up: Net Worth Update

With the end of the year approaching I think it is time to take a snap shot of my net worth and find out how I'm doing. In general practice, even if you do nothing else for the entire year of tracking your net worth it is useful to get an end/start of year snap shot of your financial health so you can track your progress at least yearly.

House $198,000 (I recently did a survey of house listings in the area, apparently my last estimate of $195, 000 is a bit low since a house with 500 sq ft less that mine is selling for $198,000.)
RRSP $11,600
Wife's RRSP $4800
Old Work Pension $10,500 (I'm almost embrassed to say I forgot about this in my first net worth calculation)
Wife's Investment Account $4200
ING Savings Account $1000

Mortgage $149,900
Line of Credit $0 (As I mentioned before, I keep this as part of my emergancy fund.)

Therefore my net worth now stands at: $80,200.

Even with my 'lost' pension money that is still a nice little increase from my first net worth check back in Nov. See you in the New Year.

Thursday, December 28, 2006

Goals for 2007

It's the end of the year, I'm starting to plan for next year. So I thought I would share a few of my goals for the next year.

1) Save $10,000 in 2007. This will include RRSP accounts, taxable account, and the pension plan.

2) Investigate other streams of income. I'm basically going to have a look at a possible small business or a rental property. I'm not entirely sure what, but I'm going to start devoting some of my time to looking at my options.

3) Keep painting and other minor renovations to the house to boost its value by at least $10,000.

I know that hardly earth shattering goals, but I like to keep my goals for a year fairly realistic. I know too many people who make goals that are too hard and then they get frustrated by not making them.

Wednesday, December 27, 2006

Book Review: How to Retire Happy, Wild and Free

As par of my vacation I'm getting caught up on some reading and I came across a great little book. How to Retire Happy, Wild and Free by Ernie J. Zelinski is a must read, but not for the usual reasons.

Typically I read books for investment advice, spending reductions and taxation. This one is different in the regards it focuses on that old question of "What are you going to do with all that time in retirement?" Ernie actually gives a great read on how to plan your leisure time to ensure you have a rewarding retirement.

It a pleasure to read a book that addresses the idea of how to have satisfying leisure time. I think most people spend far too much leisure time at passive activities such as watching TV. One example in the book is if you reduce your TV time by just one hour a day you will gain about 365 hours a year or about 20 extra days a year (based on a 18 hour day awake time) to do something more meaningful, such as reading or another hobby.

So next time you think you don't have time for anything. Try to just find one hour a day and see what happens. (Yes, I know that an hour can seem like an impossible goal some days, but try for just 15 minutes and you still gain an extra 5 days a year on something.)

Friday, December 22, 2006

Holiday Posting & Book Review: The Millionaire Next Door

Well everyone I'm officially on vacation from 3pm today until Jan 3rd. I will not be posting on Christmas and Boxing Day, but I will try to post after that as often as possible. Happy Holidays and have a great long weekend.

* * *

I recent read the book, The Millionaire Next Door by: Thomas Stanley and William Danko, and I was a bit amazed by some of their findings. For example that fact that 80% of the millionaires in the US are first generation to their money was a bit of a wake up call. There are basically two types of a rich in the book: those that look rich (but actually have little assets) and those who don't look rich (but have tons of assets).

If nothing else this book teachings you not to worry about what others think and just do your own thing when it comes to money. Just because you earn enough to have the big house in the best neighbourhood and two cars, doesn't mean you have to spend it that way. I've always liked buying the worst house on the block in a decent neighbourhood and making sure I have a profit when I need/want to sell.

It also hammers home the idea that you are not what you drive. You have guys in the US who have a net worth of $10 million, but drive an old truck, because he likes to toss dead fish in the back seat after a trip to his best fishing spot.

So if your looking for some reading material over the holidays, I would suggest reading this book.

Thursday, December 21, 2006

Taxation Rates In/Out of RRSP

Well after thinking about it for a few days I think I have worked out my plan to not invest an additional funds in my wife's RRSP other than my current $100/month.

It comes down to taxes.

Situation #1 - In the RRSP (Spousal)
Let's say I put in $1000/year additional to my wife's RRSP. That would generate a $350 refund on my taxes which I would roll over to the RRSP. So I keep doing that I would average $112/month at 5% for 15 years I would get about $32,050. I would get tax free growth until I hit 45 but then we would start paying tax on all the gains and the original investment to the tune of about 26%, or about $8333 of that. So her nest egg after tax would be $23,717.

Situation #2 - Outside the RRSP in my spouses investment account.
In this case the wife invests $1000 in a Canadian Blue Chip stock. Dividends would be taxed at a -5% rate, so better than tax free growth and then once she sells she would only pay capital gains at a rate of about 13%. So we kept putting in $1000/year or $83/month and she got dividends to a tune of 1% for a 6% rate of return she would have $26,592 in 15 years. Now tax in this case is only on the capital gain, so drop off $15,000 for monthly investment to $11,592. Then drop the reinvest dividends for another $115 to $11,477 at a 13% tax rate, she would owe $1492. So the nest egg after tax would be $25,099.

So outside the RRSP beats inside by $1382 and I did not include any bonus for getting that -5% tax on the dividends outside the RRSP.

I should point out those numbers were made with a lot of assumptions (like all numbers are in current dollars, that the wife doesn't sell the stock early and trigger a capital gain, and that any RRSP withdrawals would be fully taxed), but with numbers like these you have to make some assumptions otherwise you can't come up with anything. I still feel that having an RRSP is a great idea for those investments which are tax equal to income like interest or holding non- Canadian stocks.

Wednesday, December 20, 2006

Pitfalls of Early Retirement

Early retirement is a wonderful dream, but in some cases that ends up being a nightmare. So let's looks at some common pitfalls of planning for early retirement.

1) Underestimating expenses. It's amazing how during your working left you get use to your lifestyle that you tend to forget about certain items like health benefits, replacing your car, your water heater, roof and the list goes on. When your planning for an additional 20 years of retirement you better make sure you check your expense list twice. One way to plan for this is to make sure when you go into retirement that everything is new or that you have planned for an extra replacement money. So for cars and houses a good minimum is $2000/year extra expense to cover those unusual expenses.

2) Not having any margin of safety on your calculations. It's nice to hope that things turn out just the way you plan, but let's face it, life doesn't work that way. So you better leave some wiggle room when doing the math. In my case I drop my expected rate of return by an extra 1%. Some people like to boost their expenses by an additional 10%. Either way works out fine, but you do want to have some cushion there.

3) Not enough diversification in your investments. In order to avoid having your retirement savings go up in smoke you need to make sure you can suffer some serious damage to your savings. The solution is to avoid putting all your nest eggs in one basket. You most likely want a conservative mix once you get near retirement, but not too conservative that inflation takes you down in twenty years. So you most likely want a high interest savings account, bonds/CD's, at least one REIT and a mix of other equities in Canada, US and the world.

4) Forgetting about taxes. Knowing your Canada or US tax law is required to build a good portfolio as much as diversification. For Canadians you need to know about the three types of investment income and how each is taxed.

5) Unrealistic expectations. You can't travel the world and live in five star resorts and leave work at 30. Ok, perhaps one in 13 million can, but I know that isn't me and most likely not you.

6) Emotional considerations. Some people do all the math and planning but forget one thing. What are you going to do with all that time? So they end up bored and go back to work. My question is what's the point of saving if you don't have a plan for your activities in retirement! Early on in your planning you want to start considering this. After all you don't want to forget about enjoying your life now and you also want to ensure you will continue to enjoy your life in early retirement.

Tuesday, December 19, 2006

Loaning Money to Friends

Well yesterday I broke one of my primary rules around money. I gave a loan of money to a friend.

To date I never given out a loan to a friend. In my mind it is just asking for something to go wrong and money is not worth losing a friend over. In fact, I know a friend in Alberta who is very well off who has helped a number of friends over the years. Almost every loan has ended badly.

So why did I break my rule? Well in this case the money is already partly his. You see I have a fund setup which a group of friends pay in to each month. That way when we see each other we just deduct the expenses for dinner out from the fund. The fund is a bit over sized right now, so I talked to the other members a while back about giving the gentlemen in question a short loan to buy an engagement ring. They all agreed.

So I've given out a loan, but in reality I only put up about $500 of my own money. Payment terms are set and we get to know about the engagement about a week ahead of the world. I'll let you know how it turns out.

Monday, December 18, 2006

Maxing the RRSP's or Investing outside the RRSP

I recently had a comment left on another post wondering if I max out my RRSP's every year. Up to now the answer has always been no. I was focused on debt reduction for a number of years and with what I was putting in to my RRSP's and my pension adjustment I don't have much extra room built up. But now I'm not sure if I should max the RRSP's or have my wife invest in dividend paying stocks and hold them for the long term.

Option 1: I buy spousal RRSP's and max out each year for the next 16 years or so. I would get back about $35 per $100 invested and then I would get tax free growth for a number of years. The problem would be I would get taxed at my new lower marginal rate when I pull them out in retirement.

Option 2: I have my wife buy quality dividend paying stocks and hold them for the next 15 years. She would have a negative tax rate on her dividends, so no tax on that growth. If I don't sell for that long I would only trigger capital gains at the end, which would be a lower tax rate than my marginal rate at that time.

Has anyone seen a good calculator that is updated with the latest tax rates? I have yet to find one during the weekend and I'm still working out how to simulate the buying stock option well. Once I get some good results I will be sure to post them.

Friday, December 15, 2006

Breaking 13K

Well it finally happened the TSX index broke 13,000 and stayed there long enough to close just over at 13,021. I have to say I'm really noticing this upswing on the market since I switched my RRSP to index funds (see here for details). I'm going to have to rebalance my funds in Jan since the TSX portion is well over it normal 25% level and crawling up to about 30% right now.

The only thing about this upswing that gets me nervous is waiting for a bit of market correction. It seems all investors are a bit too bullish on everything and I'm waiting for the shoe to drop, since we can't escape some slow down from the US. Meanwhile I'll build up some cash to go shopping for deals when we have another drop.

Have a good weekend,

Thursday, December 14, 2006

Letting Go of Control of Your Money

I have a confession to make. I'm a recovering money control freak. My wife laughed at me for years as I tracked ever little penny of expenses. The reality was it was a good thing to know about my spending, but now with the kid I just don't have the time to bother with the same level of detail.

So how do you get over being a money control freak? Start automatic bill payments and fund transfers for your savings, then comes the hard part. Don't track them as every tranfer leaves the account each month (Alright, you can make sure they leave on the first month). Just limit yourself to doing the end of month summary check to see if you have any extra money in your chequing account that can go over the high interest savings account.

I've now go it all set up so I have to pay just two bills in online banking and do one account transfer of money. Every other bill and account transfer is now automatic.

It's been several months now and it is working. I'm spending less time checking my bank balances and more time reading and playing with the kid. So if you are a fellow money control freak, don't worry there is hope. All you have to do is give up just a bit of control and get a life beyond your money. After all isn't all this saving for early retirement about having time to do the things you love. Why wait until your retired to start?

Wednesday, December 13, 2006

My Worst Investing Mistakes

My investing career started early in life. Back in high school I ran a social studies project where we bought shares in a junior mining company. We made some money and then I decided to buy out everyone else and hold the stock myself. Well that didn't go so well. After a few years I owned about $25 of stock out of my original $200. I sold and avoided the stock market for years, but I still didn't learn my lesson yet.

Now my current mistake is a diamond mine, Tahara (TAH), I bought over a year ago back when the mine wasn't even open yet. There was a lot of hype around the stock and it climbed for several months and I had this feeling at one point I should just take my gains and run. I didn't. Now the stock, even after a reverse share split, has fallen to the point of being a penny stock again.

Yet strangely enough I have no current plans to sell the stock. I bought it with a different frame of mind this time. I know that I'm speculating and I realize that that is not the same as investing. I also realize that I don't have very much money invested into the company so if it bottoms out and I have nothing. I'm not worried, because this is my form of lottery tickets. Perhaps this is the reason I have gone to index investing with my RRSP.

It's been an entertaining ride so far and I promised myself I would give the company five years after start up to see if they can't make a go of it. Even if I just take a lose at the end, at least I get to claim a capital lose on my tax form.

So what was your worst mistake? If you feel like sharing, please leave a comment.

Tuesday, December 12, 2006

Retirement Links & Info

Well in my search for retirement data I have done many Google searches and read many books. Below is a sampling of information I found useful.

Canadian Early Retirement Books
Stop Working - Start Living by Dianne Nahirny: A good book on control spending and about being creative on how to save money and make a little more cash.

Stop Working by Derek Foster: Derek's a bit new to this entire early retirement thing, but his book does offer some ideas for investing for a very long time frame.

Free Parking & Advance to Go by Alan Dickson: Two books by Alan that provide a good reality shift for most people. It challenges your belief on how you define wealth and an excellent basic description of index investing and why it works can be found in Advance to Go.

US Early Retirement Book
Work Less Live More by Bob Clyatt: This is an excellent resource on some of the finer points of cost prediction for retirement and dealing with the lifestyle of being semi-early retired. Well worth the read for any Canadian or US retirement planner.

General Personal Finance Book
The Wealthy Barber by David Chilton: A classic read for anyone who is just starting out. It covers the basics of insurance and saving, but you might want to take some of his advice with a grain or two of salt.

Investing Books
The Intelligent Investor by Benjamin Graham: A classic read on investing. I personally enjoyed the edition with commentary by Jason Zweig on each chapter. He points of many little facts that provide some reference to investing today versus investing in Graham's time.

Internet Links
The Retire Early Homepage - A great site with many useful articles. It is written mainly for the US, but it has lots of useful information including a great article on the 4% rule.

Dory's Early Retirement Forum - With over 3000 members of early retirees or people planning early retirement this page is a gold mine of advice from people who are living the dream of early retirement. On last count there were around 11,000 topics and almost 200,000 posts. The board is mostly US based, but there are a few regular Canadian posters as well. If you can't find what you need in the search function, join up and put in a post. The same topics tend to come up and those with good memories will often post links to previous topics.

Enjoy reading everyone. I'll post more links as I get some more time to dig in my bookmarks.

Monday, December 11, 2006

How to Buy Big Ticket Items

While reading my latest issue of Moneysense, I read an article the mentioned that a good idea with buying big ticket items is to have a limit at which you are required to get your spouse's approval. I realized that my wife and me, we have been doing this ourselves for a number of years already without any formal agreement.

We don't have a set limit per say, but we tend to discuss any big ticket items well in advance of buying anything. For example, last Friday I spent just under $900 on a new love seat for the living room. To an outsider it looked like a sudden purchase, but we have been discussing it for three months and deciding on styles, fabrics and what we want in the love seat. We also had decided that we wanted to spend around $700 for it before tax and delivery. So the love seat ended up slightly higher than that, but it was exactly what we wanted and I know that I'm investing in a piece that will last me for 20 years if I look after it.

So the exact method will vary for each family, but I do suggest that you have something in place to handle big ticket items (in our case: discussion, research and setting a price range). That way you can just avoid the entire phrase of "You bought what for how much?!?" from coming out your spouse's mouth.

Friday, December 08, 2006

Looking for Links

Well if you've been reading this blog for a bit you would have noticed my complete lack of links. This weekend I plan on working on that, but I could use some help. I've got a short list of some blogs I've enjoyed, but I'm always on the look out for more good reading material. So if you have a few ideas of blogs I should include, please leave a comment.

Also I'm going to dig around in my personal bookmarks to put together a early retirement resource page, but again if you have a good link please leave a comment.

One last little thing to note. I finally got my email address up on the page. If you noticed it early and it didn't work. I apologize for typing the address wrong in the link. It should work now. My inbox is open to suggestions, rants or any other questions you would like to see answered.

Have a great weekend,

Thursday, December 07, 2006

Book Review : Stop Working - Start Living

On my personal library shelf I have built up a small collection of some of my favorite retirement planning books. Out of all of these the one I like the best so far has been Stop Working - Start Living by Dianne Nahirny.

Dianne retired at age 36 and during her working life never made much of a salary (around $20,000/year), but she did make good money off a few house deals. She left the working world with a net worth of just $225,000. So the obvious question is with such a low net worth how is she financially independent? That is the lesson of the book: control your costs or they will control you.

Her book has two parts, the first part focuses on attitudes around money and how she came to her freedom day. More than anything what I was left with was the idea was to control your day to day spending and stop wasting money on things that don't mean anything to you (ie: your power bill). That way you feel fine spending money on those luxury items you really want. In Dianne's case, it was things like a antique gold locket, fur coat and a trip to Europe on the Concorde.

The second half of the book gets down to how to control your money. Some her examples are a bit extreme for my taste, but it proves the point. If your creative there is little no end in sight on ways to avoid costs and save money. The added bonus to her methods is you will be a kinder to the earth as you waste fewer resources. Which is exactly how I view it. I'm not saving the planet with low wattage light bulbs, I'm saving a few bucks and now have a $40/month power bill, so I'm taking that savings and building up to buy a new LCD TV.

Wednesday, December 06, 2006

The Emergency Fund Myth

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.

Tuesday, December 05, 2006

Retirement Calculations - Assumptions

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.

Paying for the Kid's Education (RESP)

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.

Monday, December 04, 2006

Defining Retirement

It occurs to me that I have overlooked something on this site so far. My goal is to retire at 45, but what exactly does the mean to me?

Well let me first say that does not mean I plan to never work again. For me retirement is having enough money that it does not matter if I do an activity to earn an income. That leaves me the freedom and time to do what I really love to do rather than what I just get a pay cheque doing.

I personally love to write (as you can tell from this blog), but I know that in Canada it is a very competitive market place for writers and frankly I know I need to get better at writing, but that takes time and I still have a family to feed. So I do engineering, which I enjoy but I don't love, to pay the bills.

If I reach my goal and retire at 45, it means I will most likely go to a new career of writing full time (ie: maybe 20 hours a week, after all this is suppose to be retirement!). So as one reader asked me, I'm not worried about what my then 18 year kid is going to think of having a 45 retired father, because I'm going to show him that if you work hard and plan you can set yourself up to do what you love. Which if your doing anything you really love, it really never feels like work at all.

Friday, December 01, 2006

Stay Home with the Kid or Work…Or Do Both?

Two years ago I became a parent about ten weeks earlier than I should have. After five air ambulance transfers, four hospitals, and two rounds of neurosurgery and sixty seven days later we got our baby home. Needless to say, my wife had a very strong desire to stay home with our baby to ensure his development was progressing normally for the next several years. I agreed, but we needed to make it work with the budget after the maturity leave money ran out.

I worked it out that we could exist on my income alone, but there would be no extras (ie: no vacation money, Boxing Day shopping, or us covering the bill at a family supper out). So I gave the wife the news and offered her a challenge. “You have to earn some kind of an income while you stay home. I don’t care how much it is, just something.”

So she went to work during her maturity leave and got a home based daycare up and running in our house. The cash flow is tiny, but when you consider the cost savings on work clothes, commuting, paying for daycare and the tax write off of a home based business it does make sense for us.

Here’s a brief example:

After tax and expenses daycare income to house $240/month
Work clothes savings $50/month
Commuting savings $57/month (bus pass)
Daycare savings $600/month (local child care rate)
Daycare portion of house bills $150/month

Total savings/income to the house $1097/month

Strangely enough that was about what she was taking home prior to going on maturity leave. So I suggest that if your one of you is earning less than $30K/year and have at least one child that you look into the idea of one of staying home with a small business. You might just find that you can have your cake and eat it too.

This post is now part of Carnival of Personal Finance #77 over at Money and Values.

Thursday, November 30, 2006

The Emotional Part of Paying Off Debt

I recent had a conversation with a friend who had a nice problem. He had a big cheque coming to him for retro pay for a raise that he got. The amount was several thousand dollars and he had decided to pay off some debt (Great idea!). The question was which debt would he pay off first. He has a car loan for about $20K (5.9%), the mortgage for over $100K (6%) or a student loan at $5K (8.5%). He was concerned about paying off the student loan since he can use the interest as a tax deduction.

My personal thought was screw the tax write off and get rid of that student loan because the satisfaction of finally paying off your loan is a great emotional high which can be used to inspire you get rid of more debt. I think people tend to get so tied up in the numbers that they forget that money is a very emotional topic.

So next time you get a windfall, try to remember that some emotion in your money decisions can be a good thing.

Wednesday, November 29, 2006

About Me

I'm a chemical engineer in my late twenties working for a consulting firm in Regina, SK. I enjoy reading, writing and saving money. After being the unoffical 'money guy' in my family for years I decided it was time to share some of my thoughts with others as I try to save enough cash to retire when I turn 45.

Tuesday, November 28, 2006

Changes to the Banks

The Federal government is hard at work avoid issues again around their review of the Bank Act . They have decided not to look at bank mergers or in bank sale of insurance, but they did address a few interesting points that could effect me.

1) Electronic cheque images to speed up the time it takes for a cheque to clear. I know I would love this one. I hate giving someone a cheque and then having it take a few weeks to clear out of my bank account.

2) Reducing the size of down payment required on a mortgage to avoid mortgage insurance. This one sounds good in principle, but I’m not too sure how much good it will do. I know that I put down 20% on my current house and is I could have saved the mortgage insurance it would have saved me $1500 overall. I suppose this becomes a more significant act as you get into higher priced homes

Monday, November 27, 2006

Retirement Calculations - Part III

Well now that I determined how much money I’m getting out of the government, my work pension and RRSP’s. I have one last source of cash to fund my retirement: taxable accounts (or investment accounts outside of an RRSP).

To determine how much I need to retire by 45 I just have to do a few simple calculations. First off from 45 to 55 I’m only using RRSP’s and taxable accounts. So for ten years I need to make up $20,500/year with my taxable account.

Then from 55 to 60 I’ll be using my company pension, RRSP and taxable accounts. So I will only need $9,100/year for those five years. That brings me to a total of $250,650 in my taxable account to allow me to retire at 45.

Ok, that does look like a lot, but I do have some time to save it up. So if I save $550/month at 6.5% interest for 16 years I should have $196,215.

So I’m a bit short as it stands now. I have a few options:

1) Save more. This might happen as I get older if my salary increases out pace inflation.
2) Work during early retirement and earn $5000/year from 45 to 55. That would offset about $50,000 off my quarter of a million requirement and it would only take a day or two a week to earn that kind of income. So I’ll consider that.
3) Downsize the house and pocket $50,000. That will depend on the local housing market at that time.

I have yet to decide what I’m going to do, but at least I have an idea of where I stand. As I get closer to my goal I should be able to improve these estimates with my personal rate of return on investments and pension projections.

Friday, November 24, 2006

Federal Economic Update

Well after all the news stories on income splitting and other great things we expected from the fed's on Thursday. We got: nothing. You can read an article on it, but I'll give you a summary.

Pay down the debt. Ok this is a good idea, but at $3 billion a year this will take a while.

Use interest savings on the debt to reduce income tax. Again a good idea, but really this will amount to something like $20/person in Canada next year. Oh yes, I can finally retire an entire minute sooner than I planned.

Reduce the GST to 5%. Hell SK managed to reduce their PST to that already. Besides your already told us about reducing the GST to 5% when you dropped it to 6%.

The rest of it was, well, hazy and vague. Here's hoping the new budget is better.

Thursday, November 23, 2006

Retirement Calculations – Part II

The other day I started discussing how I plan to fund my retirement with government benefits. With CPP and OAS I determined my wife and I can fund about 88% of my retirement goal of $25,000/year after I turn 65. Today I’m going to look at other sources of funding my retirement so I can leave work at 45.

1) Company Pension

When you first started with your company you most likely received a package with details on your benefits. If your one of the lucky ones you will have some information on a pension plan.

I recently switched jobs and was told I had accumulated about $10,000 in my previous pension plan. My new pension plan starts in the New Year is defined contribution. I pay in 5% of my salary and they match another 5%. So if I’m saving 10% of my salary and I have $10K starting I should accumulate $173,531 at 5% interest when I turn 45. Then if I let that grow for another 10 years (with no contributions) until I turn 55, I should have around $285,800.

If I take that money and use the safe withdraw rate of 4% I should be able to generate $11,432/year for my retirement. Which if you have been keeping score puts me $33,539 when I pass 65, or past my goal by about $8k a year. So for all those people who worry about having enough in retirement, you can do just fine on CPP/OAS and a pension.

2) RRSP’s

Registered Retirement Saving Plan (RRSP)’s have been sold to us as a great idea to fund our retirement. I disagree. I think they are a great idea to help fund your early retirement if you already have a company pension or your retirement if you have no pension. Otherwise they can be down right dangerous to a person who is over 65 with a pension. Why? You first get taxed at your normal rate and then if you are earning too much you get claw backed on your OAS and disqualify yourself from other government programs. Overall it has been estimated that your marginal tax rate with claw back is upwards of 52% . I know I do not like the idea of work hard for all that money just to give up half of it to the government in my retirement.

So for me I’m going to use my RRSP to mostly fund my early retirement. If it so happens that I have some leftover when I get to 65 that will be fine. So using a similar idea with my pension calculation, I estimate I can generate about $4500/year with my RRSP’s from age 45 to 65.

I’ll wrap up my calculations for retirement in my next post where I cover taxable accounts.

Tuesday, November 21, 2006

Retirement Calculations – Part I

As I previously mentioned, I have determined that I need about 40% of my current income in retirement which would mean I need about $25,000/year net income in retirement for my wife and I (in today’s dollars). Now how I’m going to obtain that money from age 45 onwards is a long process, so I’m going to divide it into parts. Today is Part I – Government benefits.

The good news is getting a $25,000/year income is easier than you think. The government is going to give me a lot of money through various programs, especially if I’m in a low income bracket. Here are some of the details.

1) Canada Pension Plan

You’ve seen the deduction on every pay cheque for years and now here is the good news. You get to have it all back over a long period of time. The earliest you can collect is age 60. Since you don’t know when your going to die I suggest that most people just take the cash and accept that your going to have a pension reduction of 30%. The 30% reduction is worth it when you consider you are being paid for any addition five years.

I suggest you request a statement of your CPP contributions to date to determine where you currently are. If you take that you can plug it in to an online calculator and get an estimate of what you are going to earn. In my case I got $7094 for me and $3897 for my wife. I know that doesn’t look like a lot but combined, the $10991/year is 44% of my net income for retirement. The added tax benefit of a CPP pension is income splitting is allowed.

2) Old Age Security

I know that some ‘experts’ don’t suggest depending on OAS for your retirement calculations. I disagree. I believe that any government that tries to remove this program will be voted out so fast that it will make their heads spin, after all seniors tend to have a high voter turnout and lots of time to be interested in politics. Based on the current rates, I expect my wife and I will collect an additional $5558/year each after I we turn 65.

So that would take me up to $22,107/year combined income or 88% of my goal. Not bad for not including any RRSP or company pensions. Tomorrow I’ll cover the rest of the plan.

Monday, November 20, 2006

Tax Changes for the Better in SK

Well it happened and I didn't even notice until I was reading on that SK finally changed their tax laws to account for the federal enhanced dividend tax credit.

What does it mean? Well if your like my wife who collects all the dividends (taxable accounts) it means she actually gets a reduction on her other income by getting dividends. I love the government! If your happen to have a low income, you get all the breaks. Which is partly how I plan on retiring at 45. If you get most of your income from capital gains and dividends you are paying way less tax for the same net income.

Friday, November 17, 2006

Retirement Myths

Most of the retirement planning people provide advice like:

-You need 70% of your pre-retirement income in retirement to keep the same standard of living
-You are going to live longer, so plan to live to 100 years old.
-You can't count on government pensions

All of the above is bullsh!t.

If you are following my previous post guideline of the 30-30-40 budget, you need exactly 40% of your pre-retirement net income to keep the same standard of living. After all your house should be paid for so you don't need 30% and if you are not saving for retirement you don't need another 30% of your net income.

Check out the government's average life expectancy (~75 for males and ~81 females) and you will be a bit overly optimistic to assume that you medical science will keep you alive for another 20 to 25 years.

The entire myth about the CPP running out of money is a bit of carry over myth from the US where social security is on rocky ground. We have been assured that the CPP fund has enough money to keep going.

So remember to take any 'advice' from someone selling you a mutual fund or other product with a grain of salt. After all they are just trying to earn a living by making you work longer than you need.

Thursday, November 16, 2006

Holiday Spending

Can you hear it in the air? Tiny bells and beeps indicating you’re spending far too much money at Christmas again. Well it doesn't have to be that way; you just have to adjust your thinking a bit.

I personally like to start shopping for Christmas starting the week after Christmas. Why? Wrapping paper and cards are cheap and if you have the storage space it is a great cost saver.

Then on Jan 1, I start putting away $150 a month into my ING savings account, so by next Christmas I have my $1500 saved for buying presents before I buy my first present. When I go to actually buy the presents I look for things people will really enjoy rather than worrying if I'm not spending enough. If I end up under budget I just get a nice present for myself on Boxing Day when the sales are on.

Happy holidays every one.

Wednesday, November 15, 2006

The Art of Being Broke

As I mentioned in a previous post, I often find myself running out of spending cash for a couple of days a month. The really strange thing is I don’t notice it most of the time. Why? I plan for it.

During those few days of being broke I plan activities that cost nothing and by filling up my time during that period I don’t even notice the days that I’m broke.

Some of my favorite activities include:

- Go the library and check out a few books and a couple of DVD’s.
- Clean the house/yard or do some other chores I’ve been avoiding
- Go through the house and write up the monthly grocery list and then go shopping (the food budget is separate from my spending cash)
- Write (either a blog entry, short story or get back to that novel idea)
- Dig into your home DVD collection and watch an old favorite
- Visit family/friends and drink their coffee (it even cheaper than drinking your own coffee)

So next time your broke for a day or two, I suggest looking at it as a challenge. You might even find you enjoy not spending money.

Tuesday, November 14, 2006

Know Thy Self and Index Investing

Over at the Canadian Capitalist, he has an interesting post on index investing and investor average rate of return. The general idea is that it is hard to beat an index (TSX, S&P 500, etc) by choosing your own stocks. The main reason for this is the index cheats. It picks up the winning stocks and dumps the sinking stones for you.

Early this year I changed my retirement mutal funds over to all index funds because I realized that I'm not that good at doing my own research yet. To cover myself from being tied to just one index I have the following breakdown:

25% Bond Index
25% TSX Index
25% S&P500 Index
25% International Index

This is the high growth version of the Couch Potato portfolio which I read about in MoneySense magazine. Overall I'm very happy with the results to date. Even with the big income trust bomb I'm still ahead with about 8 months into the new portfolio.

I think the major thing about doing a system like this is being honest with yourself. How much time can I put towards investing and can I really beat the index? If you don't know or you know you can't beat the index I would suggest using index funds.

30-30-40 Budgeting

Ok, budgeting does have bad reputation. Who really likes tracking every little cent you spend? So over the years I have tried a few different things, but I found a nice rule of thumb to see if you are on track: 30-30-40.

Basically it goes like this you should be spending about 30% of net (take home) pay on housing, 30% towards retirement savings and debt repayment, and the remaining 40% all other living expenses.

That first 30% toward housing should be used to pay off your mortgage. If you don’t own your house I suggest looking for one. After taxes the next biggest monthly expenditure for most people is their housing cost. Once you remove that monthly cost you are a lot closer to retiring early.

The next 30% for savings/debt payment may seem like a lot, but you are most likely a lot closer to this level than you think. For example, if your net pay is $3700/month and you have the following monthly payments: Car $300, RRSP Savings $100, Spouse RRSP Savings $100, Student Loans $610, you would be at the 30% level. The real trick with this 30% is to take any extra cash you get and pay down those debts faster to leave more of the 30% for savings.

So after you’ve been responsible enough with the first 60% of your net income, the last 40% becomes fairly easy: you spend it. The only real trick I found for this amount is to limit those little daily purchases on things your really don’t care about (coffee or a lunch out at work). An easy way to limit these is to just use cash (No credit cards or debit cards). That way when the cash is gone you stop spending. My wife had the idea to take cash out twice a month. That way you typically are cashless for a few days in the middle and the end of the month.

Now isn’t that a relatively painless way to budget?

Friday, November 10, 2006

Up To The Start Line

Well in any race you need to define where you are and where you are going. In this case I need to understand where I am right now. So I’ll use my net worth to provide a benchmark (which is basically: what you have minus what you owe).

What I have (Assets)

House (Market Value) $195,000
My RRSP $11,000
Wife RRSP $4,000
Wife Investment Account $4,000
ING Savings Account $2,000
Asset Total: $216,000

What I owe (Liabilities)

Mortgage $150,000
Line of Credit $0
Student Loans $0 (Just paid off!)
Liabilities Total: $150,000

Net Worth = $216,000 – $150,000 = $66,000

All in all I’m fairly happy with that number. After all I’m under 30 and I have a positive net worth. By the way, I had $60,000 in student loans between my wife and me about six years ago.

Thursday, November 09, 2006

In The Beginning

About two years ago I read several books on retiring early. They got me thinking, why am I planning on working until 65? I've got better things to do than work. Then I thought better yet, why not retire at 55! I'm young (under 30) so I should have lots of time to save money for this.

Then I starting coming across news stories on those who retired very early. Like under 40. Well I'm not that well off so I changed my freedom 55 to freedom 45. It's not going to be easy, but your welcome to join me on the ride.