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.
Friday, December 29, 2006
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.
Assests
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
Debt
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.
Assests
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
Debt
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.
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.)
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.
* * *
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.
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.
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.
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.
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,
CD
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,
CD
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?
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.
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.
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.
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,
CD
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,
CD
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.
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.
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.
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.
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.
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.
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.
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