Monday, April 02, 2007

Ten Intermediate Goals to Retirement

On the 100th post contest I had a good topic idea from The Money Diva on intermediate goals to retirement.

Early retirement planning can be rather grueling. Let's face it, you are saving for something that you will see no results from for decades down the road. It is very easy at some point to face some burnout from saving/planning for retirement. So to combat this I proudly present my top ten list for intermediate goals towards retirement savings.

1. Assess the situation.

In the beginning the assessment is going to take a while. You need to find out how much you own, where it is, and what you owe everyone else. Then you have to pick a date and start making some plans/guesses on how much to save. After the first go round you should come back to your numbers at least yearly to find out if your still on track or if you have a better estimate for something.

2. Kill all consumer debt.

Debt is like a ball and chain to your early retirement. You have to get rid of it to move on to better things. Start off with getting rid of all credit card debt before anything else (an 18% rate of return on after tax dollars is hard to beat), then move on to lines of credit and car loan(s). The idea here is to get rid of it all so you can have a big cash flow to start saving.

3. Kill the mortgage.

Ok, there is a significant debate out there around paying off your mortgage or investing for the future. The answer for each person is different, but in the case of early retirement the only number that matters is having a mortgage of $0 on your retirement date. Having no mortgage in early retirement is essential to reduce your living expenses.

4. Save $500.

Now at some point during the first three steps you likely put something away for retirement in a mutual fund. In the very beginning of saving mutual funds are hard to beat for someone just starting out. I'll touch on some good basic ones in another post.

5. Save $10,000.

With $10,000 in your account balance you can likely buy into some lower cost index funds with your bank in a nice mixture (see the Couch Potato family from Money Sense for mixture ideas). Find something that works for you and stick too it. These funds work well for someone who is still adding a significant amount each month to their account (ie: $200/month is a 2% addition to your portfolio).

6. Save $25,000.

Now at this point you can shop around for a self directed account and look at buying Exchange Traded Funds (EFT). They cost a trading fee to buy in (like a stock), but then afterwards you have a really low MER. Also at this point your $200/month is less than 1% of your portfolio, so you can afford to have it build up for a year before your rebalance your index funds.

7. Save $X.

Now at this stage you will want to flush out a few personal savings goals to bridge the gap until step 8. Pick something you like and make sure you reward yourself with something when you get there. After all we want to be happy prior to retirement, just not in retirement.

8. Save $100,000.

After chatting with various people about saving large sums of money, the all tell me the first $100,000 is the worst. After that your compounding really starts to help out and it gets easier from here.

9. Diversify investments.

Now that you have a significant nest egg built, its time to make sure you have it spread out over more than just index funds. Look at individual company stocks with good dividend growth, real estate (try a REIT if you know you could not stand being a landlord), also don't forget about those completely unsexy investments of fixed income (bonds, GIC, etc). As you get older you will want to reduce your stock market exposure to lock in your gains as you get close to your retirement date.

10. Keep setting goals.

Now here some people get confused and just set more savings goals. You also want to setup personal goals like learn a new language or pick up a new hobby. The idea here is to slowly build up your non work life to ensure you have a happy and fulfilling retirement when you finally hand in your notice.


the money diva said...

Hi CD!

Glad you liked my idea for a post. This is a great list that people will find very helpful.

I'm still on the fence about the mortgage question for myself personally. I agree that it makes a big difference in cash flow, but there are so many considerations.... Maybe goal number 11 should be to learn all you can about managing your money so that you can (hopefully) make smart decisions!


Canadian Dream said...


Good point for #11. You do want to expand your PF knowledge as you go.

As to the house question. I seem to recall you have part of your home rented out which provides some income to cover your mortgage. Perhaps you should look at the question, do you always want to be a landlady? Or do you want the entire house to yourself?

I noticed on your net worth summary you have a pile of cash, if that isn't tied up in the business could you dump a pile on your mortgage? That would drop interest paid each year by a lot.

Just some ideas,