9. “How can I retire at 50?”

Note: it probably makes most sense to read these posts in order, i.e., starting from #1, but it’s up to you.

Since I came out of the financial closet by announcing that I would finish work at the age of 50, a number of people have asked me how I have managed to do this. (I have been surprised that more people haven’t asked. I would have thought that everyone would want to know.)  For the millennials, the answer is pretty straightforward: read my blog, save lots of money, and don’t buy mutual funds.

This link has more information about “Couch Potato investing”. I think it is a simple, straight-forward approach to investing that does not require a lot of research or knowledge about markets.

http://www.moneysense.ca/tag/couch-potato-portfolio-guide/

For people of my own generation, it is more difficult. There is an old saying that the best time to plant a tree is twenty-five years ago.  But I do think that switching from mutual funds to exchange-traded funds, or even better to dividend stocks and REITs can help a Gen-Xer or Baby Boomer get more juice out the oranges they have at this stage of life. By improving an investment strategy, it should be possible to safely draw more than people are thinking they would be able to draw, meaning that people can retire earlier or better than they might think possible now.

A common rule-of-thumb used by people in the financial sector and by do-it-yourselfers is the “4% safe withdrawal rate (SWR)”.  The SWR is frequently cited as a financial planning guide for retirees. The idea is that you can set your annual withdrawal as 4% of your portfolio at the time of retirement, and adjust it for inflation annually. So if you have $1 million when you finish working, you can withdraw $40,000 in the first year, and then adjust that amount by inflation every year, and your money will last at least 30 years in the large majority of cases.

The 4% SWR comes from the “Trinity study” which was published by three professors from Trinity University in Texas: Philip L. Cooley, Carl M. Hubbard and Daniel T. Walz.

The authors studied historical U.S. stock and bond returns from 1926 through 1995 to determine sustainable withdrawal rates. They looked at different possible portfolio compositions of stocks and bonds, and evaluated the impact of fixed annual withdrawals. The result that is commonly cited is that someone with a 30-year planned retirement would have been safe in withdraw 4% of the balanced portfolio in the first year of retirement, and then adjusting that amount only for inflation each year, regardless of what year they retired in, for  all 30-year periods. In other words, it works in the worst-case scenario without any adjustment to withdrawals.

I spit in the face of the 4% rule.

I am not criticizing the work of the Trinity professors, only its usefulness in telling me how to manage my portfolio.

For every complex problem there is an answer that is clear, simple, and wrong.

— H. L. Mencken

As with any complicated issue, people look for simplifications, and the 4% SWR is just such a simplification. Anyone planning a retirement (their own or a client’s) is doing the retiree a great disservice by incorporating such a gross simplification into their calculations. Like the “70% of income rule” mentioned in post #8, this “rule” should only be used in early stage of analysis. It is like a back-of-the-envelope calculation that you do until you can do the proper analysis.

The authors of the study do not, in fact, recommend taking a fixed withdrawal from any portfolio: “Mid-course corrections likely will be required, with the actual dollar amounts withdrawn adjusted downward or upward relative to the plan. The investor needs to keep in mind that selection of a withdrawal rate is not a matter of contract but rather a matter of planning.” So they reject the idea that someone would actually take the fixed (inflation-adjusted) amount out every year regardless of market conditions.

Our withdrawal rate is based on actually modelling income, spending, rates of return, and taxation over a 45-year time horizon. It starts at about 6%, rises to 10% when we are 65, then falls back to 6% because pension, Canada Pension Plan and Old Age Security start up. After 65, the withdrawal begins to rise gradually. This may be shocking, and devotees of the 4% rule will tell me that we are heading for financial ruin, so I am going to explain why flouting the 4% rule doesn’t scare me, and I think it shouldn’t scare most people.

So let’s get one thing out of the way: the yield on our portfolio at the end of March 2016 is 5.6%, and I am pretty confident that the income stream I have established is reliable. A 4% withdrawal rate from a portfolio that is yielding 5.6% means that our assets would grow over time, and would soon grow rapidly, rather than being paid out. As we have no particular reason to leave a legacy, that would mean a much more parsimonious post-work life than we need to have.

There are a lot of other reasons why the 4% rate should just be a starting point for a discussion about decumulation, and should never replace actual analysis.

The 4% was based, as others have noted, on the original portfolio, with adjustments to the withdrawal amount for inflation. There is nothing wrong with calculating your withdrawal on the current value of the portfolio, but 4% has no meaning or basis in this approach. 4% would be a random or arbitrary percentage.

It was based on a “balanced portfolio of U.S. stocks and bonds”, not on our portfolio which is (a) almost all stocks, and (b) designed to generate income from dividends and REIT distributions. My withdrawal will be related to income from my portfolio, not a figure taken from a different methodology.

Someone whose investments are in higher fee mutual funds, or in investments that do not produce a reliable stream of income, or who wants just a simple rule to follow instead of doing a full analysis, would have good cause to be more conservative than our plans is allowing.  4% could be closer to the right number for them. The trade-off is a shorter, more frugal retirement.

SWR

As I noted in post #7, we will have a cash cushion of Guaranteed Investment Certificates [CDs] and a pool in a high interest savings account so that we don’t have to sell off our dividend stocks or REITs during a downturn. If we use these up during a downturn, we will replenish them when share prices recover by selling off at a higher value.  This means that in a downturn, I will not be undermining future income streams by selling shares off cheaply.

With less than a month to go, I remain convinced that our plan is prudent.

Thank you for reading. Comments are welcome.

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9. “How can I retire at 50?”

8. How much will we need?

This is the most difficult question to answer in any discussion of financial independence. Everyone is looking for the one number to tell them exactly how much money they need in order to be able to stop working. Thinking that there is one number is a fallacy.

First of all, everyone has different needs and wants. That should be obvious. There are lots of people out there, especially among the “extreme early retirement” community who say that they can get along just find on the change they find under the cushions in the chesterfield. Others will tell you that you can never have enough, so you’re better off just keeping working.

Charles Dickens’ Micawber Principle is most instructive here:

“Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.” – (David Copperfield, Chapter 12)

There are four tests that I have used to evaluate our financial readiness for life after work. Three of them are not new, but I will repeat them here for completeness, and to provide my comments on each of them.

No single test is going to give you an unambiguously definitive answer. Even all four tests together may not tell you what you need to know, but it is better to look at all of the results to make your decision. (If any reader – if anyone is reading – knows of another test, please share it in the comments below.)

Test 2 is the only new thing here – at least I haven’t seen anyone else calculate this starting with the tax return, so you may want to skip to that if the rest is old hat to you.

Test 1: the 70% of income rule

A standard rule-of-thumb in the financial planning industry is that you will need in retirement income equal to 70% of you pre-retirement before-tax income.  A rule-of-thumb is a pretty blunt instrument. It should only be the start of the discussion, not the end point.

This rule of thumb I don’t find to be very useful. Let’s consider this example: if Spendthrift Sandeep earns $60,000 a year, pays $10,000 in tax, and spends the rest, he’s consuming $50,000 a year. 70% of $60,000 is $42,000, which means he will have to reduce his standard of living in retirement. If his neighbour Frugal Frieda is earning $60,000, paying $10,000 in tax, and saving $20,000 a year, she is consuming only $30,000 a year, so 70% of her pre-retirement income means her retirement at $42,000 will be a big party by comparison.

Having had a high savings rate through my working life, my pre-retirement income has little bearing on what I need to spend to be happy. But also, my plans for life after-work have little relation to my life during work. If Spouse and I are to travel the world, we will be spending much more on travel than we did during our working lives. We have travelled a fair bit, but there were some staycations in there – some years where we spent our time off renovating our home, for example.

Furthermore, there is hardly unanimity around the 70% figure. You will find financial writers who will provide very good reasons for why 50% or 60% should be enough. Others, mostly in the financial planning industry, will tell you that you will need 80% or even more in order to have what you need to be happy. A cynic would say that the financial sector makes money when you save more. A more charitable explanation would be that no financial adviser wants to be responsible for having one of their clients retire too early and be disappointed with their retirement lifestyle.

Test 2: your current spending

Following on the criticism of the 70% rule, it makes more sense to look at how much you are spending now so you can get an idea of how much you need to spend in retirement to maintain your current standard of living.

If you have an annual budget and you know how much you spend, then I would say to you: congratulations, and you should get a life.

That’s not really fair – everyone has their own particular obsessions, and I’m in no place to criticize someone else’s.

Since I didn’t know how much we were spending as a couple, and didn’t want to take the traditional approach of tracking my own spending, let own asking Spouse to report to me what he was spending (that would not have gone well), I decided to find an alternative method.

Your Canadian tax return has a lot of the information that you need to calculate your current spending and adjust it for life after work so you can determine how much after-tax income you need to maintain your current spending.

Your current spending can be calculated as follows:

Start with your income – I use Line 101 from the T1 form (employment income) – the only other income I have is investment income, and that is all being reinvested, so it does not form part of my spending. You may have other types of income, so check through Lines 102 to 147 to see what makes sense to include.

  • remove pension (T1 line 207) and RRSP (T1 line 208) contributions which you won’t be making any more,
  • remove professional fees and union dues (T1 line 212)
  • deduct taxes payable (since we are calculating how much you have left over to spend) (T1 line 435)
  • remove CPP contributions (Schedule 1 line 9) and EI premiums (Schedule 1 line 11) that you won’t be making any more.

There may be other lines that you would deduct depending on your personal circumstances, so you should go through you return carefully when doing this.

Now off your tax return, there are other things you are putting your money into that you won’t be doing after work:

  • Any increases in taxable investments
  • Your TFSA contributions (well, you should continue these after work if you have taxable investments to transfer into your TFSA, but this isn’t coming out of the income you need to support your spending)
  • Other uses (funding your kids’ education, mortgage payments, etc.?)

Now you have a good idea of how much you are spending in a year without going through a stack of credit card and bank statements.

I’ve read all of the articles that say your spending goes down in retirement because you spend less on commuting, dry cleaning, office lunches, but since my commuting costs are nil (aside from new shoes), I spend little on dry cleaning, and I take my lunch fairly often, I’m not convinced of that. On the other hand, when I have the time to travel, I want to do as much of that as I can, so my spending could go up. That bring us to Test 4, but first, there is another test that I have explored.

Test 3: what the neighbours are spending

David Aston, writing in Moneysense magazine in 2013 http://www.moneysense.ca/retire/how-much-money-will-you-need-to-retire/, used these numbers to describe the before-tax income required to retire in different styles. Aston assumes no debt in retirement, and for all categories except Bare Necessities, a paid-for home.

for couples | single people

Bare necessities:              $25,000 | $18,000

Basic middle class:            $40,000 | $28,000

Average middle class:    $55,000 | $39,000

Upper middle class:        $70,000 | $50,000

Deluxe:                                $100,000 | $75,000

Aston explains what he means by his categories:

“Everyone spends their money differently, but to give you an idea, think of a “basic middle class” couple as being able to afford a used car that they keep for eight years or more. Vacations are mostly driving holidays, with occasional jaunts outside Canada. “Average middle class” couples can buy a new car and trade it in more often, and enjoy foreign holidays with average accommodations. “Upper middle class” couples can buy a new car every five years, or have two cars that they replace every eight years or so. They can also enjoy higher-end international travel.”

It is not clear how Aston developed these amounts, but judging from an earlier article he wrote, they seem to be based on the average and median income from Statistics Canada’s Survey of Household Spending. I am not questioning Aston’s numbers – I think they add a lot to the discussion – I’d just like to see more explanation of his methodology.

Another piece of information that was really useful to me was talking to a retired couple of friends who were really open about their spending, and told us their after-tax monthly budget ($7500).   Getting a real number from someone broadly in our income group really helped because it made me realize how irrelevant what the neighbours are spending is to us. While this couple have a nicer home and travel quite a bit, their style of travelling and spending patterns are very different from ours. They eat out a lot, but don’t drink. They have hobbies that are different from ours. They go to a warm place in the winter and stay there, rather than moving around. How relevant is their spending to what we expect to spend? It is only relevant as a broad indicator.

This was really useful, though, because it pushed me into doing what I had been putting off for a very long time: drafting a budget for life after work.

Test 4: Drawing up a budget

Drawing up a budget for your spending after work is the most tedious, time-consuming, useful exercise of any of these. I resisted doing this for a long time, but I was really glad that I did it because this gave me much more confidence that we will be able to stop working this year.

  • I started with as many of our known fixed expenses and I could dig up and put them into a spreadsheet – this is really about housing costs.
  • I made estimates for as many unknown costs as I could think of, e.g., for running the car that we will acquire when we finish work.
  • Buying a car every six years.
  • I put in provisions for other household expenses, and a budget for fun for the months that we are at home.
  • I set a budget for travel expenses – some money for airfare for two big trips a year, and then a daily budget. I have tested this daily budget on recent trips, and it seems to stand up well. Of course, travel in Europe is more expensive than travel in Mexico or southern Asia, but I assume that we will mix up trips between cheap and expensive places.
  • I set aside an amount for unknown extras.

A key thing here is to be explicitly conservative, but not conservative throughout. By this I mean that I have not rounded up all of the amounts, and hidden away contingencies in each part of the budget, but rather I make one large contingency reserve. It is unlikely that every element of your budget is going to be more expensive than you were predicting, but some parts will be. If you gross-up each of your budget items by 30% “just in case”, you will find you will likely never be able to quit working. Setting aside an explicit 10-15% contingency amount should provide adequate but not excessive coverage.

The total spending amount is projected out through the plan with 2% inflation per year. Over the last 20 years, Canada has averaged 1.82% increase per year in the consumer price index, and the Bank of Canada has an official target range of 1-3% per year, so 2% is a pretty good number. I know that some people look back at the 1970s and years of 10% inflation, but there was a fundamental shift in monetary policy in the 1980s when economists realized that printing money could not provide ongoing economic stimulus to an economy. This resulted in the 1-3% target range. This is pretty consistent amongst developed economies.

I’ve budgeted for six months a year of travel (woo hoo!), and adjusted that down to five months at age 70, when I figure we’ll be more focussed on going somewhere warm during the winter and staying there, and less on gallivanting.

Thank you for reading. Comments are welcome.

8. How much will we need?

7. How my plan works

I have a very complex spreadsheet model (I’m an economist) that projects out our

  1. desired spending,
  2. expected income,
  3. withdrawals from different accounts,
  4. the taxation of these, and
  5. adjustments for inflation.

The key metric is how much is left when we are 95 – this represents a safety margin as it seems unlikely that we would both live to 95.

  1. Desired spending

I’ll outline in the next post how I determine how much I think we will need to maintain our desired level of spending.

  1. Expected income

I treat each of our different investment pools separately:

  • Registered Retirement Savings Plans (RRSPs) [like U.S. Traditional IRAs]
  • Tax-Free Savings Accounts (TFSAs) [like U.S. Roth IRAs]
  • taxable investment account
  • Guaranteed Investment Certificates (GICs) [like U.S. CDs] and high-interest savings account.
  1. Withdrawals from different accounts

For each pool I start the decumulation plan with the current value of the pool, and assume income based on the current yield of that pool. I am using my current dividend and interest yields, but given that yields are very high right now, I have adjusted them downward in the RRSP and TFSA accounts where I expect that we will continue to accumulate over the coming years.

I assume that we use all of the income from the taxable account for each year in that year. Then I add in any income from my defined benefit pension plan (starting at 65), Canada Pension Plan (from 65) and Old Age Security (from 66). [CPP and OAS would be “Social Security” in the U.S. CPP is a contributory plan, while OAS is paid to all but the highest income seniors.]

I then withdraw from the RRSP and TFSA accounts in order to top that up to the desired pre-tax income.

I have built in a tax calculator based on current tax parameters to determine the after-tax income, including the OAS clawback on high-income people, which we generally stay under.

I then somewhat iteratively adjust the RRSP/TFSA withdrawals to equate the after-tax income to the desired after-tax income.

Each year the income from an account increases if my withdrawal has been less than that year’s income, or is reduced as I draw down the capital in the account.

I assume no future capital gains (since capital gains are wildly unpredictable), which builds in an extra degree of prudence. Over time, the stock market has always gone up, if you wait long enough. This could mean higher taxes when withdrawing from the taxable account, but then I’ll have more money to pay taxes, so it should be okay.

I will have a cash cushion of Guaranteed Investment Certificates and a pool in a high interest savings account so that I don’t have to sell off my dividend stocks or REITs during a downturn. If I use these up during a downturn, I will replenish them when share prices recover by selling off at a higher value.

  1. Taxation

The tax calculator reflects the different tax brackets, the tax treatment of different types of dividends, capital gains and other investment and pension income. For taxable investments, I am assuming a capital gain of 25% of the amount withdrawn, which is probably an over-estimate – our portfolio is relatively young because I have been investing directly for only a few years, and I trade more than I should.

  1. Inflation

I have set inflation at 2% because the Bank of Canada targets consumer price index (CPI) inflation of between 1% and 3% per year, and has been in that range consistently for the last 20 years. Over that period, average CPI inflation was 1.9%.

Some people look back further and cite the high inflation of the 1970s and early 1980s as justification for assuming higher inflation. I don’t think that this is a good basis for forecasting. There was a sea change in monetary policy in the 1980s – Maggie Thatcher’s “monetarism in the lab”, Alan Greenspan in the U.S., and similar policies in Canada. The Bank of Canada now aims for price stability instead of using expansionist monetary policy to stimulate the economy. Since the latter was shown to cause inflation instead of long-term expansion, I cannot see us going back there.

This approach is more sophisticated that the simplistic “4% rule” that is often cited as it deals with our portfolio and our rates of return and our tax rates in the 21st century, rather than using a figure developed in studies using typical portfolios of U.S. stock and bond markets over a hundred year period.

I will write a separate post on the so-called 4% rule.

Thank you for reading. Comments are welcome.

7. How my plan works

6. Our investments

We have 14 stocks in our portfolio, and no single holding more than 10% of the total. Most of the companies are fairly typical of a Canadian retiree’s portfolio, but there are a few quirky elements that came out of recommendations that I got from a relative when I was setting up the portfolio. (Statistics as of late January 2016.)

Utilities (24%): Innergex (INE-TSX), Algonquin Power (AQN-TSX), Brookfield Renewable Energy (BPF.UN-TSX), Scottish and Southern Electric (SSEZY on the US over-the-counter market)

These four companies offer dividends in the 5-7% range at the moment, and all have grown their dividends over time.

Real estate (19%): Dream Office (D.UN-TSX), Dream Industrial (DIR.UN-TSX), Dream Global (DRG.UN-TSX).

These real estate investment trusts are offering 9%-15% yields (yowza!). They have not increased their distributions over time, but did I mention the 9%-15% yields they are offering now? We have some diversification, but not enough. I like being diversified between office property in Canada (D), industrial property in Canada (DIR), and office property in Germany (DRG), but I am concerned about having all of our real estate eggs in one management basket. I just cannot bring myself to give up on Dream’s glorious yields. Their adjusted funds from operations (AFFO) ratios, which are used to measure the sustainability of cash flow for REITs, are high, but are not dangerously so. This is probably, however, the biggest risk to my financial plan. I have seen speculation about D cutting its distribution. See my comments about stress-testing the plan below.

Retail (19%): Boston Pizza (BPF.UN-TSX), A&W Canada (A&W.UN-TSX), and Liquor Stores (LIQ-TSX)

The first two are restaurant royalty trusts that offer about 8% and 5.5% yields respectively. Boston has raised its dividend in the recent past, while A&W had not for years, but did so in October 2015 – a nice surprise!  Liquor Stores operates in Alberta, BC, Alaska and Kentucky. I like the fact that it is growing by opening new stores, and has a range of formats, which I think makes it flexible in adapting to changing markets. The stock has been battered because it is perceived as being an Alberta company, so its yield is now around 15%. The people who speculate about these things are speculating that LIQ will cut its dividend.

Telecom (17%): Bell Canada (BCE-TSX) and AT&T (T-NYSE)

These should be stable parts of a portfolio, and they grow their dividends. I have bought and sold both as they’ve gone up and down. BCE’s yield is below 5% now, while AT&T’s is closer to 6%. I am trying to train myself to trade less, so I am holding onto these.

Finance (5%): Bank of China (BACHY on the US over-the-counter market) and China Construction Bank (CICHY on the US over-the-counter market)

This is the more exotic part of our portfolio. I believe in China’s long-term prospects despite the uncertainty this year, and have held on as these stocks have lost value. Our positions are not large, but they have yields of 6.5-7% and have grown them over time.

Spouse’s defined contribution employer pension plan (15% or our portfolio) is invested in four mutual funds. Job 1 when he leaves the company is to roll that over into his existing locked-in retirement account and invest it in the companies we already have.

Our geographic diversification is not as good as it should be: we are over-weighted in Canada (71%), in part because of the desire for tax efficiency: Canadian dividends qualify for better tax treatment. But that’s not a good enough excuse. As with many investors, familiarity with the Canadian market has led me to invest more at home. We have 20% in the US, 3% in Europe, and 5% in Asia/other.

So this portfolio provides an excellent stream of income for us. But what happens if companies cut their dividends or distributions? I stress-tested the plan for a 40% cut in D.un distributions, and a 40% cut in LIQ dividends to see what would happen. The plan was still sound, but the margin for error was reduced significantly. I have discussed with Spouse that if things fall apart,

Fire and brimstone coming down from the skies! Rivers and seas boiling! Forty years of darkness! Earthquakes, volcanoes… The dead rising from the grave! Human sacrifice, dogs and cats living together… mass hysteria!

We would have to revisit the spending side of the equation and tighten our belts for a while until things blow over. I think there is enough slack in the spending side that we could do that without giving up things that are really important to us, like travel.

Thank you for reading. Comments are welcome.

6. Our investments

5. My investing style

I’ve gone through various stages in my investing career.

First Stage (mutual funds):

When I started working, I was just leaving money to accumulate in a bank account because I didn’t know where to start. A friend from university told me to go up the street to Montreal Trust (that’s how long ago it was) to open a money market mutual fund account. I don’t remember why I didn’t do exactly that, but it did get my off my duff to start researching mutual funds, and I ended up investing first with Altamira Funds, which had had a couple of good years. I gleefully invested a few hundred dollars a months in a few funds on automatic investment. Sometimes I moved money from one fund to another trying to time the market, but never with much success. As my portfolio grew, I started looking further afield and ended up investing money with AGF, another star performer, but one with higher management expense ratios (MERs), and onto various other companies.

Second Stage (index investing):

Over time I began to realize that I wasn’t really ahead of the market. I had some winners, some funds that moved only a little, and some dogs (hello Japan Fund). As I read more, I began to realize that I am not smarter than the market, so trying to pick winners was a bad idea, especially trying to pick winners on the basis of recent returns. I also began to realize that as it looked like the high returns of the 1980s were coming to an end, the impact of MERs is an important determinant of overall return on investment. I began to shift funds from managed funds to TD’s e-series of low-cost index mutual funds.

Setting up a brokerage account and getting into exchange-traded funds (ETFs) was the next logical step, especially as my portfolio grew larger and the trading costs associated with ETFs would be relatively small compared to the values I was purchasing.

Third Stage (income investing):

The third stage of my investment career began about five years ago when a relative began teaching me about investing directly in companies. This help came along at the right time for me, as my portfolio had grown to a size where it made sense to invest directly, but I need some help to get started. His focus was on dividend-paying stocks, with some more colourful investments on the side. I dipped my toe in the water, and over time began to shift more and more of my portfolio from ETFs to stocks as my comfort level grew and as I found more opportunities that I wanted to pursue.

The settlement of a lawsuit gave me more time to focus on investing, and cash to invest, and it was around then that I disposed of my remaining ETFs and invested the whole portfolio in stocks. I also began investing some of Spouse’s money into the more conservative stocks that I was buying for myself.

This style suits me for my stage in life: with financial independence imminent, it helps me to have an identifiable stream of income to support Spouse and me in the style to which we would like to become accustomed. Dividends and REIT distributions are not the most tax efficient form of income. Indeed, it would make more sense from a tax perspective to have our taxable account heavily invested in non-dividend-paying stocks with a better likelihood of capital gains, which are taxed less. But capital gains simply are not as reliable as dividends and distributions from good companies and REITs. I don’t think I would be comfortable planning financial independence based on assumption about realizing capital gains to fund our lives.

What about bonds? I had some bond mutual funds and then bond ETFs, because I was always told to have a balanced portfolio. When I started investing directly, I really had trouble justifying buying bonds with low interest rates when there were real estate investment trusts (REITs) offer nice juicy returns of 5-6% or even more. And I rationalize it to myself that my defined benefit pension plan is the fixed-income part of our portfolio, so the rest of our portfolio can be held in equities.

Our equity investments are by-and-large, conservative – dividend stocks and REITs are going to be less volatile than other stocks, especially since I focus on those that have not cut their dividends. Of course, there is a first time for everything, but if a company didn’t cut its dividends during the crash of 2008, I think it is probably pretty stable.

In the next post, I will discuss what I have invested in. Thank you for reading. Comments are welcome.

5. My investing style

4. How I achieved financial independence: Vision – Plan – Action

As I explained in my last post, when I started work, I had a vision of life after work. I developed a plan to take a different path from friends and colleagues. The plan to achieve my vision gave me the motivation to take the actions necessary to achieve it.

This was an essential component of my success in achieving financial independence. Having a vision and a plan helped me every time I had to make a decision about spending money. Do I buy the nice shirt that’s not on sale? Do I order the more expensive dish when out at a restaurant? I remember soon after starting to work meeting a classmate from university who was bragging about the Saab that he had just bought. It was used, but being able to buy a spiffy car was clearly important to him. For me, squirrelling away my money was more important.

It can be hard to forego current consumption for the future, especially when friends and colleagues are buying nice cars, taking expensive vacations, splashing out on expensive clothes and entertainment. I don’t want to suggest that I lived like a monk. Travel is important to me, so I made sure that there was always money for travel. And fortunately, I am happy to travel in a modest style. I continued to stay in youth hostels for a while after I started working, before graduating to inexpensive hotels, and then VRBO.com, and now there’s Airbnb. The glitzy hotels do not appeal to me.

Some degree of lifestyle inflation is going to happen to most people. For me, a key thing was to make sure that it lagged my income growth. I continued living as a student when I started working. As my income grew, I allowed myself more of an entry-level lifestyle, and so on. Living in downtown areas meant never having to buy and operate a car. I think that the savings from that more than offset the additional housing costs that come with downtown living. In early retirement discussions, this is known as “living below your means”.

There has been some discussion in recent years about how millennials having been “living above their means”, i.e., accumulating debt during their mid-to-late twenties in order to get all of the toys when they start working with the plan to pay for them later. I don’t know if this is at all true. The millennials I work with seem to be pretty level-headed people.

Now that I am at the end of my path, I do wonder what it would have been like if I had set a more aggressive goal. I aimed for financial independence at 52, and will make it at 50. What if I had aimed for 48? Would I have achieved that? Would I have over achieved at finished work at 46? I’ll never know, and I’m not going to stress over it because there is nothing I can do about it now. I am happy with how my career has gone, and finishing work at 50 is something to be pretty happy about too. I hope to have 15 years of active living and travelling before I start to slow down, and then another 10 years of good health before I start to seriously slow down. Who knows – without the stress of work and with more time to devote to exercise and healthy eating, maybe Spouse and I will be one of those annoying enviable couples who are still living on their own at 85 and power-walking around the neighbourhood every morning.

In the next post, I will discuss my investing style. Thank you for reading. Comments are welcome.

4. How I achieved financial independence: Vision – Plan – Action

3. Getting started

My path to financial independence began when I started my first professional job. I had taken time off during university to travel and work overseas. When I started work, I found that the work was interesting, challenging, and worthwhile, but I kept thinking about all of the amazing places I went and the amazing people I met when travelling. I felt that a few weeks of vacation here and there would not satisfy my wanderlust, and began working on a spreadsheet (so long ago, it was probably in Lotus 1-2-3) to see when I could retire and travel full-time.

By starting with income of A, assuming it would increase at rate B, savings of C, assuming that would increase at rate D, return on income of 8%, income needed at retirement of E, inflation equal to F, etc., I came to the conclusion that I could stop working for money at 52.

This put me on a different path from my colleagues. While I now see a large early retirement/financial independence community online, and a smaller “extreme early retirement” community, when I started working, I only knew the standard model of working until you’re 65, or taking early retirement a few years before that. In the 1990s, London Life was so successful with its “Freedom 55” advertising campaign that it became a catch-phrase for early retirement in Canada, and other financial planners criticized it for promising something the company couldn’t deliver.

In the public service, people work toward their “unreduced pension” date, i.e., the date at which you can retire with a full defined benefit pension. “Factor 90” is an important concept here. When your age (minimum of 55) plus your years of service equal 90, you can retire with a pension equal to 2% times the average of your best five years of salary. It is a pretty good deal. You do pay for it – typically 7-9% of your salary comes off your paycheque to go into the pension plan, but you end up with a fixed, certain and indexed pension.

By planning to leave at 52 in December 2017, I would never qualify for this great pension, but only a fraction of it, delayed, and would have to make up the difference through private savings.

So I began plowing everything I could into a Registered Retirement Savings Plan (RRSP, like a traditional IRA in the U.S.), and some more into a taxable account. The latter was earmarked for taking a year’s leave of absence at some point to travel.

I never wrote out a budget, because I just wasn’t interested. I admire people who do, but I know that I would not follow it. What I did do was set a savings target every year and tracked my progress towards it every month. Every year, I set a higher target than the last, always keeping my eye on the prize at the end – financial freedom.

I bought the hot mutual funds, and paid only scant attention to MERs. I tried to time the markets. I switched back and forth. I put money into a Japanese fund when that seemed to be a good idea (it wasn’t).

Best laid plans… not very much went according to plan. My salary increased faster, through promotions. 8% return turned out not to be realistic. I bought a house to live in and rented out parts of it. I fell in love with a man in another (more expensive) city where I had grown up, and moved there. We bought an apartment together and exchanged rings, so the year’s leave of absence idea went out the window and the travel fund became a general financial independence fund. I got involved in a lawsuit that dragged on and on. I tried my hand at consulting, tempted by the big money. But I didn’t find it fulfilling, so I found my way back to the government, accepting the large pay cut as the price of having rewarding work. The law was changed, so we got married. I finally clued in that mutual funds are a bad deal, stopped chasing the elusive winners, and switched my investments over to exchange traded funds. I began learning about income investing, and started slowly shifting money into dividend stocks and REITs.

When the lawsuit was settled, I took that money, and the remaining money I had in exchange traded funds and put it entirely into dividend stocks and REITs, having developed enough comfort with income investing.

With the legal uncertainty out of the way, and a definitive investment income stream developing, I could now turn my attention to concrete planning for financial independence. I developed a new spreadsheet that factored in pension, OAS, CPP, investment income, withdrawals from different accounts and built in a tax calculator. It is a pretty impressive thing, IMHO. There was no question that Spouse and I would finish work together. I know that lots of couple retire at different times for a variety of different reasons. But since we are both eager to be done with jobs, and we want to travel together, both leaving at the same time makes most sense.

My first cut at our joint financial independence plan had us leaving work in June 2019. Not far off from my original plan. How much money we would need in retirement was a pretty random number, to be honest. I really had no idea how much we would need. (I’ll write a separate post on that issue.) The plan had a lot of placeholder numbers and assumptions in it. As I developed the plan further, and replaced guesses and assumptions with real numbers, I found that we could quit work earlier. Spouse leaves the financial planning up to me (and I don’t have to worry about any technology in our home – yes!), and was quite amused at how long I was spending obsessing over my spreadsheet. He was quite happy though, when every so often I would announce that I had moved our target date six months earlier. And I was increasing our projected income in retirement, too.

In 2014, two things happened. The first was that I got a job I had been pursuing for two years, giving me an opportunity to do something very different and exciting. The other was that I decided I had to stop adjusting the date, and settled on June 2016. That would give me a little over two years in the new job, and allow me to feel that I had fulfilled my commitment to my employer.

Since then, during a couple of times of high-stress, I have a cut a month off, so now we are planning for April 2016.

In the next post, I will discuss how I achieved my vision of financial independence by developing a plan, and taking action. Thank you for reading. Comments are welcome.

3. Getting started