How can you get there if you don't know where there is?
If you don't change anything, will you ever get there?
How long will it take?
Are you chasing a mirage?
Early Retirement. It's a concept I'm consumed by.
5 years ago (almost to the day) I secured an internship for my first job in finance. Likewise, my girlfriend (now wife), also secured a full-time job in finance. I would end up starting in early December, while she had until January to relax. This one-month together changed how we viewed our lives forever!
We called it "our retirement life".
We met up every day. Went for long walks, swimming, and skating. Sometimes we cooked lunch and sometimes we ate at new places. And for a week we went to Las Vegas on our first trip together.
It sounds simple. But that's the kind of life we want to live. We found that out by accident and early on. Some travel with a simple life and some coffee shops in the afternoons.
The life you want to live in retirement may be different. And you have to figure that out.
For us, how much is this retirement life going to cost?
Imagine the average week. You're not working a 9-5 job anymore. You may be doing some freelance work or working on a "side hustle" . You may just wander around your neighbourhood, or do some gardening, or drive into the mountains for a daily trail hike, or maybe you'll be travelling around the world. Whatever you imagine your ideal retirement life to be, keep that image in your mind.
For us, it's afternoon lattes chatting and reading at coffee shops. Grabbing sushi for lunch or Chinese noodles for dinner a couple times a week. Cooking at home will still be in the equation because I enjoy it. Plus when we pass by a cake shop, I want to get a piece every once in a while.
But that's the home life. We also want to travel to Japan (our favourite destination), Taiwan, and Europe. Walking down the streets of Barcelona, Osaka, Taipei, Copenhagen, London...... We love travelling and seeing new things and places.
So. Do you have your image of your retirement life?
Let's price it out:
Latte every day with a pastry: $8 x 7 = ~$56/week (We like to share. If you're like Joey, then you can double this)
Lunch 3 days a week: $30 x 3 = ~$90/week
Dinner 2 days a week: $45 x 2 = ~$90/week
Total Food Cost: ~$17,000/year
Mortgage paid off: $0
Property Tax: ~$3,500/year
Utilities/Gas/Hot Water Tank/Garbage/Water/Insurance: $1,400/$900/$350/$23/$400/$1,200 = ~$4,300/year
Other Household expenses: ~$1,600/year
Total House Expenses: ~$9,400/year
Total Travel Expenses: ~$15,000/year
Phone plans: ~$2,000/year
Extended Health: ~$3,000
Total Other Expenses: ~$15,500/year
Total Infrequent Electronic Upgrade Expenses (computers, phones, etc.): ~$3,000/year
Total Expense In Retirement For Two: ~$60,000/year
Now that we know what we are trying to achieve we can work backwards to get there.
If you are not planning to make any income from a "side hustle" or "real estate rental". Then you will have to come up with the full amount every year after paying taxes. For us, it's about $60,000 a year. For two people, that's about $30,000 after tax, each. If we are funding our retirement from public company (stock) dividends we will not have to pay any tax due to the favourable tax advantages in Canada.
According to the SimpleTax calculator, I can make up to $56,480 a year in eligible stock dividends without paying any tax.
Or if we're withdrawing from our RRSP (registered retirement savings account), we would each need to withdraw $36,720 per year to net out $30,000 after tax.
So how much net worth do you need in order to live on $60,000 a year for the next 50 years.
If inflation is 2%, then your $60,000 expenses are going to be increasing over time as well.
If we get an average investment return of 6%, then $1,400,000 is the number we need to achieve before we can officially retire and do nothing but play.
But here's the thing, If you can do some work and make just 25% of those expenses a year, then the amount you need is much less. You can cut the $1,400,000 down to $1,050,000.
Let's say you own your house by the time you retire, if you have a separate rental suite, you could cover all your house expenses with one tenant. $10,000 maybe $15,000 a year after tax.
If you have a side hustle that can bring in $15,000 a year, then together with the rental suite you could cover half of your retirement expenses ($30,000).
All of a sudden your required retirement nest egg is cut in half to $700,000.
It's still a lot of money, but it's achievable.
If you want to retire in 20 years, For every $10,000 of expenses you expect to have in retirement you will need $340,000 in invested savings. To get to your goal, you will need to save $10,000 a year for the next 20 years. If your goal is like mine and you want to retire with $60,000 a year in expenses, you will need to save $60,000 a year for the next 20 years. But remember, you don't need to travel as much as us, if you take travel out, you only need $45,000. If you make a side income of $15,000, you only need $30,000.
20 years is a pretty early retirement actually. If you start at 30, you can get there by 50. Most people retire by 65. That's 15 years early.
How can you get ahead of the game?
The first step is to save your money. If you don't have money saved, you don't have choices.
For example, because I have money saved, I can choose to buy a house and make rental income. Or I can choose to buy a house, renovate it, and then sell it a year later for a profit.
When you have money you can invest in stocks. While some investments will make you money, some may not make you money. But the ones that do could make you more than the average of 6%. When you have savings, your opportunities to invest expand.
The first step to get ahead is to start saving aggressively. The reason I save money is not necessarily to retire, or retire early. It's to give myself options and choices to do the things I like. Investing is something I like, whether it's real estate, stocks, or a private business.
How can you increase your savings rate?
I have provided many tips in the last month, go back and read the 100 Dollars A Day blog
#100 Eating In, DIY save 75%, and #99 It's No Big Secret - save $2000
#94 Getting Around is So Expensive - save $5000
#93 Laziness = Burning Money - save $2600
#74 Washing Money Down The Drain - save $200
#79 Delay Gratification - Patience can save you more than you think
If you are single now, but find a spouse in the future, you will be able to share a lot of costs. Perhaps you can be like me and my wife, wherein the last 4 years we lived off of one person's income and saved the other person entire income. This really accelerated our savings.
In our retirement, we intend to settle into a house that has a rental suite in the basement, or a coach house in the back. Renting out the extra suite should give us an opportunity to cover 20-25% of our expenses. We also hope to continue to have some side hustles, like Seeking Alpha to bring in a few thousand dollars a year.
The remainder of our expenses will be paid from dividends from our stock portfolio and withdrawals from our RRSP stock portfolio.
Save Money Retire Early is written by Jon Lo, a barely 30 something change optimist, and personal finance guy. I believe anyone can be rich or poor, it's what you save that makes the difference.