Monday, September 10, 2018
Is Early Retirement Possible?
When I sit down with a new client for the first time I always end our conversation with a question on retirement. The question, “When do you want to retire,” always brings up a broad range of answers. I hear things like, “I don’t think I’ll ever be able to retire,” or “As early as possible,” or the ever-popular “Freedom 55.” The truth is most people do not know when they will retire. Most people do not have the defined benefit pension, which leaves them a bit confused as to when the best time to hang it up is. Most people these days do not even think early retirement is possible. It is this kind of sentiment that leads people to not save at all for retirement, 32% of Canadians aged 45-64 have no retirement savings. While I am not here to blow smoke up your behind, I will tell you that early retirement is possible. In today’s post, I will explain my thoughts on early retirement and what you will need to do to achieve it. We must wrap our heads around the concept for it even to be a possibility because otherwise, we will end up like that 32 % of Canadian’s.
Early retirement is not normal, so you can’t be normal
What’s normal and why isn’t early retirement normal? Here’s what’s normal these days:
Long Lifespans: The average Canadian female lives till age 84, males 81
Debt: The average Canadian has over 20K in consumer debt
No Security: The average Canadian will change jobs more than 4 times in their life
More No Security: The average Canadian has less than $1000 in emergency savings
Even More, No Security: The average Canadian does not have a workplace pension plan
All of these things add up to a situation where early retirement becomes an aberration, not the norm. When you take each of these problems that exist, a solution seems improbable, if not impossible. I am not going to say it is easy, because I know it is not, but it is definitely not impossible. Let’s go one by one:
Long Lifespans: We are living much longer than our parent’s generation, so we must plan for it. This is part of the reason for the decline in the workplace pensions. People are now living too long for employers to cover them in retirement and still maintain profits. We see our grandparent’s living to a ripe old age, logically so should we. It isn’t a mystery.
Debt: No one forces us into debt, we do it on our own. I can find any number of excuses as to why I racked up over 50K in debt. Health, education, the government, family. The truth is it was my poor decision making and neglect that led to it. Logically if I put myself in that position, I could have not put myself into it or I can (and did) get myself out.
No Security: It is no surprise that jobs are becoming more fluid and we need to guard against it. How do we do that? Plan for unemployment. It sounds weird but it makes complete sense. Anticipate you may not work in the same place forever and plan accordingly.
More No Security: Just like no one forces us into debt, no one forces us to not save a penny. We choose to save or not to save on our own. We can control what we spend, and we can control what we invest.
Even More, No Security: We know that the workplace pensions are gone or almost gone. It is on us to navigate our own retirement and in all reality, we are better off. We will not be dependent on something that might not be there when we need it most.
So back to the bullet point, “Early retirement is not normal, so you can’t be normal.” What that means is that you will have to sacrifice. Early retirement is a value, meaning it is something that you must believe. Do your habits match your values? Let’s find out.
It Requires a plan
It has been said, “You never plan to fail, you merely fail to plan.” Every morning team members get together at workplaces across the country and plan their daily actions. Something as grand as a lifetime of work that leads to early retirement should require the same scrutiny. The nonchalant response I get when I ask the question of my client’s, “When do you wish to retire,” is troubling. It appears that almost no thought has been put into it at all. Whether you write it on a napkin, or in a 50-page financial plan binder, you must think about an early retirement plan. Pick a date you want to dip. Know that the date will most likely change, but at least you have set a target. Find a number that you can live on comfortably in retirement. Know that those numbers will change as well. Take some time and write down, with a pen or pencil, what you think retirement will look like. Remember that if you don’t know, how is anyone else supposed to.
The numbers aren’t complicated
When you have picked your retirement date, and what you need to live on per year during retirement, it isn’t that complicated as we make it out to be. Let’s go over a quick example:
John (Bookkeeper) and Jane (Real Estate Appraiser), both age 35, combined income 100K
They want to retire at age 60, so 25 years from now
They want to live on 70% of their current income in retirement, so 70K annually
To plan to age 90, they will need 2.1 Million dollars to achieve this
See that wasn’t so complicated right? Well, kind of. The big question is: How do we save up that much? It certainly seems like a lot of money. It is a lot of money, but how you get to that number may not be as tough as you think.
Part of your retirement income will come from government benefits which should provide John and Jane 30-40K annually, but let’s say 30K. So, they will only need 40K annually to reach their goal.
In order to generate 40K annually for retirement savings over 25 years, age 35-60, they will need to save 1.4 million by age 60. If a 7% rate of return is achieved, they will only need to save $17,868 combined annually. That is $8,934 each per year or $343 per person per paycheque, (26 pay periods per year).
That seems a bit more reasonable, right? Well to me it does. The tough part of it, which shouldn’t be tough at all, is finding a way to live off the roughly $5,000 monthly that they will net after taxes and savings. Remember what I said to start with: “Early retirement isn’t normal, so don’t be normal.” The average person in John and Jane’s position won’t save that money and therefore won’t retire early.
Retirement doesn’t mean not working
John and Jane might not even need to completely retire when they retire. They may not even want to. Imagine John and Jane both work part-time during retirement bookkeeping and real estate appraising, earning roughly 10K each per year. That would mean each of them would only have to earn roughly $800 a month or about $200 a week. They would then only need half of their desired retirement savings to live comfortably in retirement. This picture is starting to look a bit more promising now, isn’t it? The average person doesn’t fully retire when they hit retirement age. Most still earn a part-time income to supplement their retirement savings. Those side-hustles you roll with during your working years could end up being your primary job later in life.
It’s all on you
Let’s get to the moral of the story. The reason why the answer I get, when I ask the retirement question to my clients, is usually vague and pessimistic is that most people have not truly thought about it. The secret to retirement planning is simply to act intentionally towards your retirement goal. John and Jane save $343 dollars each per pay and that is their intentional action. Oh, by the way, if their company matches part or all their contributions, they reach their goal sooner. If they invest in a rental property or several, they reach their goal sooner. If they pay off their home quickly, they reach their goal sooner. The key is, they must act on it. No one is to blame and to be honest, no one else gets the credit when they succeed. We need to escape the mentality that someone else is in control of our lives. While we while never fully dismiss outside factors (jobs, family, the government, etc.), we can mitigate their effects so as lessen or neutralize their hold on us achieving our goals. The recipe is so simple it hurts my brain:
- Maintain positive cash flow through your lifetime (spend less than you make)
- Save and invest the difference (Long-term for growth)
- Guard against disaster (Protect your assets and income)
- Pay off your home (As soon as possible)
- Live within your means and sacrifice for what’s important (Seriously, just do it)
If your family is important, act like it. If your home is what’s important, act like it. If financial freedom is what’s important, act like it. Words are just words and let’s be honest, love isn’t everything. While you may say you love yourself, your family and your future, do your dollars align with that love? In my opinion, your dollars acting intentionally is the ultimate way of showing your love. Your dollars acting intentionally is the only way to retire early, period. And it is possible, just so you know.
“For many people, being asked to solve their own retirement savings problems is like being asked to build their own cars.” – Richard Thaler
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