Wednesday, March 7, 2012

Early Retirement

Many of us would be thrilled to be able to retire from our regular 9-to-5 jobs long before the standard retirement age of 65. There is a vibrant community of people dedicated to finding a way to retire when still quite young. However, most of the early retirement enthusiasts have plans without a large enough safety margin to suit me.

One blog dedicated to early retirement is Canadian Dream Free at 45 run by Tim Stobbs. Stobbs has a detailed plan to retire at age 45 on savings of $1.1 million. He and his wife plan to live on $2000/month, which sounds low, but they “both plan to do some work on the side after pulling the plug to fund some luxury items and trips.”

Most readers of this blog who plan to retire early and have described their financial plans online expect to have roughly the same low spending levels as Stobbs, seemingly without the plan to work on the side. In general, these plans look quite realistic as long as these people are able to keep their costs down to the planned levels.

I definitely understand the desire to leave the rat race and enjoy life. For several years I did consulting work that paid sporadically and gave me tremendous freedom. However, even though I have a larger net worth right now than most of those planning early retirement expect to have when they retire, I continue to work.

This is in part because I enjoy the type of work I do, but it is also because I’m quite conservative about my possible future spending needs. I had been thinking in terms of being able to spend $5000/month (after taxes). When I was young I lived extremely frugally, and I know I could do this again, but I don’t think I want to. There is also the possibility of age-related health issues leading to increased spending.

Some time ago I made a projection based on conservative spending needs and conservative investment returns, and I found that there was a risk that if I retired immediately, I might run out of money some time in my early 70s. I have very marketable skills right now, but I doubt that employers would be as interested when I’m over 70.

So, while I wish the early retirement crowd the best of luck with their dreams to amass the lump sum they think will allow them to retire permanently, I will work toward a larger lump sum.


  1. Would that be $5,000/month pre-tax, for a 2 person household, & assuming a paid-for residence?

    (Although I have been extremely interested in these types of estimates and have been collecting examples, I find that one or more of these important qualifiers are usually left out, reducing the value of the information)

    I personally am targetting 80-100k per year pre-tax for our 2 person household, but allow 24k for "shelter costs" since we may be abroad and could be renting. This seems supportable with 1.2million + 34k defined pension + cpp + oap (I assume will get 80% of the cpp/oap)

  2. @Anonymous: As I said in the article, I'm targeting $5000/month after tax. Eventually it will be a 2-person household, but for now there are 4 of us.

    How much income $1.2 million could create depends in part on how long it has to last. I've been thinking of a withdrawal rate between 3% and 4%, but it could certainly be higher for someone who doesn't retire until 65.

  3. I was in a rush to retire not so long ago. Turns out I just really dislike my job but I'm in love with the money I make.

    I watched the clip on Tim and the other posters from his site on CBC

    After watching the part where Sheryl is sitting at her table and the interviewer says, "she doesn't go out much and she clips coupons" it really hit me like a truck.

    Is there any point rushing to retirement by staying home and clipping coupons only to stay home and clip coupons on a full time basis? What if you scrimp and save your whole life just to kick the bucket a few days before you were about to retire at 45?

    I think it boils down to finding a balance. Enjoy life, but be smart with your money so that you can at least quit your hectic job and get paid less to do a job you love. That way there is no reason to rush to your retirement.

  4. @Steve: Like a lot of advice, I suspect that the wrong people will embrace yours. Those who live a painfully miserly existence will likely reject your reasoning even though they would do well to listen. Spendthrifts will likely agree with you as a justification for continuing their wasteful ways. We need some way to get certain peole to listen to you, but not others.

  5. If you don't like your job, switch, life is to short to stick it out. I am lucky that I like my job, I love my wife and kids and plan to live long. Just started in the 50's and planning to retire at about 60 or so with 2 million invested. The way I see it, at 3 or 4% revenue per year and life expectency of 85, that is the majical amount for me. Frugal living and financial planning.

  6. @Anonymous: I definitely agree with you about working at something you like. Sadly, many people feel trapped in their jobs because they've built up a lifestyle and debts and can't afford even a small drop in pay if they switch careers.

  7. @InsureCan: On one level, I agree with you -- I can't see getting up in the morning with a plan of doing nothing all day. However, my wife and I both like coaching youth sports, and we have volunteered in other ways with youth sports organizations. It wouldn't be hard for me at all to fill my days with rewarding activities that don't necessarily pay any money.

    Even as I age I still like doing some training myself so that I can play sports. Having a flexible schedule is important for me to be able to get adequate exercise. I doubt that I would ever be significantly less busy, whether I have a full-time job or not.

    1. The comment above is a reply to InsureCan's comment:

      I've noted this before, but I'm not sure that I'm going to pick a date and 'retire'. To do what, golf? I hate golf.

      I may start changing my work/personal balance a bit in 20+ years, but I fail to see the attraction of getting up in the morning with no plans of working.

      Perhaps if we're getting up wanting to not work, we're in the wrong job. And that can be fixed long before we retire.

  8. As usual; these Retirement blogs and comments leave me to wonder: Don`t you know yourself well enough by this age to make basic decisions? Retire early or later or never?

    This is not rocket science, but self-knowledge.
    If this has not been understood by now, you will not get it from heaven or any financial advisor`s blog.

    Take a deep breath, look at yourself in the mirror,
    What you see is what you get. Nothing right or wrong, it just is.
    Enjoy whatever decision you arrive at in front of the mirror.

  9. @Anonymous: I agree that making decisions about early retirement requires self-reflection about what you want to do with your life, but I think there is much that people can learn from blogs about what your planned lifestyle will cost and how much it takes in savings to be able to afford the life you want.

  10. This is a very simplistic approach, but with 1.2 million you could do something as easy as invest it in the BMO monthly income fund. Every 100K nets you a monthly dividend of $670.00. If we multiply that by 12 thats $8040.00 pre tax a month. You would never have to touch your 1.2 Million.

    I'm not recommending the fund, just when you have that kind of base to work with there are some really easy options for anyone.

  11. @Paul: I think this is likely to be a very bad idea. BMO's monthly income fund has an unsustainable payout combined with a high MER. When you look at charts of its growth, they assume that the distributions are reinvested. If you spend the monthly income, then you are digging into your principal. This means that your monthly payments are likely to drop over time.

  12. We too plan on retiring early, but will have more than a million in investments and will have ongoing rental income.
    I think we all need to OVER estimate how much we will need in retirement - because of inflation! While $2,000 a month right now might be fine... twenty years from now it won't be.

  13. @Julie: You make a good point about inflation. I tend to think about real returns when I plan a withdrawal rate, so I'm implicitly assuming that the $5000/month that I seek will rise with inflation.

  14. "There is also the possibility of age-related health issues leading to increased spending"

    And not only your own health; my parents have spent a lot due to their own parents' poor health - not just obvious things like having to put them up at times, helping with the cost of prescriptions, and a couple of cancelled vacations, but many small things like last-minute taxis due to emergencies. My inlaws have spent an enormous amount helping an adult child with cancer get the treatment he needs in a better hospital in the US.

    I think I would love to retire early. I'm taking a 6 months sabbatical this year which will test that to a degree. That said, someone on the Star's comments section said that Stobbs is going through a public career change and rebranding rather than an early retirement, which seems right to me.