Achieving Financial Independence

Achieving Financial Independence
 

A while ago, I started my financial independence journey and set sail towards my early retirement with a goal of $2M in family net worth. Once I started this journey, I met a variety of people from bloggers, to families and friends to the casual strangers on the way. Very often, I would get either a skeptical or an astonished reaction when I tell people that I can and will be achieving Financial Independence and Retire Early (FIRE) by the age of 48. I called it my Freedom 48. I just turned 25 for the fifteenth time last month, so I am about 9 years away from achieving my FIRE goals. For this post, I will share my navigation plan to reach my FIRE destination.

 
My Retirement Hobby

What Will I Do After Achieving Financial Independence?

Many people think that by retiring at an early age, I will be bored because I will have nothing to do or don’t know what to do. On the contrary, I know exactly what I wanted to do after achieving financial independence. I will stop working for money and I will be pursuing my hobbies or passions with my new found freedom. For now, one of my passions is the Stock and Real Estate Market where I love to invest my time and money in. My other passion is the ISaved5K blog, where I enjoy sharing my thoughts with anyone who’s interested in personal finance. Recently, I’ve also picked up a new hobby by building custom wooden planter boxes (this will be discussed in a later post). I can definitely find an abundance of activities that I enjoy doing and to keep myself occupied.

 
Running Out Of Money

Am I Afraid Of Running Out Of Money?

Yes, I do have this fear. I would be lying if I said that I am not. However, this fear can be managed and mitigated in many ways, which I will be covering with a few strategies. The first is to make my money lasts for 51 years by stretching my money. I honestly don’t have the desire to live for a whole century. The second strategy will be to pay less taxes during my retirement years. Wait for it, I have a plan to pay zero income taxes with my six figure family retirement income (legally). The third strategy is to generate additional sources of income with my hobbies/passions.

 
Stretching My Money

Stretching My Money

Earlier this year, I had a fun experiment to see how far I can stretch my $25 dollars. I was able to get seven delicious meals and six desserts. So one way to make my retirement money last longer is to either get more for every dollar that I spent or paying less and get the same quantity of items by buying things when they are on sale. Another way to stretch my money is to do things myself like cooking my own food and fixing things around the house. With all these free time, I don’t think it will that difficult.

 
Growing Your Own Food

Growing My Own Food

This doesn’t seem like a very difficult task as I have a few things working in my favour. I have a great size backyard to plant my own fruits and vegetables. On top of that, I already have lots of fruit trees/bushes planted in my backyard that will be bearing fruits for years to come. I have been quite successful with growing my own food for the last ten years. This would make growing my own food during retirement a breeze.

 
Managing My Expenses

Managing My Expenses

I must admit that I currently have a pretty high annual family expense budget of approximately $100K compared to other personal finance bloggers that I follow. A huge part of my annual family budget ($6K for public transit, $15K for my kids’ daycare, $6K eating out) were spent on three items. When I retire in nine years, I can easily reduce these expenses by at least $20K. I don’t have to commute to work on a daily basis and my kids will no longer be in daycare. I can also get rid of one vehicle that can save me at least $5K per year. Hence, I’ll need about $75K per year in after tax income at retirement.

 
Income Tax Efficiency

Income Tax During Retirement

Based on a recent article at Financial Post, if an individual earns $50K in Canadian eligible dividend income per year, then that person pays no income tax. Since I am married, between my wife and I, that amount increase to $100K per year. It will be difficult for me to narrow our income to just one source to take the full advantage of the tax breaks. It will also be unwise to get rid of the other sources of income (rental property, options contracts, Real Estate business, capital gain, interest, foreign dividend, blog) that I have worked so hard to diversify. However, this is a great place to start to pay less income tax and keep more money in my pocket. It’s a good problem to have.

 
Retirement

Important Retirement Numbers

The two most important numbers for my early retirement are $75K and $100K. If I have about $75K in after-tax income per year, then I can live pretty comfortably. As long as I keep all my sources of income to around $100K, then I should have no problem funding my retirement. Another number that personal finance bloggers like to use is the 4% drawdown rate. This means that I will most likely not run out of money during retirement if I take out 4% of my $2M savings on an annual basis to fund my retirement. However, I have a different view. I believe that I can generate a decent 5% return annually on my net worth of $2M, which is $100K. So I don’t need to deplete my net worth and my $2M will last forever. Or until I die.

 
Room For Error

Room For Error

There are two sources of income that I rarely talk about as I don’t like to count on these to fund my retirement. I have a love-hate relationship with the Canada Pension Plan (CPP) benefits and Old Age Security (OAS). Both my wife and I qualify to receive these benefits because we are Canadians and had been paying our CPP contributions because we work. Based on the 2017 estimate, the current maximum CPP benefit is $13,370 and OAS is $6,942 per year per person at the age of 65. Let’s assume that my wife and I get only 50% of the benefits when we are 65. This still equates to about $20K per year, which means we only need about $55K of income per year till we die. As a result, I only need to earn less than a 3% ($60K) return on my net worth of $2M. Oh, I almost forgot to mention that we’ll also get pension payments from our employers. With these extra money, I will have a bit of wiggle room for error if my investment is not performing that well during retirement years.

My Two Cents

Whether you want to retire early or at the normal age of 65, it’s important to know your financial numbers. When you have a good grasp of the amount of money that you need to save in order to achieve your ideal retirement, you’ll have won half of the battle already. The second half of the battle is to start the journey towards your destination. There will be bumps along the way, but with a map to guide you, it’s only a matter of time till you reach your retirement destination.

 

So, when do you plan to retire? Do you know how much money you’ll need to save to have a comfortable retirement?

 

Leo T. Ly, Canadian Personal Finance Blogger/Enthusiast and a Realtor Living in the Markam, Ontario, CanadaAbout Leo
I am a Canadian personal finance blogger/enthusiast and a Realtor living in Markham, Ontario, Canada. I built a net worth of a million dollars over a ten year period. I did it by being a disciplined saver, taking advantage of income tax rules and borrowing money to invest rather than for consumption. I am often excited to take advantage of free money from employers and governments in addition to building more passive income sources. After accumulating my first million dollars, I am now embarking on a second journey towards achieving financial independence. On this journey, I will strive to increase my net worth to two million dollars and retire by the age of 48 - Freedom 48. Come along and follow my journey on Facebook, Twitter or Google Plus.



There are 58 opinions expressed on this post.

  1. I don’t know when I will “retire” since I’m only 25, but I have plans in the next 5-10 years to become financially independent so I can do what I want with my time. I’m trying to build multiple income streams… it’s going slowly, but my situation is improving each month!

    You will get there sooner than you think! $1.3M to $2M could come faster than you expect!

    1. @Erik, I definitely agree. It takes me ten years go from $0 to $1M. However, from $1M to $1.2M takes less than a year. This is due to a great run in the stock market for the last year. I don’t expect this to last forever, but I am actively managing the down side risk.

  2. @ Leo, $75k/yr in retirement at age 48 – add to that inflation, I just can’t imagine how much per year that will be when you are 96 years old.

    In retirement….

    Do you plan on living in the same property you are in now in the same town/city?

    Will you be empty nesters?

    Will your lifestyle totally change & are you able to adjust?

    Will your travel budget increase?

    From the many blogs around I have read I see that many younger FI with children live on less than $75k, even ones in the US where they need to pay huge medical insurance premiums

    To the want to be FI, “Will you run out of money” or need to have a side business or hobby that produces passive income – that is a very good question.

    1. @John, I do plan to live in the current home that I am living in. By 48, I think that my kids are not independent yet and they still have a couple more years before going to University. I think that my lifestyle will change a bit and I will want to travel a bit more.

      Now the $75K in income is just all passive, I have not accounted for any side hustles yet. Knowing myself, I am too competitive not to try and earn any money actively. Even earning an extra $10K for my side hustle is very doable especially if I have all the free time.

    2. @John, I can really imagine how much it will be when I reached that age either. However, based on my projection, by the time I reach my 80’s, I don’t think I’ll be spending that much. Worst of all, I may have to withdraw from my $2M pool of retirement money. Hopefully, I don’t need to use all of it.

      For me, I do plan to live in my current house as I love my backyard and the stuff that I can grow back there. I know that nothing is set in stone and things can change from time to time. I hope that I will be ready if there are any changes.

  3. Dear Leo,

    Great breakdown on your plan. Looks like you’ve thought of everything.

    Personally, I would depend on my company pension less than CPP and OAS (I used to work for Nortel Networks, but they’re not the only ones, hello Sears), although I agree that things will likely change with them before you turn 100.

    I too am afraid that we won’t have enough money. However, the alternative (as I see it) is to work until I die and see if I was right or not. Since I’m not willing to do that (I “retired” in 2005 and have never gone back), then I have to make the best choices with the information I have at this time.

    Currently, our non-registered and TFSA accounts generate 75% of our (forecasted) required income. My husband will start collecting CPP in January (aged 62) and child benefits (we have two young kids) will pay the rest. He will start collecting OAS at 65.

    This assumes no additional passive income (we generate ~10% without even trying), capital gains/growth in dividends, the sale of our house (we will rent a family members in exchange for maintaining it) and that we currently do and will continue to spend almost half of the year living in Mexico.

    Having 25% be dependent on social securities is kind of scary, especially since the child portion will expire when our kids reach 18, however, wen’re not getting any younger and one never knows when the proverbial bus will come.

    I’m looking forward to your ideas about ways that I could firm up our future even more.

    Sarah.
    Sarah De Diego recently posted… Experience the Arts at a @ShawTheatre Play #HamOnt #NiagaraMy Profile

    1. @Sarah, Depending on CPP, OAS or company pension is not in my plan when I retire. I think that those three items are just icing on the cake. When I calculate my retirement income, I don’t include those at all because it’s too unpredictable. I am a control freak and I need to be in control of certain things. Retirement income is one of those things that I want to make sure that I have full control.

    1. @Brad, 3.5% is a good withdrawal rate. If I can, I would like to have a rate of 0 to 2%. Preferably the number is 0 so my money will last forever. I like the idea of increasing my budget if my investment grows faster than my withdrawal.

  4. I just retired a little early a couple of years ago and I wouldn’t be surprised if you find out what I did. Boredom? Well not a minute of it so far. Money, well I can’t seem to not keep making it. I’m only working two days a week from home and occasionally traveling at four side gigs but without even trying they are making over six figures so while I feel retired I’m not spending anything out of my retirement investments. Add on the seven or so non paid volunteer side gigs I pursue because they are helping other people. Also add in my wife’s and my distance running, tennis, hiking, off roading, traveling, fishing and the meals we cook together and I don’t see boredom as ever happening. I highly recommend having some paid side gigs to keep your mind challenged and because if you stay involved then you’ll always have a network to use to get re-employed should, somehow, the money run short. I find making money is so much easier once I totally stopped needing to make money!

    1. @Steveark, it sounds like you have a great gig going there. I would love to work two days a week when I reach financial independence and make half of what you make. That’ll be more than sufficient for me to live a luxury life. I also have the save view regarding the net working piece. I would love to continue blogging as long as I can and let see where it will lead me after I reached financial independence. Welcome to the I $aved $5K personal finance community btw.

    1. @J.Money, thanks for dropping by. I just came across your side hustle post. It’ll definitely be very useful for me when I reach FI. I would definitely want to try at least one side hustle on your list.

    2. @ J Money, interesting, very interesting blog you have, especially in the investing tab on the Morgan Housel interview.

      https://chrisreining.com/morgan-housel/

      I thought it was only I that subscribed to the simple investing of ‘fewer & less’ investments/holdings’ is best.

      I also liked his two book pick

  5. I thought I had a pretty good idea when I would retire however with us having more kiddos and then with healthcare a bit up in the air, I am holding off to get a better gauge. I don’t want medical premiums to potentially put me in a bind in the future. So while I thought four years from now I have a feeling it might be slightly longer 🙁
    Mustard Seed Money recently posted… How Fast Can You Make A Million Dollars?My Profile

    1. @MSM, I definitely agree that kids are expensive and they can eat up quite a bit of your annual budget. As for medical cost, I feel pretty fortunate that health care in Canada is almost free if you live in the country for more than half of the year.

      I feel that once I am getting close to the last year or two before I reach FI, it would feel pretty stress-free as I know that I will have the freedom to do what I love.

    1. @Heather, even if I am retired, it’s definitely prudent to keep your mind challenged and body active. Hopefully, we don’t have to resort to working to keep ourselves alive and I think I found a way. Follow our passion and do what we love during our retirement years.

  6. I don’t know when I’ll retire. To be honest, considering, I want to make blogging and writing my career, I am not sure I’ll ever retire. And if I retired early, I am afraid i’ll be bored or would know what to do or would be watching all my friends still working so not sure i’d like it. xx corinne

    1. @Corine, many people think that retirement life is when you don’t work. For me, I don’t think that’s my definition of retirement. I think that I will still be working at some capacity, but I get to chose what I do and when I am doing it. Achieving financial independent will give me the choice to choose what I want to do with my time.

  7. These thoughts do cross most people’s minds at some point of time or another. It is important to be financially independent. However, each one has their own means of achieving it. While some choose to retire early, the others love to keep at it for as long as they can.

    1. @Lyf&Spice, I do agree that everyone is different and each person approaches retirement/financial independent at a different pace. I strongly believe that regardless if you like to work or not, achieving financial independence as early as possible will give you many choices. Having choices is great.

  8. I loved this inspirational post about achieving financial independence. Right now I am smack in the middle of working toward my own FIRE goals. My strategy is to elevate my blog and websites to new heights to develop a steady stream of residual monthly income. My husband and I are also investing in real estate rentals. The key is in diversifying income streams and having more than one solid backup plan.

    1. @Danay, using your blog to add another stream of passive income is a great idea. The more income streams that we have during retirement, the lower the chances that we’ll run out of money. Adding real estate to the mix sounds like a solid plan. I am pretty much doing similar things currently and I would love to exchange ideas with you.

  9. I must say very inspirational post about achieving financial independence. Truly life is so busy that actually I forgot about being retired or retirement life. It’s a good reminder for me.

    1. @OWM, with today’s fast-paced world, many people are very busy with work and everyday life. If we want to retire comfortably, we must have a plan and set goals on how we can achieve those goals. I would encourage you to start as early as you can.

    1. @Terasa, I am happy to have stirred your interest in retirement and got you to analyze the pro can cons. The important thing to realize is that you are in control and you can control many factors and tailor it towards your strengths.

    1. @Ankita, the way that I look at my retirement is to reflect on the activities that I enjoy most, but don’t have the time and resource to do it now. Many people think that all the leisure activities that people enjoy cost a great deal of money, but it doesn’t have to be that way. Some activities, you can enjoy and make you money at the same time.

  10. Wow, it sounds like you have your finances all figured out. That is fantastic.I seriously need to start budgeting and planning too. Thanks for these guidelines, will help me a lot along the way.

    1. @Kimberly, when I realized that I can retire in nine years, I was more motivated than ever to push harder to save and grow my money. It really gives me a sense of direction and something to look forward to. I would recommend that anyone to go through the exercise to see when they can retire. I became relatively happier once I worked out my numbers.

  11. This is a very important topic that we all need to treat with uttermost priority cause a time will surely come in one’s when he or she will become weak physical and will then resort to the fund you saved over the year so starting early is very important. Thanks for sharing this..

    1. @Gideon, I definitely agree that planning and saving for the future is very important as we never know how long we can work till in our lives. Of course, we also need to be able to enjoy the money that we saved up sometime in our lives. The earlier we plan, the earlier we’ll get there and the earlier we will get to enjoy our freedom.

  12. This is really important. There comes a time in every man’s life when he must choose the course he will follow or the relentless drift of events will make the choice for him.

    1. @Nicole, I think that it’s never too soon to have a plan to achieve financial independence. Having a plan would help guide you towards achieving your goals and keep you on-track. Also, put your plan into action.

  13. We spent 10 years digging out of debt-my husband had a divorce and I ran from an abusive relationship where my exboyfriend had everything under my name. We did it though and played retirement funds right to make sure our future is set and company stocks we added too and watched to withdraw and move around at the right times. We are moving into a brand new home next week and had 40% down in cash we saved and are still debt free. It was all worth this feeling of freedom we have

    1. @Chelsea, from the sound of it, it seems like your career is on an upward trajectory. It’s definitely a great idea to direct some of the extra money that you earn to your retirement savings. If you have not been managing your finance, I’d recommend you take the time to read up on it or talk to people that you can trust to help you get started.

    1. @David, all you need to do is start growing fruits and vegetables that you like to eat. I’d recommend the types that are expensive to buy in the grocery store. Once you get the hang of growing your own food, you’ll find a way to expand your garden.

  14. This are some great tips in here. Even the stretching your money thing is something I have been struggling on. But you make some good points and while I am saving for a big trip next year I am going to start savign for retirement as well.

    1. @Jay, it doesn’t matter if it’s stretching your money or saving for retirement or saving for a big purchase, everything comes down to money habits. If you work on developing good money habits for the long-term and develop the discipline to manage your money responsibly, chances are, you will end up financially sound in the future. So start saving for retirement as soon as you can.

  15. I have no plans to retire. I love being actively engaged in work I love and even though there are thousands of things we can do as retirees, I’d love to stay active.

    1. @Elizabeth, it’s great to enjoy what you do for a living and continue to do as long as you can. I wish I can follow my passion once I reached financial independence and do what I love for the rest of my days.

  16. Great post Leo. And nice boxes! Cedar? Like you I don’t depend on CPP and OAS. I think the baby boomers will deplete that and we will be left with an iou. Happy bday btw!

    I would like to “retire at approx 50 and move to a lake as long as a hospital is somewhere nearby. Of course, the wife might have other plans. I dunno if she would like to move away from family altho its only like 2 to 3 hrs. 1.5mil should be plenty to support the dream but id love to give so would prefer more. Keep living the dream!
    Passivecanadianincome recently posted… 52.88, 47.36, 41.39, 34.88 – SOLDMy Profile

    1. @PassiveCanadianIncome, thanks for the birthday wish. For non-edibles, I’d use pressure treated wood as it’s cheaper to build the planter boxes. For Fruits and Veggie, I’d use the Cedar as there are no chemicals.

      It’s also my dream to retire with a piece of land right on the lake where I can grow my own food and spend some time to fish. I can have both fun and food for free :).

  17. I don’t think early retirement is boring! And considering your rather lucrative hobbies, I think you’ll be fine. I would love to be able to grow my own food, and I’ll be hopping over to that stretching a dollar post because unfortunately I live that way by necessity, and I need to be better at it. I really hate being poor! One request I’d make, on behalf of the many, many people living in poverty (many much worse than me-to the point of starvation) is to use some of your money helping the poor, maybe mitigating issues like starvation, or domestic violence, which is often perpetuated by lack of income. If I ever become wealthy, which is doubtful, but if I do, I will definitely do that too :)
    Elizabeth Brico recently posted… 12 Science Fiction Books To Add To Your Mental Health Reading ListMy Profile

  18. Hi Leo
    Just found your blog 2days ago, l have finished reading most of it. Congralutions on achieving so much these 10 years. I think most of the readers are afraid doing their own investing or do not know where to begin , fear is the main thing. Have you considered in the future posts , you might want to write about investing? Many thanks

    1. @Sor, welcome to the I Saved $5K personal finance community. I do agree that many people are afraid to invest as I think that it has to do with confidence and knowledge. I have written a few posts like “would you borrow to invest?” and “The Third Step To Saving A Million Dollars” to encourage people to invest. However, I have not done a post to specifically address people’s fear of handling and investing their money. In addition, I have not written many basic posts to get people started with their investments. I will write a few posts in the next month or two to address this. Thanks for the recommendation.

  19. Hi Leo
    Thanks for the reply. I read a lot of blogs that do readers case studies and really enjoy it. For example, let say a couples decided to take an early retirement at 50 years old. They are self employed all their life. All they have are two paid off house worth about one million and emergency fund $50000 in saving account earning about one percent. Currently working part time making about $2000 a month. Let say they want to fully retire in 2019, and are thinking to move to Taiwan to retire because living cost is cheaper there. Currently they lived in California and monthly expenses is about $3000.
    They lived in one of their bigger house and the smaller house is rented out. They can received $ 1300 per month after all the expenses. If they rent out the big house then they can receive$ 1800 per month after all the expenses. Since they decided to move to Taiwan for their retirement , they are debating whether to rent out the two houses and received total of $3100 or sell one of the house and put $200,000 in low fee vanguard for 20 years, and the rest put in CD for a years first then decide what to do later. They not sure if they should go ahead sell the house and do the investment, hoping will earn them more money than renting. Or be safe continue to receive monthly renter income. They want to make sure that they will have at least$ 100,000 saved before they leave for Taiwan. Their expenses in Taiwan is about $2000 per month, which will come from one of the renter income and social security.
    They know what they want and their plan will be but would like to hear from you and readers to help them.

    1. @Sor, the information that you provided on this hypothetical situation is great for a study. However, it would be inappropriate for me, a Canadian to provide advice to Americans as I have minimal knowledge of the tax system and retirement benefits there. With that being said, If I am in the situation described above, I will consider the following:

      1) When I am retired, two of the most important factors that I will be scrutinizing closely are income consistency and income tax efficiency. I want to make sure that I minimize the fluctuation of my income streams during retirement. The income stream that I am receiving should keep more money in my pocket as I want to pay the least amount of tax.

      2) If I am going to retire abroad because of the cost of living, I want to know what is the healthcare quality and cost, the standard of living and the currency risk for the other country. Will I lose my healthcare coverage if I don’t live in my country for an extended period of time?

      3) When I am retired, I need to ensure that I diversify my assets and income sources. I don’t want to count on a single source of income to fund my retirement as it will be very risky. For me, my sources of income will be: retirement accounts, rental property, employer pension, social security or government pension, and taxable account investments just to name a few. If one source of income stop flowing, I still have the other sources to count on.

      4) Management of your assets. If you are retired abroad, then how will you be managing your two houses? Or if you sell them and invest in the stock market, what’s the amount of income are you expecting to generate? In addition, do you have to pay capital gain tax when you sell the house? Can you withstand a stock market downturn and afford to ride it out if it happened?

      5) Even if I am retired, I will be working at some capacity. By that I mean I have to freedom to chose what I want to do to keep myself challenged and earn some extra income on the side. This is an additional source of income on top of what I mentioned in point #3). Do you have a similar plan as this?

      6) I would calculate the withdrawal rate for my assets during my retirement. From the numbers (assuming that you will retire in Taiwan), your incomes from renting out both houses are $37,200 (=$3,100 * 12) and expenses of $24,000 (=$2,000 * 12), would require less than a withdrawal of 4% of your asset as your income is more than your expenses as long as your tax rate is less than 33%.

      These are just a few things to consider. Hopefully, these points will lead to more questions and lead you to think of other factors that can help you better prepare for your retirement.

  20. Hi Leo,
    Thanks for your replied. You have given many useful tips here that are worth to take into consideration and investigate further. You continue what you are writing now and provide many effective and realistic ways in investing and retirement stories for your readers. Thanks

    1. @Sor, I am always glad to help. I am delighted to know that you find my posts helpful. Based on your previous request, I am actually composing a series of posts to help novice investors get their feet wet in the finance world. So stay tune :).

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