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.
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.
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
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 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
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 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.
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
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?