I am thinking of retirement: what should I do?

Congratulations! The fact you are thinking about or asking questions about retirement is a significant step that many people are never able to get to let alone put a plan in place to enjoy.

One of the biggest questions that people have is: Will I run out of money? and how can I stress test this. Over the past few years, I have done a lot of reading and learning about what needs to be true for retirement so I thought I would share some of the resources and or learning I have gained over this time.

  • To retire, you need to understand how much you plan to spend each year. This will help you understand how much of a nest egg you need to have saved up to fund your lifestyle. As you go through many of the categories, for a 6-12 month period, you will also be able to identify areas of spend that will not be as high in retirement for example, clothing, commuting costs, lunches etc. There may also be some areas that increase vs. your working days for example travel, entertainment etc. To track Expenses, I use Mint where I link up all of my accounts and credit cards that with a little help learns categories over time. This will help you trend your spending and understand variance year over year in a very easy way.
  • Fees: if returns are 6% per year and your advisor or the funds you invest in are 2%, then you are giving away 1/3 of your earnings. ETFs can be put together by a computer and cost significantly less while still providing exposure to the equity markets. If you are investing this way, it is not likely that you need a highly paid money manager.
  • Wealthica (Canada) or Personal Capital (US) are great tools you can use to evaluate your net worth over time and understand the fee structure associated with your investments.

Resources

  1. Mint.com – track and categorise your spending
  2. Wealthica – net worth tracking
  3. Personal capital – net worth tracking.
  4. Mister Money Mustashe
  5. Choose FI / start
  6. Choose FI for kids
  7. Big Ern and the Safe Withdrawl rate series.
  8. Quit Like a Millionaire
  9. Your Money or your Life
  10. Playing with Fire
  11. The mad Fientist
  12. https://firecalc.com/
  13. https://earlyretirementnow.com/2017/01/25/the-ultimate-guide-to-safe-withdrawal-rates-part-7-toolbox
  14. https://jlcollinsnh.com/calculators/
  15. https://www.financialsamurai.com/
  16. https://www.gocurrycracker.com/
  17. https://www.donebyforty.com/
  18. https://princeoftravel.com/
  19. https://earlyretirementnow.com/
  20. https://www.newretirement.com/planner/plus-signup?nr_a=ern
  21. https://engaging-data.com/early-retirement-calculators-and-tools/
  22. https://www.whitecoatinvestor.com/
  23. https://whitecoatinvestor.teachable.com/p/fire-your-financial-advisor
  24. https://www.caniretireyet.com/the-best-retirement-calculators/

Can I retire yet?

Retirement needs to be reframed.  It is not about your income and how much of it you can replace but rather how much you spend and how much your investments bring in.

Your education, work ethic and passion in your career can help you earn more money but once you get into the work world for a while, your income becomes a bit more stable and starts to plateau.  As this happens and your career lengthens, large income bumps become less and less in your control or they could require dramatically more of your time.  Your expenses however are controlled by you for every cent you spend.

There is another concept that is very important in building wealth or value.  In business a company’s worth is based on its owners equity on the balance sheet.  If shares are issued of that company, the share price is the owners equity / number of shares.  That value is what shareholders expect to increase and why they invested in the company.  My point is that your balance sheet matters not your income statement; if you make $1M and spend $1M you have nothing to add to your net worth or “owners equity” at year end.   It is also worth mentioning if you spend more than you make in a year, you will reduce your net worth.

Income statement rich shows up bigger in the world!  These people make money and spend it on lavish things: cars, homes, vacations, clothing etc.  they appear rich but at the end of the year, they don’t increase their net worth.  People focused on expenses and make the same money have lots left over at the end of the year to add to their net worth that they can put to work via investments for them.

4 Step plan to get started:

  1. In a spreadsheet track your net worth; list your assets down a column, your liabilities, and the difference will be your net worth; record the months across the top and do this each month.
  2. Track your expenses via an app called “Mint” then at the end of each month, drop that amount into a spreadsheet with months across the top.  I also like to reduce this number by work related expenses.  Examples could be work clothing, toll roads and gas on the way to work, eating lunch at work vs. at home, dry cleaning, camps for kids during the summer etc.
  3. In a line below your expenses calculate the cash flow that would be generated by your invested net worth; using the 4% safe withdrawal method this calculation would be =networth*0.04/12 to get a monthly number; you can also include other sources of income like rent from a rental property etc.  If you are in a home you want to sell soon, you could include that in your calculations but if you don’t plan on moving and pulling equity out of your home, I would not include it.
  4. Track your savings rate by taking any investments you made or principal paid on your mortgage and divide it by your after tax income.  Your goal will be to increase this rate as much as possible.  One analysis showed that if you can have a 50% savings rate, you can retire after 17 years!  That would require living off of 50% of your income.

Once you have tracked this over time, and your income line has consistently been above your expenses line with some cushion, you should be able to pull the trigger. This becomes a math exercise where you need 25x your annual expenses to be able to withdraw 4% each year.

To summarize this equation, ((Net worth (Assets-liabilities)) – home equity) * 0.04 / 12 – Monthly expenses.  If positive your investments cover your expenses and you don’t need to work anymore.  Further posts will focus on how to increase your assets, reduce liabilities and expenses but have fun doing it!