Some people look at savings as money they can spend. But I like to think of my savings as perpetual future income. When I save $1,000 today, I don’t consider that money spendable anymore. In my mind that $1,000 of savings has been changed into $40/year of income (or 4% of that savings) for the rest of my life
Many actuaries and financial experts like to use the 4% rule because it represents a sustainable draw down rate over a long period of time. Since I rarely have any cash savings I make sure that any new savings I bank is always working hard for me When I occasionally sell my investments to pay for large purchases, I also think of it as taking future income from myself.
If one manages to save $1,000 a month and make 4% return every year, then after 32 years of working, he or she will have about $750,000 of investable assets, which that person can draw from at 4% a year, or $30,000 of spending money forever （＾－＾）
With $30,000 of income every year coming from our nest egg, plus maybe $20,000 from government assistance/pension programs, and/or private pensions, we can expect to live quite comfortably on $50,000 a year (before accounting for inflation.) Not everyone is able to save $1,000 a month, but statistics show that men who live in B.C. like myself plan to save on average about $15,000 this year. So for most people, this level of savings, if not more, is to be expected. One way I like to save is to cook my own meals most of the time because eating out can be quite costly.
Personally my savings rate is about $1,500 to $2,000 a month thanks to my side hustles. So I plan to retire quite a bit earlier than 55 In fact, according to my latest net worth update, I already have over $750,000 of financial assets
But wait a tick. That can’t be right I’m not making $30,000/yr from my investments just yet. The reality is that I only have about $175,000 of investable, liquid assets. The remaining $575,000 is locked up for the long term. But building up $175,000 of stocks and bonds over a 5 year period still sounds pretty far-fetched. Luckily there’s a wonderful tool called leverage! Instead of buying stocks in a regular trading account, I have a margin account to borrow money to purchase new investments with.
So my net liquid portfolio (total stocks/bonds minus margin loan) is worth about $125,000 today, which at 4% means I can easily convert that into $5,000 of income per year for the rest of my life. Every $1,000 dollar I continue to save will add another $40 of perpetual revenue because savings are future income!
We should be able to sustain a 4% withdrawal rate by investing 60% of our money in equities, and 40% in fixed income, all via indexed funds. In terms of geographical allocation we can go with a 50/50 Canadian and international split. We then rebalance our portfolio to meet these ratios once a year
Random Useless Fact: What is a 4 letter word, yet is made up of 3. Rarely consists 6 letters, and never is written with 5.
Hint for the riddle above: Think about why it’s under the Random Useless Fact section