Jun 152017
 

We’re Living Longer

I don’t know how the term “aging gracefully” can be a compliment. To me it just sounds like a nicer way of saying you’re slowly looking worse. 😛 When the government pension (CPP) was first introduced in the 1960s, the average life expectancy was about 71 years old. The idea was that most workers would retire at around 65 years old, and receive 5 to 10 years of CPP benefits in retirement. And that was the case for awhile. 🙂 But today, the average life expectancy in Canada is over 80 years old which puts more pressure on the CPP investment board to perform well. It’s not unreasonable to assume that my generation of workers (millennials) could have a life expectancy on average of 90 years or older.

According to a Telegraph article, we could witness in our lifetime a world where most babies will have a life expectancy of 100 years or longer! 😀 It’s nice that people are living longer than previous generations. But it’s also kind of sad to think about getting old. Can you imagine having sex when you’re 90? It’ll probably be like trying to shoot pool with a rope. 😕

Young adults are also starting careers later today than in the 60s. So with relatively less money going into the sovereign wealth fund, and more people withdrawing, many economists are worried about the future sustainability of government benefits on the local, provincial, and national level – not just in this country, but all around the world.

If generation Y folks are likely to live to 90 years old, then planning to retire at 65 may not be financially feasible unless a large amount of wealth is saved up first. For those who are planning to retire early like myself, it is even more difficult. Assuming I reach financial freedom by 35, I will have 55 years of living in retirement if I choose to. That sounds great. But the reality is I will most likely be working on and off, or on a part-time capacity throughout my 40s and 50s because there are only so many non-productive activities I can do before I get bored and start working on something economically productive again. 🙂

So instead of planning to live until 80 years old, most healthy people my age should be aiming for 90 as the starting point. And with that it means accumulating more personal savings for retirement. But also keeping in mind that there is no set retirement age anymore, so plan to be flexible with work schedules to accommodate a balanced lifestyle.

 

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Random Useless Fact:

Aug 182016
 

Early Retirement 

For professional skiers the best time to retire is when they start to go downhill. But what about the rest of us? Well for most people the question isn’t at what age we should retire, it’s at what income. 😉 People who want to retire early seem to have a clear and consistent focus to grow their wealth so that it can provide them with enough passive income to sustain their lifestyles forever. This can be done through a number of ways such as reducing living expenses, increasing income, and making high investment returns. 🙂

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I recently read a CNBC article that featured a couple, Carl and Mindy, who retired in their early 40s with a million dollars. And they did it pretty much the same way as most other early retirees.

In 2012 the husband-wife duo with 2 kids already had $570,000 saved up. But they were inspired to retire early so they set a clear goal to build a portfolio of $1 million and no debt. And earlier this year in 2016, they have accomplished their dream. 🙂

The CNBC article suggests that “anyone can do the same — and you don’t have to be an investment banker raking in millions. All it takes is smart decisions along with intelligent saving and investing.

Here are some steps the couple took to reach their financial goals.

  • Track spending – “My wife and I wrote all of our expenses in a book,” says the husband.
  • Live in an affordable location –  The couple resides in a low-cost area in Colorado, and lives on $2,000 a month for the whole family. They mention this would not be possible in San Francisco or Manhattan.
  • Cut bills – “I learned that you don’t need a lot of money,” said the wife. “My quality of life has not changed since we became laser-focused on cutting out our expenses. I don’t need the cable TV. I don’t need a super-expensive phone plan. I don’t miss all this stuff because it didn’t really add to my life,” she said.
  • Invest in appreciating assets – The couple bought a $176,000 fixer upper home that they estimate is now worth over $400,000. They also I bought 2,000 shares at Facebook at $30 a share which is now worth around $120 a share!
  • Consistent savings – They’ve continuously put away $2,000 per month into their investment portfolio.

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May 092016
 

Time and Annual Returns

I recently watched an interesting YouTube video about time and the rate of return, by finance columnist Preet Banerjee. He explains the relationship between an investor’s time horizon and his or her rate of return. Here’s a question to illustrate an example. If our goal is to accumulate $100,000 by age 65, how much do we need to save per month?

Here’s a table that breaks down how much investors will need to put away each month depending on their current age and the expected rate of return. For example, we can see that someone at age 30 who expects their portfolio to return 4% a year should save $109 per month.

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As we can see, the rate of return is a much stronger factor for investors with a longer time horizon. The 20 year old still has 45 years until retirement and how much he has to save is heavily influenced by his average investment returns. On the other hand, the 60 year old investor only has 5 more years before retirement so most of his accumulated wealth will come from savings rather than from investment gains. This means he shouldn’t take on more investment risk and reach for higher returns since the his rate of return simply doesn’t matter very much. This is why I have a relatively high risk tolerance, even though some people don’t approve. It’s because I’m in my twenties and if I can get that higher rate of return on my portfolio now, my life would be so much better in the future. 😀

The other thing to note about the table is that time trumps rate of return in most cases. If one person starts to invest at age 40 and earns a 2% rate of return, and someone else starts just 10 years later but earns a 6% rate of return, then the first person would still come out ahead despite making 4% a year less. In other words if we start investing 10 years earlier than our peers, then that will have the same effect as outperforming their investments by more than 4% each year. Wow! Let that sink in.

We can also track our retirement progress with this information. For example if we plan to retire in 15 years we can use the AGE 50 row of numbers in the table above. Let’s say we want to accumulate an extra $300,000 between now and our retirement date. We know the table is based on an accumulation of $100,000. So to find out how much we need to save each month we just multiply the green numbers by 3, since $300,000 is 3 times $100,000. The tricky part is guessing which rate of return we are most likely going to see over the next 15 years, but I think 4% sounds like a reasonable assumption.

So start investing as early as possible and front load more risk to the earlier stages of wealth accumulation. 🙂

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Random Useless Fact:

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Apr 252016
 

How to Think About Retirement Planning

Some people are reluctant to accept change, especially cashiers because nobody likes to count nickels and dimes. But the world is constantly changing and the retirements of generation Y will look very different than generation X. The trend towards a gig economy has only just begun. In the private sector less people are working 40 years at one company, and more are doing contract work, starting side hustles, and becoming self employed. According to Intuit, in just 4 years from now up to 40% of American workers could be independent contractors. Wow, what other changes will we see in 4 years? I don’t know, because I don’t have 2020 vision. XD

So as we adapt to changing economic strategies, by growing our income streams for example, our retirement plans must also reflect this new world of mobile apps, and short-term work that is long on flexibility, but short on benefits. When it comes to making smart retirement decisions today we should separate the things we can control, from the things we cannot.

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We start by thinking about the factors that we have full control over, such as how much we need to save (and therefore, spend) in order to meet our long term goals. For example, I want to reach financial independence by age 35, which means I need to save about 1/3rd of my income right now. Although diet and exercise habits aren’t directly related to personal finance, they’re extremely relevant in the big picture because healthcare can be a major cost, especially for Americans, when we reach retirement age.

According to the National Council on Aging, about 92% of older adults have at least one chronic disease. Jeez Louise! Chronic diseases account for 75% of the money America spends on health care. Diabetes alone affects 23% of Americans over the age of 60. According to Statistics Canada, more than half of all Canadian adults are overweight or obese. 🙁 Although certain aspects of our health revolves around genetics, we also rely heavily on epigenetics, and the idiosyncratic personal choices we make today to determine how we live our golden years. Just like with a motor vehicle, proper maintenance can extend our life expectancy, and keep the repair costs down in the long run. This way we can save our money and spend it on meaningful experiences rather than on medication and treatments. 🙂

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Apr 012016
 

Quitting my Job

There comes a day in everyone’s life where they have to throw in the towel. After holding down 2 jobs for the past 8 years I felt it was time for me to quit. I’m simply getting too old for the workplace. And after analyzing my financial situation I realized that I do indeed have the means right now to leave the rat race and live solely off my investments forever!

So I quit my part-time job in early March. And then a couple weeks ago I handed in my letter of resignation to my full-time employer. The company tried to keep me because I’m rather good at my job. Much like a carpenter, I’m always able to nail my work. My manager even offered me a 30% raise if I stay, but I politely declined.

Yesterday was officially my last day at work so I’m finally free from the grind! From now on I can enjoy life to the fullest on my own terms. 🙂 Woot!

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Enjoy unlimited free time for the rest of my life? Yeah, I think I could get use to this.

But one obstacle that can stand in the way of true freedom is debt. 🙁 To obtain real financial security I knew I had to get rid of all my debt. So I decided to make some major changes to my balance sheet.

Selling the Farmland

I bought a farm in 2012 for $150,000. And then bought another farm for $172,500 in the following year, for a combined purchase price of $322,500.

Well I recently sold both my farms for $550,000 to a single buyer. Yay! This $200,000+ capital appreciation is due to the strong demand in this area. According to an official Farm Credit Canada report, farmland values in Saskatchewan have increased 83% on average from the beginning of 2012 to the end of 2014. Amazeballs!

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We don’t have the official numbers for 2015 yet. But according to another FCC report, “increases could be as high as 9%, with some upside to reach higher.”

Although I was able to sell my farms for a total price of $550,000, I had to pay $20,000 in agent and legal fees, pay off the remaining $195,000 of farm loans to the bank, and set aside another $35,000 for capital gains tax.

So in the end I only ended up with $300,000. But hey, I’ll take what I can get. 😉

No More Debt

As shown in my most recent net worth update I had roughly $300K of non-farm debt last month, including a mortgage, LOCs, etc. Well over the last week I used the net proceeds from selling the farmland to pay off the balance of all my remaining loans so now I’m completely debt free! 😀

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New Balance Sheet

So with the farmland and debts gone, here’s what my new net worth looks like.

Assets: Total = $530,000
Cash: $7,000
Primary Residence: $263,000
Non Registered Investments: $200,000
RRSP/RRIF: $60,000

Liabilities: None 🙂

Net Worth = $530,000

It’s such a relief to finally be debt free! 😀 My balance sheet looks a lot cleaner without all those pesky liabilities. Debt is evil. I will never go into debt ever again! Debtors are losers.

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