Sunday, September 19, 2004

FireCalc

I just tried a very interesting tool: FireCalc.

This tool lets you enter some data about your starting portfolio, annual withdrawals after retirement, withdrawal changes along the course of your retirement.

I did enter my data and found that my chances of success were about 78%. Quite low. I looked back at the data to see what was going on. There is a flaw in the use of this program before retirement. While the program adjusts figures to inflation, it considers you are retiring tomorrow. For instance, when you enter the value of the house you will sell 10 years after retirement, you enter the value of the house today and the program automatically adjust this value to take inflation into account. Right. But what the program doesn't consider is that if you retire in 8 years, the value of the house should be adjusted for 18 years (8 years from now, 10 years after retirement), not only 10. Thus, the value I did enter, 85 000, was undervalued by about 15 000 $.

The same apply to the other values entered: my social security pension that I will get from age 65 (that is, 28 years after my early retirement at 37) is undervalued by about 20%, since the value when I will retire is larger than the value retirees receive today.

In order to use FireCalc, thus, remember that what the program considers as being "Today" refers actually as if today was the first day of your retirement. Then, adjust these values to inflation for the number of years before you retire.

After the modifications, my chances of success according to FireCalc raised to nearly 92%, with a mean balance after 43 years of retirement at about $600 000.

Friday, September 17, 2004

Why you should not rely too much on experts and calculators

When I explain to relatives that I plan to retire at 37, some questions naturally arise:

How much will your savings worth by then?

How much money will you withdraw each year?


While calculating how much money you need and how much wealth you have to cumulate before retiring is important, these figures are irrelevant to other people than you. Their situation might be quite different of yours. A little bit later on my Blog, I will provide my personal situation, my current savings and my budget. This information will not mean “Here is what you actually need to retire”. I’ve defined my own needs, evaluated expenses and expectations according to my lifestyle, location (for instance, living in a 100k – 500k city in the province of Quebec, Canada is less costly than living in NYC or San Francisco, for instance), actual income, projected income, the level of risk I am comfortable with, etc. If I say I need $14k a year to retire, it does not mean this will be enough money for you.

However, my Blog might help you retiring much sooner than you think using two approaches:
  • Finance experts say you will likely need about 75% of your pre-retirement income after retiring to have the same lifestyle. I will try to challenge this assumption. I believe that what matters in defining how much money you’ll need after retirement is post-retirement expenses, not pre-retirement incomes.

  • Frugality does not mean deprivation. You can have frugal habits that will bring you no more or less happiness than living with higher means and literally wasting your money (a general rule to remember: wasting your retirement money is akin to wasting your pre-retirement time).

Tuesday, September 14, 2004

Preparing your mind to early retirement

Before going forward with my early retirement project, how I plan to achieve it and how I will try to convince you to follow my example, you need to get some basic ideas on early retirement. I suggest you read a bit on the subject.

For instance, read some articles on http://www.retireearlyhomepage.com/. Look particularly at the Top ten reasons to retire early and the general rules in How do I retire early? On this site, however, retiring early means "earlier than 65", not retiring at 37. It will give you a fair idea of how you can manage to retire before 65, but not how you can do it at 37.

I also suggest Diane Nahirny book: Stop Working... Start Living, particularly for the thoughts and general principles that are behind very early retirement. In my previous post, I told you that I believe her success story might not be generally reproductible with the same salary. I plan that it will take me an additionnal year to get retired despite wages much higher than hers. But anyway, this book is still very interesting and contains many saving tips, budget management informations, thoughts, etc., that worth the price of the book.

Very soon, I will share with you my actual financial situation, the starting point of my early retirement project.

Happy reading!

Sunday, September 12, 2004

What this Blog is about?

My name is Jack. Well, actually, it is not my real name. I've decided not to use my real name, because this blog will contain confidential data about my financial situation, and I don't like the idea that my friends and family could know such personal information. So why should you? Well, I have a plan. A plan about which I’m going to talk for the next 8 years, in details, to show you what steps I take in order to fulfill it.

This plan, you probably already have guessed it, is to be retired by age 37, that is, in less than 8 years from now. First of all, I need to tell you some facts. I'm not already rich. Today at 29, my net wealth is not more than 50 000$, RRSP included. More, I am an average worker, earning a salary between 57 000 and 65 000 Canadian $ (about US$44 000 to US$49 000). Well, I say average, it would be more accurate to say that, for a 29 years man, I earn more than the average young French-speaking worker in Quebec, Canada.

The first question is: why would I want to retire at 37 and why 37? Well, that's actually two questions. First, I want to retire early because I'm trapped in a work more/have more /improve your position at work spiral. More, I spend 50 hours a week in an office, most of which I stand sat in front of a computer. I don’t like the idea that I will spend most of my disposable time behind a desk. It is not that I dislike my job, I actually like it. But I have many other projects that I’m unlikely to pursue since I lack the time (or I’m too lazy or lack the energy after a work-day to work on these).

I could start my career over, but that would be no good investment. First, my actual salary is rather good. Financial security is important for me, and I cannot imagine myself turning to an art related career, for instance, even if I’d like to. The fact is that I believe there is some rational one should have behind its choice of career. Even if I like arts, I would make neither great musician nor great painter. Science suits me much more. And would I be a musician (assume this would be my second choice of career, should this choice be given to me), I think I would not be 100% satisfied. The fact is that, like many of us, I’d like to do 1000 things. Today a scientist, tomorrow a musician, and who knows what I’d like to do next year. Maybe I’d like to volunteer some time too. Or write a book.

There is only one way for me to be able to do whatever I want, whenever I want. This is possible only is my financial situation allow me to do it. That is, if I wish to write a book and this book doesn’t sell, well, that’s it, I will still be able to buy food, pay my mortgage, the phone company and the hydro. I will feel no hurry to get success. I will not have to wash dishes in a restaurant waiting for my book to gain success. If my book doesn’t sell, well, too bad, I still can try myself to another book or conclude that I’m not skilled at writing. I think you get the point. Or maybe not.

Anyway, I’ve decided that the way to go for me to reach happiness is to retire early and then, do whatever I want of my spare time. I always have thought that early retirement meant retiring at 55 and that it would be difficult to do it. A few weeks ago, a coworker told me about a book written by a woman saying she retired at 36: Stop Working... Start Living, by Dianne Nahirny. I borrowed his book and read it in two days. Well, first of all, I have to say I don’t believe her example will allow you to retire in such a short time as she did with the salary she says she earned (less than 25 000$ a year). She has benefited of conditions that are not likely to be mine or yours in the future.

For instance, in three of four years, she made tens of thousands of dollars (or returns over 300%) by buying condos just before real estate was set to boom and at times when you could get more than 10% on government bonds, for instance. More, she says that she can live 30 years with 80 000$ in its unregistered savings, using 8000$ a year. Well, I don’t know how she did her math, but my calculations tell me that with 80 000$, I could get 8000$ a year for at most 15 years, at current inflation and interest rates.

So I did the math using my data and found that it might be possible for me to retire as early as 37, that is, in 8 years. I was astonished, given that my calculations were conservative, much more than Dianne calculation. By conservative, I mean that it assumes I will not earn any money (other than from invested savings) after that. As I don’t plan to spend all my spare time reading on my balcony, I think this is quite conservative.

Retiring at 37 includes some risks. For instance, my future incomes are based on economic projections, such as inflation, interest rates and yield of return on my investments. But this risk is offset by the fact that at 37, if things aren’t going the way I planned, I will still be young enough to find a job for a few years and get my finance back on track.

If you ever dreamed to be free, free to do whatever you want whenever you want, stay tuned. From now up to my retirement, in 8 years, I will describe my situation, my plan and my progress. I’ll give you details, where I will invest: stocks, RRSP, bonds, funds. You’ll be able to verify that my yields are real and not modified so to exaggerate my success story.

If I succeed, this blog will be my heir to other people who, like me, think that life is too short to spend most of it in an office doing the same thing all over again. If I fail, well, just as any scientific experiments, knowing what doesn’t work should be useful too and maybe this blog will have diverted you somewhat.