Saturday, July 09, 2005

Very early retirement and financial planning phases

Most retirement planners consider three phases of financial planning: accumulation, distribution and legacy. On the other hand, early retirees may have different needs.

Take the distribution phrase, for instance. The typical person will retire at 65 and live up to about 80. Thus, its distribution phase comprises about 15 years on the average while accumulation makes typically 40 years or more.

Compare that to what I plan to do: retiring at 37, after about 15 years of accumulation, and likely 40 years of distribution. Might sound impossible, but you need to put some figures on a sheet of paper: if you accumulate fast enough and compound for a reasonable number of years, then, you should be able to withdraw some money forever. The key is withdrawing the right amount and from the right assets.

Safe withdrawal rates is the proportion of your portfolio you should be able to withdraw yearly without risking depleting your nest egg before you die. Planners often use 4% as a standard value, but I personally don't like that much. I think you will likely have many distinct phases in your retirement lifetime, particularly if you retire very early. My guess:

  • The "early phase": goodbye boss! The first years (1 to 5?), you likely will want to do all the things you promise yourself you would be doing after you retire: travel, relax, starting new hobbies, starting projects, etc. You'll want to enjoy life as much as you can! You likely will need more money those years than subsequently. In those years, I would decrease the value of my portfolio.
  • The "I'm too young to stop working completely". I guess that after some years of retirement, I might be tempted to work part-time, maybe at an unstressful job, 10 hours a week or less. Maybe I would work only for some part of the year (during the winter, for instance). I would be about 42 at that time. My portfolio would likely increase slightly during that phrase, since the work wages would cover some expenses and returns from nest egg will be high. If the "early phase" took a larger part of my portfolio that what I expected, this would be the right time to get it back on track. Also, adjustements to budget and planning would be done, according to real needs, expenses, etc.
  • The “Now, I’m ready to retire completely”. Starting 50, 55 or 60 (who knows?), I might want to get back to full retirement. But, having lived 15 or 20 years doing everything that I want, when I want, maybe this part of my life will be less active and more frugal, with health-related expenses increasing, but some other type of expenses decreasing with time.

But who knows?

Friday, July 01, 2005

The Man Who Plans to Retire at 37 (RET37) Reports Q2 2005 Results

RET37 today reported that earnings for the quarter ended June 30th has increased 28.5% at $9k from $7k compared to the previous quarter ended Mars 31tb, resulting from increased income from investments.

Expenses decreased very slightly from $4299 to $4278 on insurance costs.

Assets increased $15k to $196k from $181k in the previous quarter. Liabilities increased to $75k from $69k. Liabilities include $32k put aside in provision accounts, comprising $22k for contingencies, $2400 future tax provision, $700 for travel, $700 for car repairs, $2100 for home repairs and $2500 fund for investment bad times.

Total wealth (net assets) at the end of the quarter amounted to $121k.

Excellent investment returns in the quarter
Yields on stock and mutual funds were much higher compared to the previous quarter. After getting rid of a bad stock, two stocks were sold after over 10% gain each after less than three months, another one was sold with a 30% gain (bought december 2004) and another stock, still in the portfolio, increased 70% in the quarter, up 170% since April 2004. This was partly offset by slight decreases in three other stocks and near flat results in RRSP ETFs funds, bonds and cash investments.

RRSP portfolio returns increased slightly on a nest egg of $43k during the quarter, but the yield is a non-annualized 6% in the trailing nine months. Other investments include $20k cash in an INGDirect account yielding an annual 2.4%.

A Canadian stock market correction is expected, and as a consequence, about 20k has been transferred, in part into American indexes, a part into a REIT ETF and the remaining amount to cash accounts. About 25k remains in individual stocks.

Forward looking statement
I expect the stock market to be mixed in the next quarter. Canadian stocks could drop if oil prices decline, since the TSX is highly exposed to oil-related stocks. Interest rates are not expected to move a lot in the next quarter, as inflation is kept under 2%. On the other hand, American stocks might increase after two flat quarters and rather bright outlook.

Statement on Retirement Target
Retirement is scheduled for not later than October 1st, 2012. Since the retirement plan was decided ten months ago, results are on track to raise about $175k registered and $169k unregistered and $40k equity in real estate for a total of $384k at 2012’s dollar. Expenses in 2012 would be inflation-adjusted $20k annually.

According to calculations using historical data (using FireCalc) and the number of years before target, I estimate that the probability of retiring by the target date has increased to 74% in this quarter from 72% in the previous one. The main reason for this increase is positive returns on investment.