Our early retirement plan

For Brian and I, the big motivator for working hard, paying off our debts and savings gobs of money is the allure of early retirement. Who wants to work forever? I’d rather take advantage of free haircuts, cheap homecooked meals, and even free tax software and put my money to better uses. Sure, there are people who apparently love their jobs so much that they never want to stop, but for us, we want to spend our time travelling, enjoying good food and good wine, and indulging in our hobbies… while not worrying about bills and mortgages.

Photo credit: s_falkow via flickr

We sort of allude to our goals in our Master Plan, but I don’t think we’ve ever come out and said it. So here it is: We hope to “retire” by the time we are 35. That’s less than 10 years away. Gulp. Let’s say 35-ish. But let me be clear – we don’t want to spend all of our time on the beach (CF) or playing golf (Brian). Indeed, we will probably work a little… but only because we want to work. So in that way, we are not “retiring” the same way a 60 year old might retire. We simply want to be financially independent in the sense that all of our needs are taken care of by income generating assets.

I first heard about “extreme early retirement” from a blog of the same name and the idea has captured me since then. The basic premise is simple: Work hard for ten years or so, save and invest the majority of your money, then live off the earnings. What a great idea right? Well, it’s damn hard, especially in Vancouver where real estate prices are quite high. But Brian and I have been plugging along and chipping away at the Master Plan for a few years now and we have been making progress, which I’d like to share.

Our retirement plan is based on a three pronged approach: Real estate, current investments, and retirement investments.

 

Accumulating income-producing real estate

The big problem with early retirement is the question – how are you going to pay the bills? For us, that question is partially answered through ownership of real estate, which is one of the best ways to make money in our city. Vancouver real estate is expensive, but due to the nature of the city as an Asian hub with a large university and several colleges, you can have steady rental income without too much difficulty. You do have to be smart about it of course – not all neighbourhoods are created equal and it is just as easy to lose money as it is to make money.

I hope to own 2-3 income producing units of real estate within the next ten years. I have one unit already and we will start thinking about adding a second once my student loans are paid off.

 

Purchasing income-producing stocks

We invest heavily in dividends as a means to generate income. In Canada, you can hold dividends in a Tax Free Savings Account, allowing you to earn and withdraw money at any time, tax free. As well, Canadian dividends held outside of a retirement portfolio are taxed at a lower rate because dividends are paid from a company’s after-tax income. A win-win combination! It’s also pretty cheap to invest in dividends because you can use your earnings to purchase more dividends with no transaction fee! This is called a Dividend Reinvestment Plan (DRIP) and is explained in great detail elsewhere.

Brian and I hold a handful of dividends in telecom, finance, energy and commodities. We add several thousand dollars to our dividend holdings each year and we’re hoping to increase that amount as we pay off my remaining student loans.

 

Funding traditional retirement plans

In addition to our aggressive real estate and dividend plans, we contribute monthly to a traditional Registered Retirement Savings Plan (RRSP) at our bank. RRSP contributions are taxed upon withdrawl, so you receive a portion of your contributions as tax refund. Your maximum yearly RRSP contribution is a percentage of your earned income, so keep an eye on your contributions – if you go over, you may have to pay additional fees.

Currently, we are purchasing $1000 a month of a medium-growth mutual fund but we are planning to move into investing in lower cost ETFs once we reach a target amount in our accounts. Our choice of mutual fund is relatively low risk, but we are comfortable with that considering the large amount of real estate that we hold. We also know that $1000 a month probably isn’t going to cut it, but we’re holding off on increasing contributions until we’ve knocked off things like my student loan.

 

Is it enough?

I guess that’s what everyone wonders isn’t it? How much is enough, especially if you plan to retire early?

 

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51 Comments

  1. I agree that in order to retire early that you do, in general, need a multi-pronged approach to get there. This will allow you to have mutiple income streams so you’re not banking entirely on one thing for the whole of your retirement.

  2. Liquid says:

    Same plan for myself. I wish to retire early because I don’t want to work until my 50s or 60s like most people do. I’m planning to use a similar strategy too, buying income producing assets and investing regularly. Have you thought about how much money you’ll need by then to cover your basic expenses? I figure I’ll need a net worth of about $800,000 to quit my day job. If I can *retire* in 10 years from now then I’m sure you guys will be able to as well :0)

    • CF says:

      To cover our bills (mortgage, utilities, phones, internet, groceries), I think we need assets of around $600,000 conservatively producing 4% each year after inflation. That might change depending on how aggressively we are able to pay down our mortgage with my new job.

      A net worth of $800,000 like you say would be perfect as it would give us a bit more flex money as well. I think we’re on the same page ;)

  3. Your plan sounds tough, but all the more encouragement to achieve your goals! $800k doesn’t sound unattainable especially with the effort the two of you are making.

  4. Wow, that sounds extreme — but AWESOME. Can’t wait to read about your progress!

  5. Pauline says:

    Depending if you want to live as extremely as Jacob, or a more “normal” frugal lifestyle, how much you need can vary greatly. I don’t know about RRSPs but is it worth it to lock some money until traditional retirement age instead of getting another rental property? Good luck with your plan, 10 years sounds reasonable to achieve financial independence!

    • CF says:

      That’s true. We don’t want to be quite as frugal or minimalist as Jacob, and we value things like travel more than he does, but at the same time, I think he presents a good ideal.

      The RRSPs are our “traditional retirement age” savings :) We do not intend on touching those until we are much older!

  6. 25? Wow that’s awesome! I don’t think I have plans to retire early though I do like the idea of more just being financially in a place where you can work when you want. So do you own a place and rent it out, and then rent yourself? That’s something me and the BF have been discussing but not sure if it’s a right fit for us.

    • CF says:

      Yup, right now we own a rental and we rent an apartment to live in. The math actually works out in our favour because we’re able to charge a high price for our nice condo, while we don’t mind living in an older building with older fixtures.

      The condo that we just purchased is for us to live in, which brings us to 2 condos. :) You guys should totally go for it, especially around our area. Prices have really been coming down.

  7. We’re trying to achieve much of the same thing as you guys – but are not sure if we’ll get there by 35 since it seems we’re a little older than you. The only part of your plan so far that would make me nervous are the condos and condo fees. I know too many people here who have been burned by special assessments and impact fees for various condo association things that they have no control over. It just adds in another variable that would make my stomach skip.

    • CF says:

      We’ve tried to buy into buildings that are solid and only need regular maintenance and replacements. We expect that we will still have to replace the occasional roof or pipes, but we set aside money each month into a “condo maintenance savings fund” for that. Hopefully it will be enough!

  8. agentfang says:

    I like your plan of action… setting goals and making it a habit is the right mind set to financial freedom! I feel like an old fart compared to you 20 somethings! Freedom 35 is out of the question for me cuz I only have 4 yrs left and no where close to accumulating that fortune. It’s hard saving when life gets in the way. It doesn’t help since I’m on the lower spectrum in the income bracket… I’d be happy retiring at 50 though!

    • CF says:

      lol… we are getting closer to 30 than 20-something I think. Hence, 35-ish is the goal :) Nothing wrong with retiring at 50, it’s still years and years better than most!

  9. Savvy Scot says:

    Looks like you have a diverse mix of options there! I particularly want to get into real-estate investing before I retire! I have also just bought my first investment fund stocks!!

    • CF says:

      Niiiiice. I wish I had more knowledge of real estate other geographical areas – Vancouver is a damn expensive place to buy. I could buy a condo outright in Arizona for the amount I had come up with as a downpayment in Vancouver…. :p

      • Savvy Scot says:

        That is crazy! London is also very expensive, but I have the knowledge of areas in Scotland where it is cheaper. Trouble is that would mean using Property Management companies..

  10. Cat says:

    Wow – it’d be amazing if you can do that. I’m past 35 (sigh), and we’re in good shape, but certainly not ready to retire in any way..

  11. Nice! I’d like to retire early, too, though I’m not willing to go through the necessary sacrifices to make it THAT early. It helps that I love my career field. Mad props to you guys for doing it, though. Seriously. That’s a lot of hard work for a great reward.

  12. Edward Antrobus says:

    Good luck. Wanting the independence do work at a job you don’t need I can understand, as opposed to most people’s definition of retirement. Personally, if I never retire, I’ll be happy.

    • CF says:

      You are fortunate! Even though I enjoy my current field of work and find it interesting, I don’t love it enough that I wouldn’t rather be doing something else.

  13. i love the idea, and give you two much kudos for attempting to do this.. i appreciate you “keeping it real” by admitting that you will need to keep working in some sense, but will be able to do it on your own terms.. awesome.

    i wonder how having kids would affect your plans.. do you have kids now (sorry, i forget)? do you plan to? i know that kids can certainly put a wrinkle in one’s financial plans :)

    • CF says:

      We don’t have kids and we’re not planning on having kids. It may be that that opinion changes in the future… mayyyyyyybe…. But I am hopeful that the things we do now will provide us with a good financial base, even if our situation changes.

  14. Catherine says:

    Good luck! There is no way we can retire by 35 but I can`t wait to figure out what will be possible once we get this studet debt paid off!

  15. Goldeneer says:

    This is great that you are looking at an extreme early retirement and think that it’s achievable with the right investments, specifically in real estate. I know this because we have reached financial independence at age 29.

    Lessons Learned from Achieving Financial Independence:

    Financial Independence Income
    Your projected income should match your lean spending plus a small contingency. In the event that we lost both of our jobs and were frugal to the point of never spending past our budget, we would be ok. In real life, we found that even though we strive hard to trim our spending budget, we need twice as much income to live normal life. We’re finding that our extra income is going to wanting to aggressively pay off our mortgage and investing money into other investments or businesses.

    Retirement Income
    We need our retirement income to be twice our spending budget. We’re not there yet but it means that one of us can quit our job forever and that is our plan.

    Time to Financial Independence
    We did it in 5 years. Three of those years were spent aggressively paying back our debts, saving and working extra jobs. We bought 1-2 investment properties every year and now we’re up to 5. The thought of sunny vacations didn’t fit our budget back then. In the last two years, we’ve increased our disposal income without significantly taking a hit to our savings. In short, we sacrificed 3 years of tough living.

    Focus on Leveraged Investments
    Real estate has high ROI because it is leveraged by a mortgage. We typically get 50-200% ROI on real estate. The stock market would probably give us 3-10%. We don’t invest in stocks. Assess all your potential investments in ROI, risk and effort and decide for yourself where you want to invest.

    Redundant Plan
    Your idea to contribute to an RRSP is good since it is redundant and it is harder money to access until you are of regular retirement age. We have the same plan.

    • CF says:

      I am super impressed that you guys reached financial independence at the age of 29! That is out of reach for us, but it’s always so inspiring to hear about other people who’ve accomplished the goal.

      Sadly, I don’t think we will achieve the same ROI on real estate that you’ve managed to, simply due to prices in Vancouver. But it’s something I’m going to keep in mind when searching elsewhere for property.

      Thanks for your comment!

  16. 35 is a PRETTY aggressive goal. It sounds good, but don’t get too caught up in it. Even Jacob from ERE ended up going back to work. I’m also obsessed with the idea of retiring early, but not quite that early. You might might be interested in the construction of my master plan:

    http://www.mymoneydesign.com/personal-finance-2/retirement/my-money-design-october-2012-update/

    • CF says:

      Haha, yes it is aggressive. We are not fixated on the number, as I feel like whether or not we reach it, we’ll be in a better position than most. But I like having ambitious goals. :)

      We will definitely check out that post – thanks for the link.

  17. I’m just curious. Do you plan on having children? I feel like this would affect the plan by a bit, but you are completely fine in answering that it’s none of my business ; )

    • CF says:

      We don’t have plans to have children. :) I agree, that with children, the level of potential unexpected goes up, and a steady salary (at least for a bit longer) would be beneficial.

  18. Steve says:

    Really enjoyed this read. I think I’ve been enjoying this blog so much because it aligns a lot with our own personal philosophy on life and finances!

    We’re thinking of and implementing similar strategies to work towards FI.

    I had a question about real estate for you guys: what made you choose physical real estate over REITs?

    Knowing myself, I don’t think I’d want to deal with tenants and all the other stuff that comes with being a landlord. I think REITs will be the way we go to get real estate exposure in our portfolio. Any opinions on REITs?

    • CF says:

      Thanks Steve!

      I have RioCan as part of my portfolio actually, so I chose both ;) I like the idea of physical real estate for the potential selling prices and the flexibility of having a rental. I like the idea that I can rent it out, I can live in it, and I can sell it. I wouldn’t overload on real estate, especially in a high price market like Vancouver, but a condo or two is definitely part of my plan.

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