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