29 from Canada

[zxcvlkj]

Hi,

After lurking for a few weeks, I've decided to join and request some insight. I am almost 30 (single, no kids) looking into retiring as early as possible as I am sick of working.

Financial situation:
House 600k
Car 50k
Cash 40k
Stocks 40k
RRSP (equivalent to 401k) 25k
Income 65k-90k
Expense 50k
Mortgage 370g
Debt 0

Once I have paid off my mortgage I think I can retire. I am wondering what I can do with my cash and I am thinking about purchasing an additional property for rental income to speed up the mortgage payment. I do not want to invest into anymore stocks as I would like to diversity.

Suggestions for a self-managed business (if it exist)?
Thoughts on how I can retire as early as possible?
Retiring at 35-40 an achievable goal?

 

[Niko]

Hi,

After lurking for a few weeks, I've decided to join and request some insight. I am almost 30 (single, no kids) looking into retiring as early as possible as I am sick of working.

Financial situation:
House 600k
Car 50k
Cash 40k
Stocks 40k
RRSP (equivalent to 401k) 25k
Income 65k-90k
Expense 50k
Mortgage 470g
Debt 0

Once I have paid off my mortgage I think I can retire. I am wondering what I can do with my cash and I am thinking about purchasing an additional property for rental income to speed up the mortgage payment. I do not want to invest into anymore stocks as I would like to diversity.

Suggestions for a self-managed business (if it exist)?
Thoughts on how I can retire as early as possible?
Retiring at 35-40 an achievable goal?

It's hard to say without more specifics about your situation, but my gut answer is that retiring in 5-10 years is probably not possible on the trajectory you're on. A few points:

-Is your stated income before taxes/deductions? Or is that your "take home" pay? Even if it's a take home amount, your pay only exceeds your expenses by $15k - $40k. That is not enough savings per year to retire in your 30s with annual expenses of $50k.

-Can you cut back on your expenses some? If your car has a value of $50k, you can probably downsize significantly on your next car purchase.

-I don't know which metro area you live in, but a $600k house for a single guy with no kids in any part of the country seems high. Since you have $130k equity, you should be able to sell without bringing money to the table. Can you take that equity and either buy cheaper or rent for a while?

-Have you factored in health care?

-Future family plans?

-If you provide more background about your job, your educational background, etc, others might be able to suggest DIY or self-run businesses that might support an extreme early exit from the rat race. But with the information you've provided it's hard to say.

When I was about 24, and before I had a family, I had made it my goal to retire at 40. I had all sorts of spreadsheets, goals sheets, and plans. As life evolved, though, I realized that it is very hard to retire that early on an average (or even above average) salary without some sort of windfall, such as an inheritance, family gifts, winning the stock option lottery, starting a wildly successful business, etc. Early retirement is possible in most lines of work, but the typical formula involves reducing expenses, saving early and often, and endurance. Until you figure out that magic self-managed business that will get you to an early retirement, I would start with reducing your expenses and increasing your savings.

While I've now realized that 40 is out of the picture for me, 50 is very doable and I think I'm actually well ahead of schedule to retire at that age.

 

[zxcvlkj]

Hi Niko,

-Is your stated income before taxes/deductions? Or is that your "take home" pay? Even if it's a take home amount, your pay only exceeds your expenses by $15k - $40k. That is not enough savings per year to retire in your 30s with annual expenses of $50k.

Before taxes and deductions.

-Can you cut back on your expenses some? If your car has a value of $50k, you can probably downsize significantly on your next car purchase.

Once my mortgage is paid my expense will be dropped to 35k.

-I don't know which metro area you live in, but a $600k house for a single guy with no kids in any part of the country seems high. Since you have $130k equity, you should be able to sell without bringing money to the table. Can you take that equity and either buy cheaper or rent for a while?

Toronto, houses are pretty pricey here. It maybe more than I need, however due to the low mortgage rate I do not feel like I need to downgrade. I also miscalculated my mortgage, it is 370g. once retired I can downgrade.

-Have you factored in health care?

No, we have health care and I do not have any medical problems.

-Future family plans?

No kids planned in the future. If they do happen I do not expect more than 1-2. How much do kids cost?

-If you provide more background about your job, your educational background, etc, others might be able to suggest DIY or self-run businesses that might support an extreme early exit from the rat race. But with the information you've provided it's hard to say.

I am in the IT industry. The self-run business does not need to support me or have anything related to IT. I am looking at a business to increase my assets. I have a personal line of credit at 35g. If I apply for a homeowner line of credit I can receive additional 100g-200g.

Also, when I stated I was sick of working. I meant I am lazy and I am sick of working period. I have been working since I was 16 and cannot see myself enjoying any kind of job.

I also estimate an inheritance of 300g in 30years. When can I retire?

 

[Chelhxi]

You can't have it both ways. Do you want that lifestyle or do you want to retire early? As Niko was quick to point out, the house and car are crazy expensive for a single person, even in Toronto. Your expenses seem a bit high, too, though I'm in Winnipeg so it's cheaper.

Even with the low interest rates right now, how much interest are you paying over the life of that mortgage?

 

[imoldernu]

I'll catch the devil for this, but with no responsibilities, and being under 30,,, I might be tempted to retire now... maybe just for few years.

Life is pretty much upside down... Like us geezers, have the dessert first... Ya never know....

 

[Niko]

When can I retire?

You still haven't provided enough information to answer this. Assuming you maintain a pattern of spending $50k/yr, and assuming you have no defined benefits coming your way, your magic number will likely fall between $1.2m and $2m (depending on your rate of withdrawal). That is in today's dollars, so be sure to factor in inflation as your true future number will be higher.

Play around with some online savings calculators, changing various assumptions such as amount saved, time duration, growth rate, etc. Remember, you have near complete control of the amount saved and the time period for which you save. You will have little control over your growth rate. So save as much as possible as early as possible, and don't fall down the rabbit hole of chasing higher returns.

In terms of your IT background and whether you can parlay that in to some sort of business allowing you to retire early, I'll defer to the IT experts on here since I am not one.

PS -- sorry I initially missed that you were in Canada. Having access to the health care system will solve one of the puzzle pieces that flummoxes many wannabe early retirees south of the border.

 

[Free To Canoe]

I'll catch the devil for this, but with no responsibilities, and being under 30,,, I might be tempted to retire now... maybe just for few years.

Life is pretty much upside down... Like us geezers, have the dessert first... Ya never know....

+1
Nothing like a "sea trial" to learn a few things.

 

[zxcvlkj]

You can't have it both ways. Do you want that lifestyle or do you want to retire early? As Niko was quick to point out, the house and car are crazy expensive for a single person, even in Toronto. Your expenses seem a bit high, too, though I'm in Winnipeg so it's cheaper.

Even with the low interest rates right now, how much interest are you paying over the life of that mortgage?

Unfortunately, this is the price for houses in Toronto. I do not feel it is a burden as it is within my means and the value has increased since I purchased the home. There is no return for me to rent and am unwilling to live in a condo. My mortgage interest is currently 3.15%.

The car maybe expensive but has been paid in full.

I want to maintain my lifestyle and retire as early as possible. I am currently holding 40k in cash. I expect this value to increase approximately 10k/year depending on my varying income. I can also obtain up to 200g from a line of credit currently at 6% interest. What can I do with the (potential) capital?

 

[zxcvlkj]

You still haven't provided enough information to answer this. Assuming you maintain a pattern of spending $50k/yr, and assuming you have no defined benefits coming your way, your magic number will likely fall between $1.2m and $2m (depending on your rate of withdrawal). That is in today's dollars, so be sure to factor in inflation as your true future number will be higher.

Damn...1.2million will take forever!

 

[Mulligan]

Damn...1.2million will take forever!

Ya but, ZXC, take comfort in the fact that you have something a lot more of than a lot of the rest of us do....that being time! Congrats on your great start.

 

[My Dream]

No kids planned in the future. If they do happen I do not expect more than 1-2. How much do kids cost?

I live in the Greater Toronto Area and will only comment on this quote. I have two kids and I never tried to figure out how much it cost. Only you can decide how much you would want to spend on daycare, presents, clothings, possibly move into a larger house to accomidate the amount of kids you want. Feed them, maybe help with there education.

Can we put a ballpark of maybe $100k per child till the age of 18. The reason I never put a price on it was based on the rewards. But that's a story for another day.

 

[RISP]

Welcome to the board.

Retiring at 35-40 an achievable goal?

No way, Jose, unless you completely change your lifestyle.

once retired I can downgrade.

Why would you accept a cheaper home in retirement, but not now? I think you would spend more time at home than you are now, while still working.

I can also obtain up to 200g from a line of credit currently at 6% interest. What can I do with the (potential) capital?

Are you suggesting to take a 200,000 $ loan at 6% and invest that money, hoping for a return in excess of 6%? That kind of leveraging is an absolutely horrible, horrible idea. What you need is assets, not liabilities. Pay down your mortgage, save a decent chunk of your income, and learn how to invest in a diversified portfolio.

Damn...1.2million will take forever!

If your expenses after paying down the mortgage really go down to 35K, you would need "only" 875K-1Mio. of invested assets. This does not include your home equity!

Suggestions for a self-managed business (if it exist)?

Personally, I do not have experience with that, but the small business owners I know certainly do not work less than the usual employee.

May I suggest that for the start you do a lot of reading on this site and learn about the basics first (LBYM, the 4%-rule, index investing 101, ...)?

 

[Milton]

Welcome to the board.

A few points:

1) your debt is not zero, it is $370,000 (a mortgage may be "good debt", but it is still debt);

2) most of us do not include the (presumed) value of our cars (or other chattels) in our net worth, unless we are planning to sell them in the immediate future;

3) have you maxed your TFSA? If not,why not?

4) "once I have paid off my mortgage, I think I can retire". What is the basis for that belief? Even if your annual expenses drop to, say, $35,000 after stripping out the mortgage payments, you will be unable to generate that income from your liquid assets (currently only $105,000);

5) "I am wondering what I can do with my cash, and I am thinking about purchasing an additional property for rental income to speed up the mortgage payment". In today's market, I don't believe it is possible to purchase any decent rental property in Toronto for less than $200,000. As you don't have nearly that much cash, you would need to take on another mortgage. While rental income might be sufficient to cover those payments (and taxes and misc. expenses related to the rental property), it is unlikely that there would be enough - if anything - left over to help retire your existing mortgage;

6) there is nothing wrong, and a lot right, with working towards FIRE at a young age. That said, given your details it is going to take you quite a few years to get there. So, I would suggest that if you are already "sick of working" you consider a career change; 29 is young enough to start over. Alternatively, take a three month break and decompress;

7) go to the library and get a copy of "Stop Working ... Start Living: how I retired at age 36 (without winning the lottery)", by Dianne Nahirny (of Hamilton, Ontario).

 

[zxcvlkj]

Welcome to the board.

Thanks

No way, Jose, unless you completely change your lifestyle.

I can see that now.

Why would you accept a cheaper home in retirement, but not now? I think you would spend more time at home than you are now, while still working.

I can move further away from the city and purchase the same home at a lower value.

Are you suggesting to take a 200,000 $ loan at 6% and invest that money, hoping for a return in excess of 6%? That kind of leveraging is an absolutely horrible, horrible idea. What you need is assets, not liabilities. Pay down your mortgage, save a decent chunk of your income, and learn how to invest in a diversified portfolio.

Yes, I was thinking about it.

If your expenses after paying down the mortgage really go down to 35K, you would need "only" 875K-1Mio. of invested assets. This does not include your home equity!

That seems doable. Once my mortgage is paid and I downgrade I would have maybe another 200k.

Personally, I do not have experience with that, but the small business owners I know certainly do not work less than the usual employee.

Guess it doesn't exist. I'll still research purchasing a condo for rental income and to increase my assets.

May I suggest that for the start you do a lot of reading on this site and learn about the basics first (LBYM, the 4%-rule, index investing 101, ...)?

I will, since I don't know what LBYM stands for...

 

[zxcvlkj]

Thanks for the input Milton.

I have not contributed to TFSA. From what I understand, the capital gains are not taxed. However, I do not know who manages this account or how it grows.

My logic for the rental property. I purchase an asset that increases in value with only a down payment, it can be resold and the gains can be allocated to my "good" debt.

 

[Lazarus]

Well your house is about four times more expensive than mine. You car costs twice as much as both of my cars put together. Your income is lower than mine was while working.

In short you are spending too much in relation to your income. You must live beneath your means (LBYM) and save and invest the difference. The larger the differential between what you make and what you spend the quicker you can get to financial independence.

Do not put your money in depreciating assets like cars.

Do not buy more house than you need no matter what the interest rate. You still have to make the payments on an unproductive asset.

Change your mindset to building wealth and not renting a lifestyle.

That said, you have more than I did at 29.

I think it is realistic for you to retire in 20 years or so if you make some changes in your costs.

I had about zero at 30 and I retired at 55 and that is with a wife and two kids. So I speak from experience.

 

[REWahoo]

I will, since I don't know what LBYM stands for...

It stands for Live Below Your Means and Lazarus gave you a few good real-world examples.

Only those with very high incomes, inherited wealth, lottery winnings or some other windfall (marrying into money, etc.) can retire early unless they practice LBYM. Assuming no serious health issues or catastrophic unemployment, LBYM is the single most important element in reaching financial independence.

From your description of your current lifestyle you need to make major (as in huge) adjustments if you want to reach your goal to retire by the time you are 40. Yes, that is tough and not many are able to do it - that's why so few people retire at that age.

 

[Milton]

Like an RRSP account, a TFSA can hold a wide variety of investment products (GICs , cash, strip bonds, stocks, mutual funds). It is simply a tax-sheltered account. There are a few rules but essentially your contributions grow tax-free and can be withdrawn at any time without tax. So, as well as capital gains you won't pay tax on interest or dividend income.

If you can cope with a self-directed RRSP, you are certainly capable of setting up and managing a TSFA.

My logic for the rental property. I purchase an asset that increases in value with only a down payment, it can be resold and the gains can be allocated to my "good" debt.

That's fine in theory, but the increase in value is not guaranteed.

As you are aware, Toronto real estate prices are high. Many people are talking about a bubble, and maybe prices will plateau or even a decline. Whether they are right or wrong, I can't say, but a sell off is certainly possible (you are too young to remember when the real estate market sold off a couple of decades ago). I would not be scared out of the market entirely, but you already own one home, and gambling with borrowed money seems imprudent to me.

Many people tried a leaveraged real estate speculation strategy in the US, 5-10 years ago ... it worked well at first, but not so well for those nearer the end of the cycle. Well, at least most of them had non-recourse mortgages; you won't get financing on such terms in Canada, so be aware that you would be risking your entire net worth and possible bankruptcy (I am not saying that this is likely, but like every other gamble it is important that you consider the potential risks as well as the potential gains).

 

[Meadbh]

Thanks for the input Milton.

I have not contributed to TFSA. From what I understand, the capital gains are not taxed. However, I do not know who manages this account or how it grows.

My logic for the rental property. I purchase an asset that increases in value with only a down payment, it can be resold and the gains can be allocated to my "good" debt.

The fact that you don't know much about a TFSA, the fact that you assume that a rental property will increase in value, and the fact that you are not clear on what is "good debt" all suggest that you need to learn more about basic finance and economics before getting in over your head.

Facts:

1. You can invest money in a TFSA in almost any financial instrument; cash (makes a great emergency fund), GICs, bonds, mutual funds, stocks, private REITs..... Here's a question for you. Given that money in TFSAs does not generate a tax liability for evermore, assuming equal rates of return, what type of investment would be the most tax-efficient way to use a TFSA? Do you know the maximum amount you can invest in a TFSA for $2013?

2. You are aware that the Toronto condo market has probably peaked, and that the question now is whether it will be a hard or a soft landing? This would be a good time to wait it out, unless you are looking at a lower cost market. And then who is going to look after the rental property for you? Management companies can drain a lot of your rental income. Are you going to be available with a plunger when the toilet backs up, evict bad tenants, and renovate after they leave?

3. "Good debt" is debt that helps you make money, I.e. generates cash flow. Rental properties, carefully selected, meet that criterion. Furthermore, interest paid on mortgages for rental property is tax deductible, unlike interest paid on a home mortgage in Canada.

4. Selling a rental property at a profit generates capital gains tax, unlike the sale of your principal residence. Therefore, making money from rental properties involves a combination of cash flow, leveraged "good"debt, increasing equity over time, and taxable capital gains on eventual sale after at least one property market cycle. Speculation and flipping is a fool's game.

I think you need to begin simply, by Living Below Your Means (LBYM). Save regularly, at least 10% of your gross income, more if you can. Invest in your TFSA and probably your RRSP as well. Cash is fine until you read enough to understand the pros and cons of different types of different types of investments. Listen to and learn from advisors, but beware of management fees, which are excessive in Canada. Learn about index investing, asset allocation, capital gains, income generation, tax efficiency and risk management. Then develop your plan. It may include real estate and other alternative investments, but should have basic asset classes as its core.

There are excellent reading lists on the forum (just search) and if you are looking for Canadian content you could start with The Wealthy Arber Returns, by David Chilton.

Just my $0.02.

 

[Milton]

I think you need to begin simply, by Living Below Your Means (LBYM). Save regularly, at least 10% of your gross income, more if you can. Invest in your TFSA and probably your RRSP as well. Cash is fine until you read enough to understand the pros and cons of different types of different types of investments. Listen and learn to advisors, but beware of management fees, which are excessive in Canada. Learn about index investing, asset allocation, capital gains, income generation, tax efficiency and risk management. Then develop your plan. It may include real estate and other alternative investments, but should have basic asset classes as its core.

Sensible advice.

The "Stop Working ... Start Living" book cited earlier will serve as inspiration. "Your Money or Your Life", by Joe Dominguez and Vicki Robin, is one of the classic LBYM texts; it is American but the savings (not the investing) parts are of universal application.

 

[Lazarus]

Read this first.

The Richest Man in Babylon

http://thepdi.com/Richest Man in Babylon.pdf

 

[Nemo2]

(you are too young to remember when the real estate market sold off a couple of decades ago)

To the OP:

When we returned from Saudi, (early 1989), the Toronto market was at a peak......friends relocating from Montreal were (very) anxious to buy, (against our advice to rent for a while, since the bubble signs were evident to us, having been through them before)........they paid top dollar for a multi-level condo apartment, and dropped $50K into renovations.

After the collapse, our friend allowed that, at that time, he couldn't sell the place for what they owed on the mortgage, (forget the down payment and reno expenses).

The market eventually rebounded, but there were hairy times.

Rental income: Have you ever been a landlord? I have, and shared the duties/annoyances with partners.......wouldn't do it again.

 

[My Dream]

zxcvlk

I live in the GTA, yet I can't find anything that will guarantee me over 6%. If you know something I don't, please share as I would be very interested.


As for the housing market, it was at a boom, about 8 months ago, then there was an anouncement about no longer offering 40 year mortages. Since I don't have a mortgage I can't remember the details but I think it's 30 years and the demand for housing went down considerably. The house down the street was listed for $625,000. just when the mortgage changes were implimented and the house sold last month for $535,000. Mind you it's possible it was overpriced to begin with.

As for your early retirment, I think the key points mentioned were;

LBYM,
Save,
Invest wisely,

and all will fall in place.

I was in the same situation as you when I was around 27, but my life changed as well as my priorities when I met my wife and eventually had too kids. I ended up retiring when I was 49, but was FI before that.

You've received a lot of great advice, stick around as it only gets better.

 

[zxcvlkj]

There seems to be a misconception I am living above my means. I guess that is from listing my varying incoming at the low end. I have made closer to 90k for the past few years.

With my company match I met or exceed the 10% gross saving in a pension (used to be RRSP match but it has been discontinued for a pension). I am unsure of how a pension works and assume it will payout when I retire. I don't know if I qualify for LBYM, but I do live within them.

I have also rented out a condo previously when I was living with my folks. It was not as difficult as people say and I managed the property myself. The only thing I did other then cashing monthly checks was email the building manager for a new garage remote, or I found a perfect tenant. My cash flow was positive after expenses (mortgage, maintenance, property tax, insurance, etc.)

Being on the younger side of this board I am more open to risk. Leveraging a line of credit seems to be a bad idea and I will scrap that option. I still have 40k in cash and 40k in stocks. With a possible market downturn I want to purchase a condo at the right price and still take advantage of the low mortgage rates (even with the Finance Minister's mortgage restriction).

I will need to read up on TFSA to see if it is a better option to grow my assets. I haven't contributed anything. From what I understand, I can contribute 5k/year and it carries over the next year if I do not. I believe It has been 4-5years since TFSA was launch. Can I invest 20k-25k to this account since I've never contributed, are there management or commission fees involved, or should I speak with a Financial Adviser?

Read this first.

The Richest Man in Babylon

http://thepdi.com/Richest Man in Babylon.pdf

I've tried to read this book. I hated the way it was written and gave up. The only books I have read are "Rich Dad, Poor Dad", "The Wealthy Barber" and "Stop Working". I do not recall the exact name of the third book. It was about buying blue chip stocks at low prices and wait for the dividends to grow.

 

[Meadbh]

I will need to read up on TFSA to see if it is a better option to grow my assets. I haven't contributed anything. From what I understand, I can contribute 5k/year and it carries over the next year if I do not. I believe It has been 4-5years since TFSA was launch. Can I invest 20k-25k to this account since I've never contributed, are there management or commission fees involved, or should I speak with a Financial Adviser?

Your available contribution room in a TFSA is as follows:

2009: $5000
2010: $5000
2011: $5000
2012: $5000
2013: $5500 (first ever increase)

So by January 2, 2013, you could transfer up to $25,500 into a TFSA. Very easy to set up. You could set up the account electonically with ING or with your Big Six bank. Once the account is there, you will be able to transfer cash between the TFSA and your checking account. (If you take the money out, you can't put it back in again until the following year, but you don't lose the contribution room.) Any money that you put in a TFSA in cash or GICs generates no commissions and any interest earned is tax free. However, once the money is in the TFSA, you can invest it in stocks, mutual funds, etc, as you please. If you put money in a TFSA in ING, you could transfer some or all of the cash to a low MER Streetwise fund, all done electronically. If you want to buy GICs (and you could start a nice ladder with $5000 maturing each year) speak to your bank. If you keep some of your TFSA in cash, that makes a nice emergency fund. All of this information will be easy to find on the banks' websites.

Hope that helps.