If you’ve been around here for a while (what the hell is wrong with you, anyway!?!?) you’ll know that I’m no fan of the retire early movement. I just never got the point of hanging up the skates for 50 or 60 years. I can’t envision having a happy retirement doing nothing all day long.
I’ve never really understood why we have to wait until having a specified net worth to do what we want. If you want to make changes in your life, make them. I was a traditional full-time employee for 15 years before deciding I had enough of that. Now I work on things that interest me. These projects usually have an ultimate goal of making money, but not always.
I’ll take it a step further and say I never plan to retire. I want to be doing interesting things until they download my memories into some hard drive somewhere, which is close enough for immortality for me. I’ve probably got 50 years left. That gives them plenty of time. GET AT IT, EGGHEADS.
This has led to plenty of clashes between me and the early retirement community. The folks over at Reddit were no fans of my philosophy and the Mr. Money Mustache forums told me to go straight to hell too. (I can’t find the MMM forum link which is too bad because I’ll always remember that one guy who thought he knew everything about me based on one blog post. It truly was delightful.)
These folks are all about retiring, while I’m on record saying I’ll never do it. No wonder we didn’t see eye to eye.
And then, a few weeks ago, I realized something. We’re both talking about the same damn thing. We’re just calling it something different.
Sorry, still not retired
If you read the early retirement blogs, they’re filled with people exchanging their time for money. Seriously, go check them out. It’s amazing how much these people work and still say they’re retired.
They all blog, which is a form of work right there. It’s hard to argue otherwise when you’ve got 14 different affiliate links on your site.
They do other things too. Some might be into travel hacking. I read one this afternoon whose owner went to help bottle beer and one last week about a guy who goes into the office 1-2 days a week. The chick from Frugalwoods is a freelance writer. And so on. There are a million of these. The common theme is, without exception, they still do stuff in exchange for money.
There are also those early retirees who have wives that still work. Those are the best ones.
Okay Nelson, so what’s your point?
It’s this. Fuck it. I’m retired.
My life is exactly the same as every other early retiree’s out there. I write stuff on the internet and combine that with hobbies to get me out of the house. I spend way too much time trying to optimize my finances and tweaking my portfolio. The only difference is, up until two minutes ago, I didn’t call myself retired.
I won’t go as far as saying I’m retired from 9-5 life or a regular job or whatever the hell you want to call “normal employment” either. If the opportunity is interesting enough I’ll gladly go back to working traditional hours again. Hell, I’ll work 60 hours a week for something that interests me enough.
No, I’m not retired from work. That is not the key to a happy retirement. I’m retired from work I don’t want to do. Which is the same as every other early retiree.
No matter how loudly they might claim it on r/financialindependence, these folks don’t hate work. They hate work that isn’t on their terms. I understand this completely and agree with it wholeheartedly.
My keys to a happy retirement
I’ve come to realize I like working on stuff for a while and then taking a step back. I lose interest in doing the same thing every day. So I look for things to do that offer:
- day-to-day variety
- the ability to use my brain and try to solve interesting problems
- the ability to (generally) earn me money
- enough flexibility that I can travel and not have everything go to hell
These are the keys to an happy retirement for me. They’re the keys to a happy life, too.
This might mean working a part-time job at a grocery store, a project that will take up more of my time really soon. (The store is doing a renovation and I’ll be helping out, which consists of a lot of planning and setting up new sections. It’s my favorite part of the job) Or it might mean this here bloggening. Or it could mean something else. But as long as I can stay busy and do stuff that doesn’t annoy me, I’ll be happy.
And if something does start to piss me off. I can easily quit. Which is why we all strive to be financially independent in the first place. So we have the freedom to do that.
Wrapping it up
Ah, it feels so good to announce I’m officially retired. Finally, me and the early retirement community can be friends! Come on over, guys.
Screw it, I’m mad again.
At least for me, the secret to a happy retirement isn’t doing nothing at all. It’s work on my own terms. That’s the ticket.
I’m sure y’all remember back in the day when the FIRE (that stands for Fuck It, Retire Early) collectively took a giant coiler on Suze Orman and her AUDACITY of having an opinion that there are just too many variables to count on a million bucks lasting 50-60 years, even if you’re damn cheap. If you don’t remember, don’t worry! I wrote about it.
Naturally, Suze was attacked with more vigor than blue checkmarks on Twitter going after that MAGA hat kid (TOPICAL!). She didn’t get it, went every blog post ever, because she is so rich she doesn’t remember what it’s like to be a regular person. They dismissed Suze’s valid criticisms with studies that prove the math behind early retirement is foolproof. (Spoiler alert: it’s not)
The big issue, at least from this guy’s perspective, is healthcare. Canadian readers might be blissfully unaware of this, but I’m constantly amazed at how expensive U.S. healthcare is. I’m as capitalist as they come and even I have to admit it just doesn’t work. There’s just too many people looking for a piece of the pie.
Orman was specifically referring to long-term care when talking about these medical risk, and she’s onto something. Look at these numbers:
You’re looking at $100k per year in today’s dollars to stay in a nursing home.
That’s okay, you say. I can just insure away those risks.
Uh, no. Long-term care insurance essentially doesn’t exist in the United States any longer. Genworth, who used to offer it, stopped because the underlying care costs went up way faster than even the worst case model predicted.
Think about this for a second. Insurance executives, who are smart guys who think about insurance every hour of every day, took a look at this risk and noped out of it. What chance do you have of guarding against it?
Anyway, good news. At least for all the Americans reading this. I have a way you can have your cake and eat it too.
Move to Canada, yo
You know you want to. You’ve probably been thinking about it ever since Trump got elected.
Two political references in one post? You’re on thin ice, pal.
Health care isn’t the only reason for you to join us up here, either. All you really need to do is make sure you have enough money to last until age 65 and then you’re golden.
Don’t believe me? Check out all the programs Canadians have to help out seniors:
- Guaranteed Income Supplement
- Old Age Security
- Spouse’s allowance
- Discounted prescriptions
- Income splitting
- Fantastic taxation on dividends
- Discounted housing programs
- Government subsidized assisted living and long-term care
And so on. There are a million of these, which collectively can save seniors between $10-$30,000 a year. Yes, really.
Related story time. My grandparents, despite having a sizable nest egg, qualified for $500/month rent at a local seniors’ apartment. The reason? The assets were all invested in GICs that didn’t pay much of anything. This kept their income low, which qualified them for discounted rent. They’re now milking that same teat at the local assisted living facility.
These programs are everywhere in Canada. And nobody dares cut them because they know seniors are the only ones with enough spare time to actually go and vote.
More bonuses for Canada
You’ll likely pay higher taxes while you’re working here in Canada and winter blows, but those disadvantages are nothing compared to the perks of living in the Great White North. You’ll get:
- An instant 33% boost to your net worth when converting your U.S. Dollars to Loonies
- Health insurance that covers absolutely everything (including dentists, prescriptions, eye wear, chiropractic, and travel insurance) for about $100-$300 a month, depending if you can get your employer to pay for half. Most can.
- Way fewer murders
- Some of the nicest cities in the world
- Cheap housing (assuming you stay away from Vancouver and Toronto)
- A national pension plan that isn’t insolvent
- The handsomest Prime Minister
- Basically be Nelson’s neighbor
Now I’m not going to pretend emigrating to Canada is as easy as showing up at the border and asking pretty please. But it’s not really that hard, either. There are plenty of investor programs that are basically begging for foreigner money in exchange for citizenship. Americans will do well at the ranking system used to sort applications too, because we share a common language and it’s easy to visit Canada to check the place out.
Manitoba has a entrepreneur pathway that just about every American with a US$1 million net worth would qualify for. Winnipeg isn’t that bad. Ontario, Quebec, and B.C. each have similar programs. It’ll take a minimum $150,000 investment in Nova Scotia to get residence there. This is very achievable. There are also plenty of skilled worker programs that make it relative easy for teachers, nurses, doctors, and so on to switch. Canadians all know a person or two who went to the states in search for more money. It was a thing for a while there, we called it the brain drain.
Okay, let’s wrap this up
Health care in the United States has the ability to screw even the most well-laid plans. Coming to Canada (or any country with socialized medicine, really) will take that risk away. So if you want to FIRE, join us up in Canada. We’ll save some poutine for ya and we promise to explain all the rules of hockey.
Your boy Nelly has long been a fan of RRSPs, even preferring them over TFSAs for a lot of people.
Basically, the logic goes like this. As long as you’re making a decent amount of money, you’ll trigger a nice immediate tax refund by investing in your RRSP. That refund can then be reinvested. If you’re in the 25% tax bracket, it’s basically like getting a 25% guaranteed return and then you get years of compounding on that return.
To really illustrate the power of this, allow me to consult my oldest and best friend, the compound interest calculator.
Reinvesting $2,500 of free money turns into an additional $16,000. All you have to do to make that money appear is to reinvest your tax refund, which you only got from contributing to your RRSP in the first place. It’s truly amazing.
If you do this for a decade you can really see how immediately reinvesting that tax refund starts to add up. All it takes is a 10-15 years of investing a decent amount when you’re young to ensure there’s enough for retirement.
But we often forget about what happens once you hit retirement age. That cash has to be taken out, which becomes a problem if you’ve got a mil or two sitting there. Not a big problem, mind you, but a problem nonetheless. Just how can you deplete your RRSPs without paying a boatload of tax?
I’ve been thinking about this lately. I first started contributing to my RRSP as a slightly chubby 15-year-old flush with cash from my first job. That contribution was approximately $500 and God does that make me feel old today.
Surprisingly, the 15-year-old ladies of 1998 were not impressed with my savings ability. It’s okay though; they’re all clearly lesbians.
Remember, there were no TFSAs back then. So I continued to contribute despite not having much of a tax liability. I consistently put money away over the years to the point where I’m now sitting on some pretty solid RRSP assets.
I’ve crunched the numbers and if I compound these assets at 8% for the next 30 years — which is when I’ll hit the traditional retirement age — I’ll have well over $1 million in just RRSPs alone. I should also have another $1 million from my TFSA, which I plan to max out annually for as long as I can.
I’ve also got stocks and other investments outside of these registered accounts.
So what’s a guy to do?
The problem with all this is I’m looking at big tax bills when I hit age 65. I guess I can delay it until age 71, when I’ll be forced to contribute 4% of the portfolio.
Say it’s worth $1 million even. I’ll have to withdraw $40,000 per year that first year and then even more going forward. If I have a portfolio spinning out lots of tax-efficient dividend income (which is the plan). I add the $40,000 per year — which is fully taxable — to say $50,000 in dividend income and I’m looking at a relatively high tax rate.
And that’s assuming I only get $50,000 in annual dividend income. Considering our savings rate today and having 30 years of growth ahead of us we could easily have $150,000 to $200,000 in household dividend income by the time I hit retirement age.
It was valuable to me to defer tax when I was younger. But the more I look at it the more I realize deferring tax is no longer the right answer for me. I will likely only contribute during heavier taxed years going forward, choosing instead to channel savings into my TFSA and taxable accounts.
Yes, you can oversave for retirement
Is oversave one word or two? Screw it, I’m going with one. Even if Google doesn’t agree with me.
Somebody who blindly invests the maximum into their RRSP for their entire 45 year working life is doing it wrong, IMO. They’re going to end up with a massive amount of money set aside that’ll all have to be withdrawn at a high tax rate.
The better strategy is to end up with a moderate amount in your RRSP and go nuts maxing out your TFSA.
But at the same time, this only really applies to the very small percentage of the population that has consistently maxed out their RRSPs as a young person. If you’re 40 and are sitting with $25,000 in your RRSPs ignore this whole post and put in as much money as you can afford. Your problem is saving enough for retirement, not avoiding tax caused by oversaving.
Essentially, I’m getting close to oversaving for my retirement. If I don’t settle down on the RRSPs I’ll have a big tax bill when I get older. I’m the first to admit this is the very epitome of first world problems, but it’s still something I’d like to avoid.
It’s taken me a little while to realize this, but hey. Apparently getting things in a reasonable amount of time is not my strong suit. Hell, it took me 18 years to figure out long division.
The key to happiness is to design the life you want to live from scratch. Some people like the routine of going to work each day, but most of us don’t. We want to be able to randomly take a Thursday and go to an interesting event two cities over without having to worry about the consequences at the office on Friday.
I’ve recently taken steps to do this myself. Gone are the days where I’m going into my grocery store job five days a week. I’m down to 1-2 days a week and couldn’t be happier. I get the interaction with the guys without falling into the trap of workplace politics. I feel more like a casual observer than someone who actually cares about what’s going on.
I should have done this a year and a half ago rather than quitting my writing job.
Speaking of my writing job, I’m back at it, baby. You can read my stuff here if you’re so inclined. I’m also available to write on your blog. Because, hey, who doesn’t need a bunch of dick jokes and incomplete sentences masquerading as actual serious points about finance.
Just think about it is what I’m saying.
Anyway, let’s get to the point of this article — you don’t need to wait for financial independence to make the life of your dreams.
Unhappy? Then change things, stupid!
Back when I had a more conventional job, I used to fall into the same trap whenever things weren’t going well. I’d vow to quit my lousy job and travel around North America, seeing a ball game at all 30 MLB parks. Only then would I be happy.
This was not healthy, of course. It was nothing more than escapism. I didn’t really want to travel long-term. I just wanted to be away from my crummy situation.
After doing this a few times I began to realize something. If I’m fantasizing about being away from a particular thing on a regular basis, then it’s probably a good idea to quit that activity. It doesn’t matter if that thing is a job, or a hobby, or some other form of commitment.
Of course, things aren’t always that simple. You can’t quit things willy-nilly. Most people can’t live without a job, and many have become accustomed to having a certain lifestyle. In other words, taking a pay cut is out of the question. Which means they’re stuck between the proverbial rock and a hard place. The only way they can quit their lousy job is to replace it with one that offers a similar level of pay. That wage comes with similar responsibilities and duties, which negates the whole point of quitting the lousy job in the first place.
So they turn to financial independence. That’ll solve all their problems.
Remember, you don’t need financial independence to be happy
Let me tell you guys about a buddy of mine who lives a pretty interesting life.
He discovered he doesn’t need much to make him happy. He lives in a small house in an extra quiet part of a small town. His leisure time is spent watching movies, reading books, and going online. He doesn’t own much stuff because there simply isn’t room in his small house for it. Besides, things don’t really make him happy anyway. Much of his disposable income is spent going on random road trips.
These decisions were a result of a long thought process about his life and what made him happy. About 15 years ago he was on the fast track to an upper management post at a certain Canadian retailer I used to own shares in. Once he hit middle management it didn’t take him long to conclude being in charge of people made him miserable.
He realized he would be much happier if he wasn’t in management, trying to motivate retail employees who want nothing more than to slack off all day. So he made a choice. He vowed to live a life so simple that it could be sustained on a entry-level salary. He then quit his stressful middle management job in favor of one that barely makes more than minimum wage. It’s been 15 years now and he doesn’t regret his choice for a second.
Don’t Wait. Act
The point is you don’t necessarily need financial independence to live the life of your dreams. You need to define what your ideal life is first before striving to become so rich you no longer need to work.
Say you want to become a full-time writer, or blogger, or whatever. Do you really need to hit a $1 million net worth to do that? Hardly. The world is filled with entrepreneurs who quit their jobs to start something new. Hell, some people might argue having no safety net will make someone more likely to succeed. Failure just isn’t an option.
For many people, financial independence ultimately becomes something they need before embarking on the life of their dreams. I’d argue waiting to design your best life is silly. Do it today, and do it with gusto. Don’t wait for your net worth to hit that magic number, just go for it.
But at the same time, I get it. The kind of person who waits until they hit a seven-figure net worth to make significant life changes is obviously a little risk adverse. Quitting their job and moving to a tiny house in the middle of nowhere is out of the question. So they wait until they hit their number and then make the change.
This is perfectly okay, of course. Just remember, you don’t need to wait that long. If it’s your dream to write or open a small store, take steps to do that today. Not tomorrow, not 10 years from now when you’re moderately wealthy. Do it today. Start designing your ideal life now.
Today we’re going to be talking about safe withdrawal rates. And you people said I’m not fun at parties.
Most people don’t spend much time on safe withdrawal rates. They go to work until they think they can retire. And then they hope like hell their nest egg lasts them long enough. This seems like a bad strategy, but most of the time it works. People are remarkable creatures sometimes.
Early retirees are obsessed with safe withdrawal rates. Some people might even mock them for this obsession, but I never would. After all, they were kind enough to not make fun of me that time I had a very visible booger in my nose for four years. Yeah, that happened. I prefer not to talk about it.
Many U.S.-based bloggers have done a ton of work on safe withdrawal rates, which I’ll sum up in about a sentence and a half. You can safely withdraw 4% of your portfolio each year and not run out of money, at least historically. If you’re looking for a bit more of a cushion, then only withdraw 3-3.5% of your assets each year.
So if you plan to spend $30,000 a year, then feel free to call it quits after amassing $1 million. If you’re feeling frisky, you could wrap it up after coming up with $750,000. Many of these folks do exactly that, successfully supplementing their income with part-time work or small online businesses.
These numbers have been proven to work for U.S. investors. But will they work for Canadians? Let’s find out
Safe withdrawal rates Canada
Oh, Canada. You crazy place. With all the poutine and socialized medicine and whatnot. Will you ever learn?
Are you talking to Canada like it’s your cat after it has been mischievous?
You bet your ass, Italics Man.
Personally, I both love and hate the Canadian stock market. On the one hand, we have a number of sectors that are pretty much guaranteed to provide great returns going forward, at least in my humble opinion. Our banks have been historically stellar investments. Our pipelines have also been fantastic places to park money. It’s also been pretty hard to lose investing in the telecoms.
The bad part of our stock market is the amount of oil and resource companies. These are mostly trash and can easily be avoided, freeing up your mental energy to analyze companies that don’t suck. Unfortunately, this means I’m not a fan of most Canadian market ETFs. I just won’t tolerate 20% of my portfolio in terrible sectors.
I’m convinced a portfolio stuffed with Canada’s best dividend payers will allow investors to spend the dividends without having to worry about the principal. Easy, peasy. But we’re not talking about that, so let’s take a closer look at investors who just buy the Canadian indexes and call it a day.
Sorry, you’re not hitting 4%
Unfortunately, there’s no Trinity Study for safe Canadian withdrawal rates. We’re going to get a little less scientific here.
A firm by the name of Resolve Asset Management specializes in putting investors into these types of portfolios. They caution against using one firm number for a safe withdrawal rate, since there are a number of factors that could matter. Say you retire when stocks are in a bubble. That would reduce equity returns going forward, which means your withdrawals would be limited.
Resolve Asset Management believes a safe withdrawal rate for Canadian investors is somewhere between 3.23% and 3.87%. Personally, I don’t think two decimal places is precise enough. Three or you’re not trying.
Wade Pfau, who writes over at Retirement Researcher, studied whether a 4% withdrawal rate would have worked around the world.
His findings were a little bleak. The 4% rule would have failed surprisingly often in many countries over the years, including Japan, Germany, and France. The good news is according to Pfau’s research, a safe withdrawal rate in Canada would be slightly higher than in the United States. The bad news is he’s not convinced a 4% safe withdrawal rate is safe.
Still, he found the safe withdrawal rate for a 50/50 stock/bond allocated portfolio in Canada would be 3.96%, slightly higher than the U.S., which has a 3.94% safe withdrawal rate. Japan’s safe withdrawal rate would be 0.2%. No, that’s not a typo. No wonder the Japanese are so weird.
Morningstar also tackled this problem back in 2017. They found that low fixed income returns would push down the likelihood of a 50/50 portfolio lasting much longer than 25 years being withdrawn at 4% annually. They figure investors who invest in 100% equities could survive even a 40 year withdrawal period, but introduce greater variance by going about it this way.
Let me summarize the various Canadian safe withdrawal rate studies out there.
Low interest rates have made the 4% withdrawal rule difficult, especially for those folks who want the added stability of bonds in their portfolios. Rates have crept up lately, which is good news. Five-year GICs now regularly pay out more than 3%.
If I was looking at retiring today — which would mean a 50 year retirement, give or take — I wouldn’t withdraw any more than 3% of my assets. I’d likely bump that down to 2.5%, just to be sure. Which means if I wanted to spend $35,000 a year, which is approximately what my wife and I spend annually, I’d want $1.4 million in the bank.
Maybe I’m overly cautious, but I wouldn’t feel comfortable basing my early retirement on the 4% rule. I’d have to have some sort of backup plan, like earning a little extra income or having a spouse who continues to work.