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If you've been out enjoying the nice summer weather instead of reading our ramblings – shame on you. Fortunately you can still catch the first two parts of Mr. and Mrs. TM's master plan, here and here.
Building the Nest Egg
Now that we have a general map of what our projected earnings and expenses will be going forward (ok so it’s general in the sense that Christopher Columbus had a “general” map to India) we can look at just how much money we’ll have to put away in order to hit “freedom 45”.
If we can say with a fair amount of certainty that we will have $80K in net income when we are both 27-years old, and take the high-end of our expense estimate of $40K just to be safe, we end up with an investable surplus of $40K. (If you’re wondering what happened to age 26, I’m going to go ahead and call it a write off on account of paying off student debt and our wedding). As we gradually climbed the salary ladder, we’d eventually have 70K or so to invest on a yearly basis, not counting side gigs or other promotions.
Trying to forecast our investment returns is pretty difficult. We can safely assume that the majority of our investments will be tax sheltered in our RRSPs and TFSAs. We can also pretty safely assume an overall return of 7-8% simply because we can afford quite a lot of risk in our respective portfolios simply because of the security of our defined benefit pension plans. What we can’t foresee is how the market will look when we plan to start withdrawing some of our investments, or how the tax treatment of investments might change over the time. Some would argue that the next century couldn’t possibly see the same investment growth as the past couple of centuries have, but I’m not sure I agree with that premise. I’m willing to assume 7-8% is pretty attainable.
Related: Using Questrade as a Brokerage
The End Game – Retirement or Independence?
So now that we’ve built up our nice little nest egg in our dream world, how do we figure we can just let it all go before our fifth decade? A lot of it has to do with tax efficiency and a relatively low cost of living.
The first major variable to our retirement math is how long we will actually work. At this stage of our lives, early retirement is a much bigger deal for me than it is for Mrs. TM. Many things could change in this equation, but as things are currently shaping up I would guess that she will teach for several years after I’ve had my fill. Now, I should note that if all goes according to plan and Findependence Day hits us before our 45th birthdays, she would not HAVE to work, but would instead be CHOOSING to work.
Because our projected revenues and moderate lifestyle give us a pretty solid yearly investing margin, I think a nest egg of between 1.5-2 million in our tax-advantaged RRSP and TFSA accounts, as well as non-registered investment accounts and real estate holdings is pretty reasonable by the time we hit 45 (looking at 8% long-term ROI).
Related: TFSA VS RRSP
At that point we could do plenty of things, but continuing to work full-time does not really appeal to me. For one thing, from a tax-efficiency perspective it doesn’t make a lot of sense. At 55 both Mrs. TM and I could begin receiving our defined benefit pension plans. We could also wait until 60 in order to get a bit of a higher payout if we wanted (something to crunch the numbers on when the time comes). We wouldn’t be entitled to full pensions if we opted out of teaching at the “tender age” of 45, but the monthly income would still be significant. Here is what my teacher’s pension plan has to say about our retirement formula (no one could explain it to me, so any blunders are entirely my own):
Years of service prior to July 1, 1980 x 2% x average salary of best 7 of the final 12 years of service PLUS years of service after July 1, 1980 x 2% x average salary of best 5 of the final 12 years of service;
Years of service from January 1, 1966 to July 1, 1980 x .6% x average annual salary up to the Yearly Maximum Pensionable Earnings (YMPE) under the Canada Pension Plan in the same 7-year period PLUS years of service after July 1, 1980 x .6% x average annual salary up to the maximum pensionable earnings under the Canada Pension Plan in the same 5-year period.
If you retire before you are 60 years of age, and your age and qualifying years of service add up to less than 80, legislation applies an ERP to your pension for any service you have after 1991.
The penalty is the lesser of 1/4 of 1% for each month you retire before age 60 or 1/4 of 1% for each month the combined age plus service is less than 80 at retirement.
If I were to leave the world of education at 45, I would have 23 years under my belt. Which means that if I waited until 60 to tap into my pension, I believe I would be entitled to 46% of 87K minus $6,900 or so for the CPP adjustment. This would gross me about $33,000 a year. Mrs. TM would have 19 years in when she turns 45, so her pension would take a bit of a hit and would probably end up somewhere around $25,000. That means that conservatively speaking we’d be looking at a combined defined benefit plan of $58,000 a year or so. The pension would slightly erode over time, but it does have a cost of living adjustment (COLA) that will soften the blow substantially. At 65-years old I like to think there will be something left of the CPP that I’m paying into every month, but I’m not holding out hope for the OAS. If one of us were to pass away, our defined benefit plans would transfer over to the other, so there is some security there as well.
Ages 45-60 – Our Golden Years?
I think that given our taste for rural/modest living, $60,000 or so coming from CPP and our defined benefit plans would be enough to take care of us pretty well when we’re over 60 years of age. After all, the plan would be to have the mortgage paid off and be debt-free at that point, so our expenses will hopefully be fairly meagre. But what about all of that investing we did before hitting 45?
That happens to be one of my main reasons for looking at early retirement. Many public sector workers find that once they factor in their DBP cheques upon retirement, they get taxed at a pretty high rate when they withdraw those RRSP contributions they were talked into making by their financial adviser (who coincidentally always had a handful of mutual funds that were begging to be purchased). The advantage of having no planned income between 45 and 60 would be the fact that much of that money could be withdrawn at a much lower tax rate and placed in unregistered investments. (Or into the new contribution room generated in my TFSA every year – praying that the program still exists at that point!) After playing around with various drawdown calculators for a while, I’m fairly certain we could withdraw $80,000 – $90,000 a year and still have some of our investment nest egg left to act as an emergency fund when we hit 60 and began collecting our defined benefit plan pensions. Obviously sitting down with a tax-specialist to figure out how to best schedule withdrawals from my accounts over the course of my retirement would be essential at that point.
I think the years between 45 and 60 are likely to be our largest in terms of consumption since we will have so much leisure time and a hunger to travel the world. Therefore, I wouldn’t be surprised to see us choose to spend quite a lot through that stretch.
A Vague Plan Is Better than No Plan
As I stated when I first started this piece, there are all kinds of variables that could severely warp our plan one way or another. Having children would radically shake up the dynamic. Deciding to work part-time after my Findependence Day, or Mrs. TM wishing to teach past the age of 45 seem like fairly probable scenarios. Inheritances, promotions, tragedies, and other life events are unpredictable swerves that everyone must adjust for, but at least it’s interesting and educational to take a hard look at the numbers involved over the long term.
At this point, despite what society-at large, and my co-workers might think, I believe that financial independence for Mrs. TM and I is an attainable reality as long as we can keep the phenomenon of lifestyle inflation under control (which might be a bit like saying I’d be in better shape if only I never ate dessert, but hey, it’s my dream world everyone else just lives in it).
Do you have similar goals or plans? Am I being overly presumptuous somewhere in my calculations or thoughts? It will certainly be interesting to see if anyone holds me to this post twenty years from now!
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