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Singing: “Oh, the weather outside is frightful, but the fire is so delightful, and since we’ve no place to go, time for a reader case, a reader case yo!”
Hi Kristy and Bryce,
I would like to first thank you for taking the “unbeaten path” and sharing your journey and knowledge with the world! We seem to have a lot in common 🙂 I also went to the University of Waterloo – but in the Arts and graduated with a degree in German History and Language. My husband and I both became teachers after the loss of our children’s fitness business and have spent the past 9 years teaching in Canada and in Kuwait! I have recently read your specific travel blog (How traveling the world made us money) and saw your pictures of Chiang Mai! We also visited an elephant sanctuary while in Chiang Mai and loved Thailand. As teachers in Kuwait we had the opportunity to fly way cheaper than from Canada and took our two children to 12 countries during our two years teaching in the Middle East. It was an incredible adventure.
I am writing to you specifically today as I have recently suffered a concussion (at my teaching job – I was coaching volleyball and took a serve to the head!) and it seems to have reshuffled my priorities! Truth be told… we do not LOVE teaching. My husband and I became teachers (French language teachers) as a means of supporting our family as we restarted our careers after the devasting business loss and subsequent consumer proposal.
At this point in my life, I cannot envision teaching until 2039! HA! Which is what my pension letter stated the other day! Not happening. I would appreciate any insight you have to MATH SHIT UP regarding a teacher’s pension… I will provide details below. We have a property on a lake in Muskoka that we are planning on selling in the spring which will hopefully provide us with our $1.5 Million dollars needed for our FIRE #.
Thanks for your inspiration and the encouragement to say goodbye to the 9-5 BS that so many people put up with. Life is worth living and living well!
- Your gross/net annual family income – $150,000
- Your monthly family spending – $5000
- For any debts you have, please include:
- Mortgage debt 2.29% $298,000 – HELOC 3.2% $140,000
- Any fixed assets you have Chalet in Muskoka- $1.5 Million, 2 vehicles $40,000, Recreational property $25,000
- And investments or savings you have (cash, bonds, stocks, etc.) – CASH $15,000, RESP $10,000, TFSA $6000
- Teacher’s Pension – Me $128,000 & Hubby $80,000
- If we retire before 50, we can convert our pension – 50% to a LIRA and then the other 50% comes out as a lump sum. Does it make sense to cash in the pension money and reinvest it or to wait until 2039 for a mini pension?
I appreciate all your help and wisdom!
TeacherFIRE
Okay, first of all, I’m so sorry to hear about the concussion. That sucks. I sincerely hope you are okay. You seem very resilient, bouncing back as teachers from a devastating business loss, and now a concussion. Life has a habit of throwing shit at us, and those who can MATH SHIT UP will prevail.
So, without further ado, let’s MATH SHIT UP!
Summary:
| Income (gross): | $150,000/year |
| Spending: | $5000/month or $60,000/year |
| Debt: | -$298,000 (mortgage) + -$140,000 (HELOC) = -$438,000 |
| Investible Assets (excluding RESP): | $15,000 (cash) + $6000 (TFSA) = $21,000 |
| Pension (cumulated value): | $128,000 + $80,000 = $208,000 |
| Home: | 1,500,000 (0.95) = 1,425,000 (after real-estate agent fee) |
Now typically, we don’t include real estate as part of your FIRE portfolio, but since our reader has explicitly said they plan on selling it to fund their retirement, we can include it.
We’re excluding RESP (Registered Education Savings Plan) because they will be using it to fund their kids’ education.
Total net worth: $1,425,000 + $21,000 + $208,000 – $438,000 = $1,216,000
With a family spending of $60,000, you’ll need $60,000 x 25 = $1.5 Million to be financially independent. So, you’re currently short by $284,000.
But, with a $150,000 gross income for the 2 of them, that’s $56,154 x 2 = $112,308/year net income. So, their yearly savings rate is $112,308– $60,000 = $52,308. Put another way, as a percentage of their take-home pay, they are saving $52,308/112,308 *100% = 47%. Not bad at all!
The concussion has made TF re-evaluate her life and consider quitting teacher earlier, but they don’t quite have enough for both to FIRE right now. But maybe that’s not their only option.
Option 1: Full FIRE
With estimated yearly savings of $112,308/year – $60,000 = $52,308 and a net worth of $1,216,000 after selling their home and adding in the current value of their pensions, their time to FI is:
| Year | Starting | Contributions | ROI (6%) | Total |
| 1 | $1,216,000.00 | $52,308.00 | $76,098.48 | $1,344,406.48 |
| 2 | $1,344,406.48 | $52,308.00 | $83,802.87 | $1,480,517.35 |
| 3 | $1,480,517.35 | $52,308.00 | $91,969.52 | $1,624,794.87 |
Less than 3 years!
Now, they mention that if they quit, part of their pension will be put into a “LIRA” which stands for Locked In Retirement Account. In Canada, the LIRA isn’t accessible until age 55.
But, after they quit their jobs, the 50% in the LIRA can be accessed using the Cash Asset Swap method we mention in our book (this is exactly what we’re using to access my LIRA). If they retire early, 50% of the lump sum will be taxable and part of that can be put into RRSPs (or 401Ks for the American readers out there and ISAs for the British readers out there) if they have room. The rest will be added to their taxable income for the year. So, they may need to work a few extra months to account for this tax burden.
However, after they retire, their income will drop to $0, eliminating their tax burden going forward. (For a detailed breakdown of how taxation works on investment income, read our book)
Okay, but what if her husband continues working?
Option 2: Partial FIRE
Assuming he brings in 50% of the income (feel free to recalculate this number if that’s not the case), that would give them a yearly net income of $56,154. Since their family yearly expenses are $60,000/year, they are short by $3,846/year. They would need that to cover that shortfall with the passive income of their portfolio.
With a $1,216,000 portfolio, taking out $3,846/year would only be a withdrawal rate of 0.31%, which is way below the 4% safe withdrawal rate.
So, if they’re open to this idea, they could go for partial FI right now. The downside is that this means he will have to continue working until regular retirement since that single salary isn’t enough to pay for their living expenses AND continue saving towards full FIRE. If he likes teaching more than her, this can be a good compromise since it gets her out now and they still get the benefits of his gold-plated teacher’s pension.
Option 3: Full FIRE at age 50
But what if they were to both work until 50 in 2039 to get the mini-pension? They’d get more money but they’d have to tough it out for another 18 years! That might be fine if she loved her job but she says, “Truth be told… we do not LOVE teaching”. 18 years is a LONG TIME to stick it out in a career if you don’t love it.
Let’s find out if these golden handcuffs are worth it:
According to the OTPP (Ontario Teacher’s Pension Plan), they’ll get a “reduced pension” if they retire before 65.
To calculate this number, they’ll need to use the OTPP pension calculator to find out their pension at age 65. Let’s call this number P.
Then assuming their years of service will be 18 (years until 2039) + 7 (9 years of service – 2 years in Kuwait) = 25, use this formula:
Reduction factor: 85 – (50 + 25) = 10
Reduction percentage: 10 x 2.5% = 25%
Reduced Pension at age 50 = P (1-0.25) = 0.75P
Since I don’t know Tf’s 5 highest salary years and I don’t have a teacher’s access to the calculator, I won’t be able to figure out their exact P value. So, we’re going have to estimate.
Using her current gross salary of$75,000 * years of service * 0.2% = $75,000 * 25 * 0.02 = $37,500/year.
Since there are two of them, that would be $37,500/year * 2 = $75,000/year. Applying the reduced pension formula, we get 0.75 *$75,000/year = $56,250/year
A reduced pension amount of$56,250/year would require a portfolio size of$56,250* 25 = $1,406,250 to generate.
So, is giving up 18 years of their lives doing something they don’t love worth a $1.4 million dollars?
I could’ve also had at least a million more if I worked a few extra decades, but to me my time is worth more than the money. I only have one life to live and I don’t want to waste it doing something I hate. They may feel differently.
If they want to talk to another teacher for validation, they can reach out to Kyle, who gave up a sweet teacher’s pension to fast track his time to FI by teaching in Qatar. I don’t think it’ll be a big shock for them anyway since they already know what it’s like to like to teach overseas in Kuwait.
So, while they don’t have enough to retire yet, they’re pretty close. If they continue working for 3 more years and follow through with selling their house, they will reach FI.
They can also choose to stay on to collect their million dollar teacher’s pension by working until their 50s, but that’s not a decision I can make for them. Only they can decide whether the golden handcuffs are worth giving away 18 more years of their lives to teaching.
What do you think? Should TF continue working until age 50 or cash out early? Do you have any additional advice for them?
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Hi South east Asia is quite nice and cheaper to live in… could lower your spending amount to fit your savings so can retire now?
One comment. Take the concussion seriously. Brain injury is not to be trifled with, ever. 🙏 (Speaking from personal experience.)
Thank you for that! Yes, I am receiving Occupational Therapy for the MTBI (mild traumatic brain injury) and will continue to get the help I need! A concussion is no joke in your 40’s ++
Thanks so much for your suggestion. Yes, we would love to live in Thailand or Bali for a portion of each year to reduce our monthly costs. Once our kids are the right age… we will do it!
Great! I have similar plans mid 2022 since I am FI. See u there and good luck on your journey
My only concern with these calculations is that you include the value of their real estate minus realtor fees which is great, but what about any taxes on that property? Did the property not increase in value since they purchased it?
If it’s a 1.5M property and their loans are sub 500k that means they have 1M+ equity in the home. Most people don’t put 1M+ down on a home purchase so I’m guessing it’s appreciated since they purchased it. I don’t know Canadian taxes when it comes to property but I’m guessing they will owe something when they sell. That could easily be another 50k+ hit in taxes so let’s not ignore that since that’s basically a year of expenses.
If they can treat it as a primary residence the gain is tax free in Canada
I should have bought a house in Canada! ……The taxes on gains are a big reason that I just consider staying put instead of moving. My house has appreciated by roughly 400k and I’m not married so that’s a decent chunk of taxes when I sell. And getting married to sell a house just sounds like a bad idea 🙂
Thanks, BIKEMIKE!
You got it!
Thanks, Zach.
Yes, capital gains tax is usually a concern, however this cottage property is still our primary residence for tax purposes. We are currently living with family to reduce our expenses and have our property rented for additional income. At the point of sale, it will be our primary place and we will avoid the tax price tag 🙂 Thanks for your input!
Be careful… If the home is currently rented, you cannot claim the principal residence deduction for that year.
In that case, it’s possible you have a portion of the gain that will be taxable when you sell the house. For example, if you owned the house a total of 10 years and rented it for 2 years, you may have 20% taxable gain, or 10% capital gain (50% of the 20% gain).
If you paid 1M$ for the house and sell for 1.5M$, for example, that would mean a 50K$ taxable capital gain at the selling of the house and a 17.5K$ tax bill (considering a 35% average tax rate). Nothing to derail your plans, but certainly something to consider.
Note : 400K$ or 80% gain eligible to the principal residence deduction and 100K$ gain taxable @ 50% = 50K$ taxable capital gain.
Also, you may have to consider whether you already “sold” your house according to CRA rules regarding “Changes of use”.
Here some information for you if that apply to your situation :
https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-12700-capital-gains/principal-residence-other-real-estate/changes-use.html
You can’t claim the personal residence exemption if that is the case. At least not for the time the property was rented out. If you do, that’s tax fraud.
Never understood why people think it’s ok to commit tax fraud.
Yes, correct. We have a wonderfully helpful accountant and will be moving back in to the property after the winter season as it is closed for a time. He is able to help with all of the details and we will do everything above board. Thanks for your input.
That’s good to hear.
In the US, you are exempt from up to $500k in capital gains if married filing jointly. This isn’t talked about enough when folks are bashing home ownership as bad investments. You can’t do that with stock investments.
Yes, we are happily married too 🙂
I also identify with this couple that teaching does not motivate me anymore. I am a Canadian teacher living in Tokyo trying to FIRE in Japan with her husband. Teaching English to Japanese students at a university is a way for us to become FI faster. Check out my blog if you are in the same boat as me:
https://expatcanadianintokyo.com
Should funding a post secondary school education for your children be part of this discussion? The amount in the RESP does not seem adequate for two children.
Hi Theresa,
Yes, you are absolutely correct. The money in the RESP is not sufficient for 2 children. We do have separate trust accounts for each child from deceased relatives to provide for their education. At this point they are at about $20 000 each, however we are also exploring the option of having them attend university in Germany (as it is FREE for Canadians – or actually about $600 a semester).
In Canada, “when you sell your home or when you are considered to have sold it, usually you do not have to pay tax on any gain from the sale because of the principal residence exemption.”
(https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-12700-capital-gains/principal-residence-other-real-estate/sale-your-principal-residence.html)
Does the $60,000/yr budget include accommodations after selling the Muskoka property? More specifically, if their current budget only includes the P&I payments on the amortized mortgage and interest-only payments on the HELOC, then I am not convinced the cost of a rental would be covered in that budget while they still have 3 years to work in the area. However, this extra cost may only add a few months until the FIRE threshold.
They are also better off working until early January of any calendar year, so as to get the taxable lump sum portion of the pension taxed in the lower tax bracket(s), as opposed to being added to a full year’s worth of Ontario teacher earnings.
And they should really maximize contributions to RRSP to their full available room to drop their incomes significantly in each of the 3-4 years to FIRE (especially if this is the last time they plan to have full time permanent incomes in Canada; they probably have enough room, will save a lot in taxes during those years in a higher tax bracket; and withdraw slowly in the lowest tax brackets after FIRE).
Some of the RESP contributions can also wait until they can maximize government contributions to RESP once their incomes drop and monthly CCB payments from government increase (depending on the ages of their children). In fact, those government benefits may significantly reduce yearly expense budget for someone with children, until they turn 16 or 18 (depending on specifics). Of course, all this assume one maintains sufficient ties to be considered an actual or deemed resident of Canada for tax purposes.
All in all, there are a lot of tax/benefit optimization avenues that might be available here to make their goal of FIRE achievable sooner or with a higher starting portfolio value.
***no individualized tax or legal advice given. all content should be viewed ONLY as ideas for further research***
Thanks for your insight. Regarding our current accommodations, we are living in and paying the mortgage and taxes on a property ($1800 a month) that we intend to live in for our Canadian stay and will take it over in the future (and rent it as necessary when we travel abroad). You are correct that RENT in this area is quite high for a 3 bedroom, 3 bathroom home.
That is a great suggestion to MAX out our RRSP this year, as well as our RESP’s for the kids. We will consider the CCB and contribute the additional funds as able. Thanks for your wisdom.
If they have a 1.5M$ property they can sell tax-free (principal residence), they are certainly very close to FIRE. If it was mortgage-free, it would be even better !
The main question I would have for them is whether they are willing to downsize to a smaller home, condo or live in a different location where the price of homes are drastically lower. If they are, then, this plan make more sense. If they sell to rent 5000$/month for a similar house in the area, then the plan doesn’t work.
———
For their pension plan, I am more in favor of withdrawing the funds and manage myself. But they can only do that after they quit and may have to wait to withdraw according to the pension rules. The amounts will therefore likely be bigger, so will be the “income tax penalty”.
The main advantage to withdrawing the funds is you can get a better return on the funds over time. But you have to manage the funds well.
Pension plans generate maybe 5-6% returns over time because they are very scared of losing money, and therefore, they adopt overly conservative investments strategies.
On the other hand, for people who can withstand market fluctuations, a S&P 500 index fund can generate around 10% return annually. But it is not guaranteed and it’s possible to get lower returns depending on market conditions.
As for the “income tax penalty” on the pension lump sum, a 50% tax rate would be the highest amount only if they have no way to reduce the income tax.
There is two main ways of reducing the income tax rate on the lump sum.
First, you can manage to have very little other taxable income during the year of the withdrawal. For example, wait to withdraw the funds after quitting (the year after or later) and try to invest the proceed of the house in tax efficient investments (TFSA, low or no dividend stocks or ETF like Berkshire Hathaway, Google or Alibaba for example).
Second, you can contribute part or all of the lump sum in a RRSP. This assume you still have contribution room. But if the contribution room is high enough, it could also mean that no income tax at all would be payable on the withdrawal).
If maximisation of taxes is possible for the lump sum payment, the income tax could drop from 50% to 25% for example (approximate rates). A 25% average tax rate would mean a reduction of the tax bill from 32K$ to 16K$ for her and from 20K$ to 10K$ for him.
A total 26K$ income tax on a 208K$ portfolio is a lot (12.5% fee). But it’s not impossible to make it back with better return. The 52K$ (25% fee) is even more, but you need a lot more time to recover. If they don’t touch this money for another 20-30 years (using the house funds first), the portfolio could become much bigger than if they would have let it inside the pension plan.
I think they are close to Full FIRE. Waiting another 3 years will probably be better however. They will have more time to prepare, think about their plan and enjoy their FIRE journey.
Please do not pull the trigger on the FULL FIRE due to the following red flags…
1. Using 4% withdrawal rate for FIRE calculation, starting in your 30’s is very risky.
2. The majority of your wealth accumulation is in RE (lottery).
3. You have the responsibility with two young children. Their college education will crush your FIRE.
Your FIRE mile marker is somewhere between Option 2 and Option 3 as suggested by FIRECracker, but use 3% withdrawal rate if you decided to pull the trigger before your 50th birthday.
Good luck!
They can log into the pension calculators for OTPP.
It allows you to run all of the calculations and scenarios you’d like.
They can retire at any time but won’t be able to draw the pension until age 50. They can get exact numbers from the website.
Also- don’t forget that the pension will be clawed back at age 65. This is in line with assumed CPP payments.
If you retire early, or if you’ve been out of the country for multiple years, you won’t get full CPP.
This means that your pension can be smaller than you’re expecting at age 65.
You could also consider a mini retirement between now and when you’re ready to quit/draw your pension. The Ontario contract allows for deferred salary sebbatical years. These are often done as 4/5, but can be 1/2. Your take home pay is reduced but payed out to you on your year off.
Depending on the contact for your specific board, you still make full pension contributions for that year off (like buying back a mat leave). This means that your year off counts towards your pension years. Your benefits can also stay intact depending on your contract.
We have committed to working until 50 (my husband enjoys teaching), but we’ll take two years off between now and then with the 4/5 strategy.
When I FIRE’d I decided to leave my defined benefits pension with my employer. One of my reasons for doing so was because I would be eligible for health benefits (dental, physio therapy, vision, prescriptions etc) not covered by OHIP. I felt those benefits were worth hanging on to. But my FIRE calculation does not include my pension amount. That will be extra money that I will start receiving when I turn 65.
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