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Hey everyone!
In our continuing struggle to get back to a somewhat normal posting schedule, today we decided to do a reader case! It’s been a while, hasn’t it?
A recurring theme we’re getting from customer reviews of our book is that they “wish they knew all this 20 years ago!” To those people, I always respond that it’s never too late to get started, but to their point all this information we present does have the greatest impact on a person’s life if they receive it at the beginning of their working careers. Fortunately, today’s case comes from someone just like that, who’s just heard of FIRE right at the start of their career! Meaning they haven’t had a chance to make any major money mistakes yet, and are wondering what the right thing to do going forward is. So without further ado, let’s dig in!
Hey you two,
I’ve been reading your blog for a while now and just finished listening to your episode on ChooseFi. Very inspiring, especially as someone living in Vancouver, another insane Canadian housing market. Couldn’t agree more with you both about the cult of home ownership.
Anyhow, I thought it might be interesting to write in to you, as of today, we are are (basically) at ground zero of our FI journey. We paid off our $73,000 in student loans in one year last year, and just paid off our car this past weekend, so we officially have no debt!! Here’s a little bit about us:
- We are a small family of 3, our daughter is 5 months old
- We both work in healthcare and our net household income is $115,000.00
- Our monthly spending is about $4000
- I make 5% bi-weekly contributions to a company RPP that they match+0.5% pre-tax. It’s value is about $28,000 and the MER is 2%. I can’t get out of it or manage it myself. It would be converted to a LIRA that I can manage if I left my job.
- My wife has a defined benefit pension plan – which im having trouble figuring out how to incorporate into our calculations. Don’t know the commuted value, etc.
- We own a 2012 Mazda 3 – the value is about $6000 now. No other major assets.
- We each have about ~$35,000 in contribution room in our RRSP and about ~$60,000 in contribution room in our TFSA
- We have $3000 in an RESP for our daughter. 80eq20fi based on a couch potato model.
- Part of my net income is a side hustle, it generates about $20,000/yr
Basically we are starting our FI journey now. We’re a blank slate!! We are looking for the fastest way forward. We are both minimalists and are used to living with a high savings rate. We’re looking for direction on whose’s tax shelters to prioritize (especially considering I have a sole proprietorship), how to factor in a defined benefit pension plan, and any general thoughts on the fastest way forward. We’d like to be retired by 42 (so I can have a year retired with my daughter before she’s a teenager!).
Would love to hear your thoughts! Thank you 🙂
The Budget Beards
So first of all, CONGRATS on paying off that student debt. $73k ain’t nothing to sneeze at, so you should be incredibly proud of that! The fact that you’re both in the medical profession with no student debt should give you a leg up on your journey to FIRE. Unfortunately, you do live in Vancouver, which is a high-cost city, but on the plus side you haven’t blown up your finances by buying an overpriced house, so that’s cause for a considerable amount of optimism.
But you know what they say, feelings are useless (or at least, that’s what FIRECracker says). So to see how you’re doing, it’s time to…MATH SHIT UP!
Time To Math Shit Up!
OK so what are BudgetBeard’s top-line numbers?
| Summary | Amount |
|---|---|
| Income | $115,000 net |
| Spending | $4000 per month, $48,000 per year |
| Assets | $28,000 in a RPP (Pension) |
| Debts |
We’re not going to include the RESP since that’s earmarked for their kids’ education rather than their own retirement.
So we have a pretty high earning family, with average to slightly-above-average spending. Not too bad, considering where they live. But on the plus side, all debts have been eliminated which is a huge burden off their monthly spending, so that’s great.
$48,000 of annual spending would suggest an FI target of, as per the 4% rule, $48,000 x 25 = $1,200,000. That’s a pretty hefty lift.
On the other hand, their savings rate is pretty good. If their spending is $48,000, that means they should be able to save $115,000 – $48,000 = $67,000 a year. That’s a savings rate of $67,000 / $115,000 = 58% after-tax! Based on that number alone, we can expect BudgetBeard’s family to be able to hit FI somewhere around the 10-15 year mark. Our reader said they wanted to spend a year retired with his daughter before they become a teenager. Good call. I hear teenagers are the absolute WORST!
Anyway, so that would put our target retirement date at about 12 years, since the kid is only 5 months old now. Does BudgetBear make it? Let’s see…
| Year | Balance | Savings | ROI | Total |
|---|---|---|---|---|
| 1 | $28,000.00 | $67,000.00 | $1,680.00 | $96,680.00 |
| 2 | $96,680.00 | $67,000.00 | $5,800.80 | $169,480.80 |
| 3 | $169,480.80 | $67,000.00 | $10,168.85 | $246,649.65 |
| 4 | $246,649.65 | $67,000.00 | $14,798.98 | $328,448.63 |
| 5 | $328,448.63 | $67,000.00 | $19,706.92 | $415,155.54 |
| 6 | $415,155.54 | $67,000.00 | $24,909.33 | $507,064.88 |
| 7 | $507,064.88 | $67,000.00 | $30,423.89 | $604,488.77 |
| 8 | $604,488.77 | $67,000.00 | $36,269.33 | $707,758.10 |
| 9 | $707,758.10 | $67,000.00 | $42,465.49 | $817,223.58 |
| 10 | $817,223.58 | $67,000.00 | $49,033.41 | $933,257.00 |
| 11 | $933,257.00 | $67,000.00 | $55,995.42 | $1,056,252.42 |
| 12 | $1,056,252.42 | $67,000.00 | $63,375.14 | $1,186,627.56 |
12 years! But juust barely. Arguably they’re a little short at the end of 12 years, but this analysis is operating on the really conservative assumption of no raises over inflation during this entire time, and a 6% ROI over 10+ years. We know that historically, stock markets have appreciated a median of 11% over 10 year periods, so there are plenty of ways this could go a lot faster than we project.
Now onto the questions about tax shelters. BudgetBeard has about $35,000 of unused RRSP room and $60,000 in contribution room to their TFSA and are wondering which one to prioritize. Generally, if you earn above the first federal tax bracket (in 2019 that’s $47,630), you should prioritize the RRSP first so you get more tax savings. Earnings below that you should put into your TFSA.
That being said, because both you and your wife have pension plans, your pension contributions will generally eat up most of your RRSP contribution room each year, so that might be more of a limiting factor that the tax bracket. Basically, use up as much of your contribution room as you can such that anything you earn over the first tax bracket gets shoved into the RRSP. For example, if you earned $55,000, you would contribute $55,000 – $47,630 = $7370 into your RRSP. Everything else goes into the TFSA.
As for how to include your wife’s pension in your calculation, that can be a bit tricky. What you’re looking for is the commuted value or present value of the pension, but not all pension plans report that in their statements. Typically, they report what it would pay you each month if you were to retire at 65, but for early retirees that’s not as relevant. You have to ask the pension administrators to do an actuarial analysis and calculate your CV, and even that’s not a sure thing.
FIRECracker was in this situation where she had a DB pension but she couldn’t figure out what the CV was. And she didn’t want to ask because the only reason you’d want to know the CV of your pension is if you’re planning on leaving, and she didn’t want to telegraph her intentions to her company. So as a result, we never actually figured out what that amount was until she actually left, at which point we were able to get the CV of the pension transferred out into a LIRA. Essentially, we didn’t include that amount as part of our FI calculation and then when we got it we treated it as a pleasant surprise.
SIDEFIRE To The Rescue
So we’re sitting pretty at retirement in about 12-13 years, which is right where we want it to be. If our family stays the course and doesn’t blow up their expenses by buying a stupidly overpriced house in the Vancouver area, they should be fine. But is there anything we can do to make this go faster?
Turns out, yes!
As we write about on this blog (and go into detail in the book), a side hustle can have a pretty dramatic impact on your retirement. This is because every dollar you make in a side hustle that you continue in retirement takes $25 off your target FI number, so even a modest side hustle income of $5000 a year can reduce your FI target by $5000 x 25 = $125,000!
The problem is that it takes time for side hustles to get off the ground and start making money, but in this case BudgetBeard already has a side hustle going making $20,000 a year! Assuming him and his wife are willing to keep doing this side hustle in retirement, let’s see what this does to the numbers.
First of all, his monthly spending in retirement gets reduced by the side hustle income, so his annual spending becomes $48,000 – $20,000 = $28,000. This is how much the portfolio needs to support.
Second, this lower spending target also lowers his FI number. Where as before it was $1,200,000, their new FI number is $28,000 x 25 = $700,000.
And according to our projection, how long would it take to get there?
| Year | Balance | Savings | ROI | Total |
|---|---|---|---|---|
| 1 | $28,000.00 | $67,000.00 | $1,680.00 | $96,680.00 |
| 2 | $96,680.00 | $67,000.00 | $5,800.80 | $169,480.80 |
| 3 | $169,480.80 | $67,000.00 | $10,168.85 | $246,649.65 |
| 4 | $246,649.65 | $67,000.00 | $14,798.98 | $328,448.63 |
| 5 | $328,448.63 | $67,000.00 | $19,706.92 | $415,155.54 |
| 6 | $415,155.54 | $67,000.00 | $24,909.33 | $507,064.88 |
| 7 | $507,064.88 | $67,000.00 | $30,423.89 | $604,488.77 |
| 8 | $604,488.77 | $67,000.00 | $36,269.33 | $707,758.10 |
Just 8 years! Awesome!
Conclusion
So as it turns out because BudgetBeard had the wisdom to quickly pay off his student loans and keep his family spending from spiralling out of control due to the crazy Vancouver housing market, and the foresight to start building a side hustle NOW, he’s actually only 8 years away from retirement!
Looks like he might be spending a lot more time with his daughter in retirement than he thought.
What do you think? Do you think BudgetBeard’s plan is solid, or do you see a problem that I don’t? Let’s hear it in the comments below!
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I was one of those 20-years-ago reviewers. Fortunately, my wife and I started in earnest about four years ago. Like that proverb says about the second-best time to plant a tree, y’know?
That said, I envy folks like TheBudgetBeards. A very promising start, knowing and asking the right questions, and kicking it all off with time to spare — that’s FANTASTIC. Keep at it!
Yes, the proverb is “The two best times to plant a tree are twenty years ago, and right now.” I’ve been using that proverb a lot lately 🙂
I think the estimates don’t account for a spending increase that naturally happens as kids get older…school fees, swim lessons, groceries eaten by a teenager etc. Even the most price conscious parents will tell you that kids come with non discretionary expenses.
A general note about the article: Explanation of the various acronyms will aid in better understanding.
One thing to factor in would be a child-related living-expense increase in the next 10-12 years. So $4K may become $5K in a couple of years. Regardless, the BudgetBeards seem to be very disciplined enough to control expenses, and avoid debt to retire early.
Yeah that’s true. Child care expenses are relatively low when they’re newborn, but as our friends Jeremy from GoCurryCracker and even Mr. Money Mustache himself has shown, the cost of raising kids isn’t nearly as high as everyone thinks it is.
Well done BudgetBeards. You have done everything right so far. Personally, if I had a child at the beginning of my career, I would work less and spend more time with her before the teenage years when they become too busy with their own lives so I get 12 years with them rather than 1. But your way, you become FI in 8-12 years in retrospect to 15 +years on the alternative so good on you.
I dunno, is spending time with a kid better when they’re younger better or when they’re older? Serious question, since we don’t have kids (yet).
My husband waited till our first son was one year old to take six months off from work to stay home with him. Idea was that he could do more activities with him at that point. But at 12 years old… Depends on your adolescent, who might or might enjoy spending time with you!
As a father of 17 and 21 year old ‘kids’, it’s definitely better to spend time with kids when they’re younger. Time goes so fast and I now look back and wish I could turn back the clock. Not that teenagers are bad but their interests won’t match yours and they’ll want to start making their own way in life. I can’t wait for some grandkids so I can have another go!!
I’d be interested in knowing how they keep expenses so low in a high cost of living area. Using a 25% rule of thumb, I calculate their rent should be ~2,400 month, which is more than half of their reported expense.
Thank you for pointing out the side hustle continuation. That’s a great point.
I wont harp on the fact that expense are likely to increase with a child, even for minimalists. Because you’ll be in a better place than if you did nothing. And hopefully your income will rise along with it.
That is pretty impressive, though Vancouver’s costs only really blow up if you buy into their overheated real estate market. Rents may be high, but they don’t kill you as these guys have shown.
Well done to them! I also live in Vancouver, and am struggling to balance out the high cost of living with trying to save for FIRE. Thankfully my husband and I are starting to rein in our spending on superfluous items, and we’ve found an apartment that allows us to use public transportation/walk to work, cutting out car expenses. Though Vancouver is expensive, it is not impossible to find cost-saving measures that really add up over time.
Thanks for the great article :).
Good for you! And here I was thinking the entire city was full of home boners. Guess there’s at least two couples that aren’t 🙂
Hi, wanderer! Thank u for all the info you provided. I have learned a lot from this blog and the book! One question for you, I have started invest 1000 every month, I saved emergency fund already. But I also have 30k left in my account, should I invest all 30k buying etf and bond at one time,or should I invest 30k at 12 months which is invest 2500 every month? Please see my comments , thank u very much!
DCA over time. Nobody knows the exact right time to invest all your money, so spread it over a year’s time like in our workshop and that way you’ll hedge against the risk of putting all your money in at the top of the market.
Big congrats to this couple for starting this journey with a clean slate. Another consideration, which they’ve likely already thought about, is where do they actually want to retire? If they decide to stay in they’re current city, then carry on with current numbers… but how a lower cost city could influence their timeline is worth exploring too.
I also find it difficult to factor in side hustle income, as a person isn’t likely to do this forever… so if aiming to side hustle for 10 years, do you just subtract ($200k (or $20k/yr) from overall FI number… or is that too simplistic?)
Anyway, lots of potential for sure! Future is promising for BudgetBeard and fam.
Side hustles are part-time passion projects, and we assume that you keep doing it in retirement. So side hustle income can be subtracted from your living expenses when calculating your FI number. So if your living expenses were, for example, $40k, then you’d need $40k x 25 = $1M to retire.
But if you earned $10k in side hustle income, the amount of passive income your portfolio would need to achieve would become $40k – $10k = $30k. That means your FI target becomes $30k x 25 = $750k. So that $10k of side hustle income can make a BIG difference to your FIRE journey.
Financial Independence is very simple. It is not rocket science and it based on very simple math.
The following proposed money plays are based on the Trinity study.
85/15 Money Play – spend 85 cents and save 15 cents on every dollar of income. Put the saving in investments with the return between 6% to 7% for 35 years – after 35 years, the accumulated saving along with the compounded interest will give a 30 years of income with 95% or greater probability of success.
60/40 Money Play – spend 60 cents and save 40 cents on every dollar of income. Put the saving in investments with the return between 6% to 7% for 20 years – after 20 years, the accumulated saving along with the compounded interest will give a 30 years of income with 95% or greater probability of success.
50/50 Money Play – spend 50 cents and save 50 cents on every dollar of income. Put the saving in investments with the return between 6% to 7% for 15 years – after 15 years, the accumulated saving along with the compounded interest will give a 30 years of income with 95% or greater probability of success.
40/60 Money Play – spend 40 cents and save 60 cents on every dollar of income. Put the saving in investments with the return between 6% to 7% for 10 years – after 10 years, the accumulated saving along with the compounded interest will give a 30 years of income with 95% or greater probability of success.
None of these Money Plays require the specific incomes, and they do not tell what to buy, what to eat, where to live and how to live.
You just have to pick a play and it is your creativity and resourcefulness that will make the play a success.
Hi there,
congrats and many thanks for all the information you share in this blog. Although your calculation and the projection table looks quite plausible from the mathematical perspective there seems to be a mistake (or I might have a completely wrong understanding of the matter). According to your estimation the initial and subsequent savings will produce an anual ROI of 6%. So far so good! But in fact the total ROI is a combination of distributed dividends and price progress of your shares.
Let’s assume BudgetBeard is investing in Vanguards S&P 500 ETF which (at the time of writing this) will cost him roughly 55$ / per share . So in the first year his 28 k will allow him to buy a total of 509 shares. If things work out well and the markets are going up there will be a price progress of the shares. But irrespective of this performance the distributed dividends are limited to his 509 shares only. In the last quarter of 2019 Vanguard paid 0,2234 $ / per share. This would result in an distribution or dividend payment of 113,71 $ / or 0.406% ROI per quarter (454.84& or 1.62% p.a.) which is far away from your estimation. As we are talking about long term investing (and not selling your shares) according to my understanding the only leverage you have is the total number of shares you hold in order to benefit from the quarterly distributions and to cover your costs of living. As I said in the beginning this is my understanding and I might be wrong. Therefore appreciate your answer to clarify this issue.
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