It’s Friday, so you know what that means: Reader case time!
When we started doing Reader Cases a little over 2 years ago, we simply thought it would be a great educational experience to see some real life examples and get feedback from the MR community to help each other out. We had no idea the impact this would have on individual readers, as some of them have written in and updated us on their amazing progress.
And recently, we had the biggest shock of our lifetime when read this e-mail detailing the complete 180 degree turn around in this reader’s life.
Especially given the particular tough situation, STB (Stop the Bleeding) was in, as the reader case was aptly titled. “How Do I Stop the Bleeding.”
To give you a brief recap: this particularly unfortunate reader got stuck with a condo in the middle of the oil rout that gutted the housing market in Edmonton. Every month, the condo was costing him money since he couldn’t rent it out for enough to cover the costs, yet if he sold he would have locked in a loss of $30k.
Try as we might, we couldn’t find any way to make that condo make sense, and at the end we were forced to conclude that ripping the bandaid off and selling it was the only thing that made sense.
And now, two years later, here’s STB again:
Hey FIRECracker, it’s been almost two years since you posted my case study – thought it was about time I gave you an update – and ask for your help again!
Part 1: The Update
After considering your analysis and that of your readers (thanks Mr. Collins and everyone else!) I decided to bite the bullet and sell the condo. To minimize costs, I used a commission-free service and in early December 2016 the place finally sold. After the dust settled, I owed “just” $5k (was bracing for $30k). Foregoing the realtor saved me about $10k; I also sold for $10k higher than what the realtors had estimated, and a few AirBnB guests covered some of the mortgage while it was on the market.
What I didn’t mention back then was that my real estate woes were just a tiny part of a much larger problem. For me, 2016 was a Category 5 Financial Shitstorm. While trying to sort out my condo situation, I was also in the midst of a divorce that had been dragging on for two years, I was living paycheque to paycheque, and generally not making great decisions. Examples? I bought a brand-new $45,000 truck for the daily office commute despite owning a sensible and economical hatchback, perfect for my city commute but parked 6000km away, literally on an island in the middle of nowhere. Oh yeah, I also bought an RV and parked it on the same remote island with the car. Although I’d begun devouring FIRE blogs and podcasts shortly after the truck purchase, their wisdom hadn’t quite taken hold. There was room for improvement, to put it mildly.
But this is where it gets really interesting.
Remember my girlfriend? Not only did she introduce me to the concept of FIRE, but through her perspective, encouragement, and frequent but lovingly-applied Mustachian Face Punches, she got my head screwed on straight again. For reasons I still can’t fully comprehend, she decided to hitch herself to a financial train wreck – with fully loaded baggage cars. She staged the condo with a charm that my black-leather-couch-and-big-screen-tv male-decorating skills couldn’t achieve, and got the place sold. She gave me advice and kicked my ass until I got the divorce sorted out. She respected my right to make my own (terrible) decisions, but also pointed out alternatives that might work out better for me. I shudder to think where I’d be now if she wasn’t in my life.
Through her help, the FIRE community, and some crazy good luck, things are quite different two years later. Car and trailer four time zones away? Sold. Big Stupid Commuter Truck? Traded it in for an efficient little diesel hatchback. Which got written off in an accident; insurance money paid off my divorce debt. G/F and I rent an amazing apartment and we bike/walk to work year round; my monthly living expenses are now less than what my monthly vehicle costs were in 2016. We share her cheap and paid-off car for grocery runs and the occasional road trip. And in an incredible stroke of good luck, the efficient little hatchback turned out to be one of those “dirty” diesels you may have heard about: I ended up getting a settlement that paid off the condo debt!
When I wrote you two years ago I had no savings, and a negative net worth. By getting rid of the stupid shit (condo, vehicles) and keeping the good stuff (G/F, intact defined benefits pension, horseshoe that is evidently buried deep in my arse), I’ve gone from financial train wreck to FIRE bullet train! I now save 70% of my income, mostly in VCN and XAW, and I’m expecting to reach FI in less than 7 years!
A huge thanks to you and your readers for the great advice!
Part 2: Help!
G/F is optimizing her finances and needs some advice because a) she wants to retire early, b) she’s a frugality master but an investing novice, and c) we can’t endure many more years at this latitude – it’s been snowing here all week (mid-September blizzard as I write this) But first, her numbers:
Your gross/net annual family income: Gross: $90k / Net: $52k
Your monthly family spending: $2K
For any debts you have, please include: N/A
The interest rate: N/A
Your minimum monthly payment: N/A
The outstanding balance: N/A
Any fixed assets you have (house, car, etc.): Car $2500
And investments or savings you have (cash, bonds, stocks, etc.):
TFSA 1: $27k (VCN)
TFSA 2: $32.5k (Cash at 1.25% interest, originally intended for down payment)
RRSP 1: $30k (XAW)
RRSP 2: $91k (Big Bank Mutual Fund, 2% MER)
Savings Account 1: $28.5k (Cash at 1.25% interest, also originally for down payment)
Chequing Account 1: $3k (No Interest)
Chequing Account 2: $13k (No Interest)
Defined Benefits Pension: $ Unknown, only 2 years in.
Since we’re going to keep renting, G/F wants to invest her down payment. Obviously there’s an insane amount of cash rotting away in chequing/savings accounts, and the Big Bank Mutual Fund is a huge rip-off. Since her RRSP/TFSAs are already maxed out, the cash has to go into a taxable account, but she wants to keep some of it in the bank for emergencies.
- How should the cash be invested? Lump Sum usually outperforms Dollar Cost Averaging, but this is a big chunk of her portfolio so she’s reluctant to throw it into the markets all at once.
- Any thoughts on Asset Allocation, and does her pension factor into the equation?
- How much cash is reasonable for an Emergency Fund? Would it be smarter to have a Line of Credit for (hopefully rare) emergencies, and invest all her cash?
- How does one estimate the value of a Defined Benefits Pension – is there a rule of thumb? Assuming she retires early, what should she do with the DBP – leave it in the fund, or take it out as a LIRA?
- Where’s the best place to keep the taxable account – maybe Questrade?
- When does it make more sense to not contribute to an RRSP if you have a pension?
- And finally, when can she retire so we can get the hell out of the frozen North?!
STB (Stop the Bleeding)
First of all, WOW! I remember when we first saw your case we thought “Wow, this guy’s in trouble.” I had no idea how much trouble you were in with the divorce and all, but your turnaround is crazy! You went from bleeding your financial guts out to retiring in just 7 years! That’s insane! I’m proud of you! Hell, FIRECracker’s proud of you, and she’s crazy hard to impress.
Second, how in the Hell did you find this FI girlfriend of yours? No, seriously, tell us. There’s this running problem in the FI community where people can’t pick out the FI people versus the “normies” when it comes to dating, and nobody knows how to solve it. Because if there’s one lesson to get out of your story, it’s this:
Date an FI person and they will fix all your financial problems.
So if you did something clever to find her, please let us know. We all need to know!
Anyway, on to her numbers. I already like the cut of her jib, in case you can’t tell, so I’m guessing this is going to go well. So without further ado, let’s MATH SHIT UP.
|Income||$90k gross, $52k + $16,200 RRSP contributions = $68,200 net|
|Expenses||$2k monthly, $24k annually|
|Assets||$27k + $32.5k + $30k + $91k + $28.5k + $3k + $13k = $225k|
Just a note here, you wrote $90k gross, $52k net. I’m assuming you forgot to include her RRSP contributions in that number. Otherwise, her average tax rate would be way too high. Canada may be a socialist paradise, but we aren’t NORWAY.
OK so where do we start? With a $24k annual spend, her FI target would be $24k x 25 = $600k, as per the 4% rule.
And given the numbers you gave me, she should be saving $68.2k – $24k = $44.2k annually, for an impressive 65% after-tax savings rate. How soon will it take for her to get to FI?
Just 6 years! Fantastic! And given that you yourself are projected to hit FI in 7 years, that means she will glide to retirement riiiight around the same time as you!
This is exactly where you want to be. Arguably it doesn’t make much sense for her to up her savings rate any further, since if she retires too soon she’ll just be sitting around twiddling her thumbs waiting for you to catch up. So that means that somehow, this magical FI girl has instinctively made all the right moves.
See what I mean about FI girls? They solve ALL YOUR PROBLEMS!
OK now let’s get to the questions:
How should the cash be invested? Lump Sum or Dollar Cost Averaging?
DCA. If you try to time the market with a lump sum buy, you’re going to sit around forever terrified to pull the trigger. Once her accounts are set up, do 4 buys over the next year, once a quarter.
Any thoughts on Asset Allocation, and does her pension factor into the equation?
With only a 6 year runway, I wouldn’t go more aggressive than 60% equity/40% fixed. As for the pension, see answer a few bullet points down.
How much cash is reasonable for an Emergency Fund? Would it be smarter to have a Line of Credit for (hopefully rare) emergencies, and invest all her cash?
I’d set aside 6 months of cash in a HISA, so for her that’s $12k. I’ve heard the argument of using a LOC instead of a cash cushion, but back when I was working, I didn’t want to run the risk of getting laid off, having the bank find out and closing the LOC right when I need it. I likes my cash.
How does one estimate the value of a Defined Benefits Pension – is there a rule of thumb? Assuming she retires early, what should she do with the DBP – leave it in the fund, or take it out as a LIRA?
You have to ask your pension administrator for the present-value or commuted-value of her pension benefit. Calculating it is complicated and involves actuarial tables and shit, so you generally can’t do it yourself.
And if she ends up retiring early, take the commuted value out as a LIRA. That way you don’t have to worry about the company screwing something up decades later when you need it, or as we like to say in finance circles “Pulling an Enron.”
When she turns 55, it can be converted into an RRSP.
Where’s the best place to keep the taxable account – maybe Questrade?
I like Questrade, that’s what I use. If you end up going for it, sign up with this link and you’ll get $50 in free trades!
When does it make more sense to not contribute to an RRSP if you have a pension?
For her, max it up. The only time it doesn’t make sense is if she’s in her 60’s and the pension payment would push your retirement income into a high tax bracket, but if you’re going to retire early and take the pension as a LIRA, she’s not going to be in this sitation.
when can she retire so we can get the hell out of the frozen North?!
6 years for her, 7 years for you.
So there we have it.
Financial train wreck + FI girl = OMG SO MUCH MONEY!
All joking aside, you also really turned things around on your end too, so major props on that, buddy. Good job! High fives all around!
But anyway, back to my question to you, any tips on finding FI girls to date?
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