Financial Independence – Outlining My Goals

One of my goals for this blog was to create more accountability. I wanted to start reporting my financial goals to be better, more capable, avoid consumerism, be environmentally aware, and save money along the way.

So what are my financial goals? Currently 29, I aim to achieve FI by 45, and retire by 50. More details below!

Between 45 and 50, I aim to cut my hours and work only part-time. My wife who is a teacher, is likely to follow a similar path of working full time until 45, followed by cutting hours and going back to supply teaching until 50. During this time, we plan to leave our nest egg untouched and let it compound for another 5 years. The income from part-time work aims to cover our expenses, a few remaining years of financially dependent children and travel a fair bit (cutting down to part-time hours should make this possible from a time perspective).

So what’s the game plan?

• I plan to contribute the maximum allowable to my RRSPs from now until 45. I have some carryover room leftover so I will be using that up over the next 5 years or so.
• I plan to have my wife start her own RRSP shortly as well via Questrade. My wife has yet to make any contributions so she has quite a bit of room here we can use to maximize our tax shield.
• We also plan on maxing out our TFSA contributions until 45 as well, possibly putting away some excess cash into the TFSA from age 45-50.*
• I also need to account for my wife’s Teacher DBPP (I know I know, very lucky!)

All in all net of a mortgage payment, which we aim to have fully paid off by 45, we budget about $40,000 (including ongoing property tax) for living expenses, and we aim to have $10,000 a year in travel funds. I also prefer using a SWR** of 3.5% to remain conservative. So we would need $50,000 after-tax at a 3.5% SWR.

In Canada, we have a few different savings vehicles (more on this later). The RRSP, DCPP, and DBPP are tax deferred, while some like the TFSA are after tax income invested tax free (no capital gains tax), and non-registered accounts (subject to capital gains tax).

Using simplified math to get a general idea:

• This would put a target, at age 50, of about $1.5M rounding up to the nearest $100k. This does not account for the DBPP, which will be cherries on top. Add in some supplementary income over the years from CPP and OAS at 65, we will have plenty of room when there are downturns in the market.
• It’s important to be flexible when there are downturns in the market, cutting back on luxuries or picking up some part-time work can easily quell any distress.
• To achieve $1.5M in today’s dollars (assuming 5% real return per year) with current balances for accounts dedicated to retirement, and assuming we stop contributing altogether at 45, we would need to add about $48k per year.

For this year, I estimate contributing $23k into my DCPP/RRSP, while saving approximately $18k in after-tax savings. This would total $41k. Less than what I need on average. That being said, my wife is still supply teaching and not full-time. When she becomes full-time, I expect to be able to contribute more to retirement (although we plan to have kids, so hard to know for sure! But it’s a great idea to have some general guidelines to follow!)

I plan to post my first FI update shortly at the mid-year mark (June 2018), so stay tuned and stay frugal!

*Net savings are currently put away in our TFSA and invested, but will be used as a down payment in the next couple years. Once we purchase a home, we will start putting away and investing after-tax cash for retirement purposes

** SWR stands for Safe Withdrawal Rate. It is the amount as a percentage of assets that you can withdraw per year without sacrificing the longevity of the asset portfolio (since you need the portfolio to live off of! Remember that you’ve set aside this financial capital to earn more financial capital for you!). While some go with a 4% SWR, there is another rule of thumb creating a lower and upper bound for an SWR. Lower bound is Retirement Age divided by 20, upper bound is Retirement Age divided by 10. So for us that would be 2.5% – 5%. If I think long-term real returns of my portfolio can give me an average of 5% per year, then 3.5% withdrawal leaves me a nice buffer; I’d only be withdrawing 70% of what I expect on average. SWR is a nice guideline but it should be just that, a guideline. You’ll need to be flexible in down years and controlled in good years.