Tag: early retirement

Ideal is the goal. Consistency is for real life.

Earlier today, I watched an reel from someone who has followed the FIRE principles to become a millionaire at 40. This person listed several rules that she followed to meet this goal. The first rule was to start saving 50% of earned income as soon as humanly possible. The math says that when you start from $0 and invest 50% of your salary in an equity-based index fund, it’s very possible to hit $1,000,000 in 17 years.

My personal experience neither verifies not refutes this statement. I’m going to take it as mathematical fact. It took me 28 years to acquire a liquid net worth of $1,000,000.

I readily admit that I never hit the venerated target of saving 50% of my salary. When I started investing in the last millennium, graphs showing the number of years it takes until you have $1,000,000 at various savings rates didn’t appear on every other FIRE blog like they do today. Instead, I simply stuck to the path of investing roughly one third of my net income and I hoped for the best. To my inexperienced DIY-mind, this seemed like a feasible amount to put towards my future, while still enjoying my day-to-day in the way that I wanted.

Here’s the thing though. As I look back, now that I’ve reached retirement, I realize that I could’ve invested 50% of my salary. In all honesty, I simply didn’t want to… despite the fact that one of my life’s goals was to retire early.

Speaking only for myself, and not for others who choose differently, I happily paid for certain expenses along the journey to early retirement. I chose to defer early retirement by a few years so that I could do the following:

  • travel to Europe several times (Italy, Spain, Ireland, and Amsterdam);
  • attend concerts & festivals with my friends;
  • go to destination weddings in Mexico & Antigua;
  • renovate my house (driveway, landscaping, eavestroughs, furnace, hot water tank, sod, exterior siding, carpet, bathrooms, basement, windows);
  • replace my vehicle (twice in 22 years; extravagant, I know!);
  • buy lots and lots of books before the novelty wore off (I’ve since become an ardent fan of my public library);
  • buy new furniture for my house.

The Ideal World vs. The Real World

In an ideal world, I could’ve saved 50% of my salary and retired earlier than 53. If the graphs are right, and I have no reason to believe they aren’t, I could’ve retired at 45 had I done everything “perfectly”. I would’ve had to invest 50% of my salary into well-diversified, equity-based ETFs. I would’ve had to continue investing through the 2008 market crash. (That financial event scared less-experienced me so badly that I actually stopped investing for 6 months until the market recovered!) Most distressingly, I would’ve had to sacrifice building cherished memories with family & friends! Same goes for taking trips and modifying my home into a space I enjoy.

If I hadn’t spent a little bit more over the years, my memory bank would be so much emptier. I wouldn’t have nearly as many good memories of times spent with loved ones as I do now. I look at photos of people I love and they bring me joy. My overseas travels were absolutely amazing! I’m still thrilled by the memories of things that I saw, food that I ate, and experiences that I got to have because I chose to delay my retirement date a little bit.

Now that I’m retired, I’m experiencing knee problems so overseas travel is off the table until those problems get rectified. How sad would I be if I’d retired and my travel plans were forever curtailed? God willing, I can improve my health situation. I look at the elders in my family and I see a future of joint replacement surgeries. Maybe I get to the end with all of my own parts, but maybe not. The bottom line is that I don’t regret travelling when I did, nor as much as I did.

Travelling to Europe 4 times was not inexpensive in any way, shape, or form but I do not regret any of those trips. Am I glad that I spent a little more money along the way instead of waiting until retirement to take those trips? Yes, I am!

Your choices only need to work for you.

It most definitely took me longer than 17 years to hit my retirement target but I can’t really complain. I enjoyed the journey along the way. Time spent with family and friends is precious. My sojourns to other countries broadened my view of the world in ways that books and movies simply could not. I don’t regret the choices I made along the way. They worked for me, but I’m not suggesting that my choices will work for you.

I’m an ardent proponent of investing a good chunk of your income today so that you have money for the Care & Feeding of Future You tomorrow. Simultaneously, I also recognize that life is meant to be lived in the present. No one is promised tomorrow. We can make all the plans we want, but all we really have is today. So while I maintain that it’s important to save & invest for the future, I’m equally convinced that it’s in your best interest to be present in the now so that every day is as good as it can possibly be. There’s a balance between living life today and investing for tomorrow. It’s different for everyone.

My top savings allotment during my working years was 36%. Yours might be more, or it might be less. Whatever percentage allows you to attain your life’s goals is the right percentage for you. You’re best-positioned to know what’s optimal for your own life. Each of us has our own unique circumstances, which necessarily influence the balance between money spent today vs. money invested for tomorrow.

So long as you’re investing something, you will have money waiting for you at retirement. The number you need to determine is how much you need to invest today to take care of Future You’s monetary needs tomorrow, while still fully living in the present & building the life you want to live.

Happiness is attainable.

I have very few regrets about how I spent my money. In fact, investing less than 50% of my money was one of the smarter choices I’ve made in my life. I’m grateful that I chose spending more during my younger years.

  • I’ve seen some of the wonders of Italy with my own eyes – the Trevi Fountain, the Vatican, and the Leaning Tower of Pisa ;
  • I’ve walked through Galway & Dublin, visited a wonderful museum in Cobh, and stood of the edge of the Cliffs of Moher;
  • I’ve created hand-made chocolate treats in Amsterdam and passed through the incredible lock system of its rivers; and
  • I’ve visited a family-owned olive farm in Spain, explored toured the magnificent Prado Museum in Madrid, and toured the incomparable Sagrada Familia in Barcelona.

I made the right choice to travel when I was healthy enough to enjoy those trips. I’m thankful that Younger Me chose to stay in the saddle a little bit longer. That decision allowed me to see/visit/taste/smell/experience a sliver of the world beyond my own backyard. For that, I’m truly grateful.

Allow me to be perfectly honest with you. I still saved & invested a nice chunk of my salary along the journey to early retirement. Consistency played a huge role in my financial journey. For every $3 I earned, I invested $1 and lived on the other $2. Though I made many investing mistakes along the way, the consistent contributions to my investment account saved me. My automatic transfers eliminated the bi-weekly task of both deciding to and remembering to invest money for my future. Instead, transfers happened without any mental effort from me.

Relying on automation meant that money was always ready to be deployed in the stock market via my ETFs. First I filled my registered accounts, i.e. my TFSA and my RRSP, then I invested in my non-registered account, aka: my brokerage account or my taxable account. Other than those six months in 2008, I invested from every paycheque for my whole working life. Earn – invest – learn – repeat. This 4-step plan allowed me to retire early while allowing me to enjoy my life along the way.

Looking back, no one would ever describe my choices as perfect or ideal. They didn’t have to be. But did they make me happy? You’d better believe they did!

My Criticisms of the Baby Steps

Based on my understanding of them, the Baby Steps have two main problems. One, the Baby Steps encourage people to work longer than they might otherwise wish. Two, people will pay higher than necessary management expense ratios (MERs).

One of the more controversial figures in the personal finance section of the Internet is Dave Ramsey. Among other things, he is famous for encouraging people to follow his Baby Steps.

When I was first starting down my own money journey, I happily devoured The Total Money Makeover. Even today, I still think that the Baby Steps are a great path for newbies who are looking for a way to get out of debt and to start building wealth. When I had student loans and car debt, I followed the Baby Steps and paid those off. Once debt-free, it was very nice to have some breathing room in my budget.

However, when I got to the step about investing 15%, I had to pause a little bit.

Criticism #1 – Working Longer than Necessary

My first concern with the Baby Steps is that they implicitly encourage people to spend 85% of their income once all non-mortgage debt has been repaid.

Allow me to exceptionally clear. THERE IS NOTHING WRONG WITH SAVING 15% OF YOUR INCOME! When there is a choice between saving nothing and saving something, always choose to save something. Then invest that money for long-term growth and go about the business of living.

However, I was fortunate enough to have learned about early retirement. I wanted to retire as soon as possible. Investing the recommended amount of 15% of my paycheque wasn’t going to do it for me. In short, investing only 15% of my income while spending the rest wouldn’t allow me to fulfill my goal of early retirement. I was not interested in working 30+ years if there was a viable option for me to still have a financially solid retirement while working for less than 3 decades!

As a result of my independent self-study, I had learned from other sources that a higher savings-and-investing rate meant a quicker path to financial independence. I’m certain that the Baby Steps will help most people get to a comfortable retirement at a traditional retirement age. And if the Baby Steps help someone to start their 15% investment plan in their 20s, I’m sure that they’ll have millions of dollars after 30+ years of work.

My life’s dreams didn’t involve working for 30+ years. My career has a lot of perks, but jumping out of bed each morning in gleeful anticipation of another day at the office is not one of them.

Fortunately for me, I had the ability to save more than 15% of my income once all my non-mortgage debt was eliminated. At this point, I seriously deviated from Dave Ramsey’s plan. Firstly, I paid off my mortgage in my mid-thirties. Then I took my former bi-weekly mortgage payment and started investing it. To be clear, that former mortgage payment was more than 15% of my take-home pay. I first maxed out my RRSP, then I maxed out my TFSA contribution room. Once that was done, I started contributing to my non-registered investment accounts. Over the years, I’ve benefitted from raises. Generally speaking, two-thirds of each raise went to my investments and the remaining third went to improving my present-day life by spending on those little luxuries that make me happy.

I am not encouraging anyone to deviate from the Baby Steps if they want to work for as long as possible. There are people in this world who love their jobs! Saving and investing only 15% of income works beautifully for these people. They get to spend their money today, while enjoying their jobs, and will still retire at traditional retirement age with a nice, fat cash cushion. If this is you, then I congratulate you on having found a way to make money doing something you love.

It just seems to me that the Baby Steps should say “invest 15% or more of your household income in retirement.” Adding those two little words would plant the seed that retirement can come sooner if you so wish. I’ve met more than a few people who’ve expressed the desire to quit working, but cannot yet do so because they need the paycheque. For these folks, saving the recommended 15% doesn’t get them closer to their goal of retiring sooner rather than later.

Criticism #2 – Paying Higher-than-Necessary MERs

My second issue with the Baby Steps is related to Dave Ramsey’s love of mutual funds. I’ve listened to him on YouTube where he consistently exhorts his listeners to invest in mutual funds.

In the interests of transparency, I admit that there was a time when I invested in mutual funds. I was younger and less knowledgeable about the costs of equity products. It’s been years since I divested myself of those products and moved into exchange traded funds with VanguardCanada and iShares. There was one main reason that I exited from mutual funds and went into exchange traded funds.

Mutual funds are consistently more expensive than exchange traded funds and index funds. This is because mutual funds charge higher MERs than their ETF/index fund equivalent. Think of the MER as the cost of the product. The returns on my mutual funds were not twice as good as the returns on my ETFs, even though the MER might be twice as high (or many multiples higher!) on a mutual fund than on an ETF. If the mutual funds’ performance had justified the higher price, then I would have continued paying a higher price. When I realized I could get the same performance for a lower price, I hastily moved out of mutual funds and put my money to work in ETFs. I’ve never regretted my choice.

So when I listen to Dave Ramsey talk about how wonderful mutual funds are, I have to ask myself why wouldn’t he tell his listeners to invest in equivalent yet cheaper ETFs? The same performance for a lower price seems to be a good thing for the people following his advice.

I have never heard a persuasive explanation for why people should pay higher MERs when an equivalent and cheaper product readily available.

Take a look at this MER calculator. It demonstrates that higher MERs result in smaller portfolios over any given period of time, all else being equal. The longer you’re investing your money, the bigger the MER-bite. Whenever possible, invest in an ETF or an index fund instead of a mutual fund. You should not be paying an MER higher than 0.3%.

So that’s it in a nutshell. Though they are a great starting point, I hope that I have articulated my two biggest problems with the Baby Steps. I sincerely hope that this blog post has given you more information about how to influence how much longer you’ll have to work. The secret is to invest more today so you don’t have to work as long tomorrow. Whenever you do invest, pick exchange traded funds instead of mutual funds to keep costs down and to maximize the amount of money working on your behalf. Lower MERs ensure that a higher percentage of every invested dollar works for you as you pursue your investment goals.

At the end of the day, the choice of how much and where to invest is yours. If you want to work for as long possible, while paying more in investment costs, then follow Dave Ramsey’s plan to the letter. If you’d like to have the option of attaining financial independence as soon as you can,then invest more than 15% of your next income and choose ETFs over mutual funds.

Mistakes with Money

Not a single one among us is born knowing how to use money perfectly. Our skill with money comes from making mistakes and learning from them.

For my part, I’ve made several notable mistakes with money over the years. I’ve written before about how I failed to take action with my investment plan for 5 full years. That one still hurts when I think about it. It took me 5 years before I finally rectified that situation by committing a good chunk of my paycheque towards my automatic savings plan. Now, I benefit from using dollar cost averaging to invest my money on a regular basis.

I hate to admit it but choosing to invest in dividend products instead of equity products is one of my biggest money mistakes! Had I started investing in equity ETFs instead of dividend ETFs way back when, then I’d be in a position to retire today…even with the recent volatility in the stock market.

Sadly, this money mistake cannot be un-done. I have been investing in a dividend portfolio since 2011, instead of a broad-based equity exchange-traded fund. The financial media has spent the last 3 months talking non-stop about the pandemic’s effect on the stock market, and how it has brought the 10-year bull run to an end. It’s true – the market took a deep fall in March. However, it has bounced back. It’s still quite volatile, and – in my completely amateur opinion – the stock market will continue to be volatile for the next 2-3 years.

I’ve been forced to realize that one of my biggest mistakes with money was to delay investing in equity ETFs. I’ve only just started investing in equity investments in 2019! It’s true that I managed to catch almost the very tail-end of the bull market, but the smarter play would’ve been to start investing in equity ETFs back in 2011… ideally, back in 2006.

Water Under the Bridge

‘Tis true. I can no more turn back the hands of time than I can lick the spot between my own shoulder blades. We make our choices then we take our consequences.

I shouldn’t be too, too hard on myself. Nine years of consistent investing has yielded a nice little cash flow for me. While my monthly dividends are in the 4-figure range, they’re not quite enough for me to retire just yet. I equate my little army of money soldiers to income from a part-time job that I don’t have to actually perform. Truth be told, it’s nearly a perfect side hustle since it’s money I earn without the sweat off my brow. How cool is that?

So why am I divulging one of my biggest money mistakes to you?

Two reasons. First, people in the personal finance world don’t talk about their mistakes with money nearly enough. The only regular mention I see of this reality is on the ESI Money website, where the millionaires who are interviewed are asked about some of their errors with money. I think it’s important that people realize that everyone who is good with money has made their own mistakes with it. Like I said at the beginning, no one is born as an expert with money.

Secondly, I don’t think that there’s any reason for you to make this mistake yourself. You can just as easily learn from someone else’s mistakes as you can your own. The more information you have, the more likely you’ll be to make a decision that best fits your particular circumstances. I firmly believe that people make the best decisions they can with the information that they have at the time. When you know better, then you do better.

Hard-Won Truths

Money mistakes are unavoidable. Mine isn’t the worst one in the history of the world, and it certainly won’t derail my financial future. And, let’s be honest – I ought not complain too much. I earn a small boatload of dividends month in and month out. How bad of a decision could I have really made 9 years ago?

My investing journey isn’t over. And I’m sure that I will make different mistakes in the future, but I just don’t know what they are yet. I still have choices and options for my money. I can choose to continue building up my army of money soldiers. The other option is to start investing in equity ETFs and take part in the stock market’s recovery. I’m quite confident that the stock market will continue to trend higher. It’s recovered before, and it will recover again. A third option is to simply coast on what I’ve already invested a la Military Dollar, so that I can spend today’s money on today’s things – home renovations, landscaping, a new vehicle, spa treatments, whatever…

I want you to accept that mistakes with money are an inevitable part of investing. That’s why it’s so very vital that you continually learn about it throughout your life, and that you put what you learn into practice. Invest as much as you can as early as you can. Invest for the long-term. Keep your mitts off your investments by simultaneously building an emergency fund for those emergencies that will crop up in life. Live below your means and stay out of debt. Save, invest, learn, repeat – this is a recipe that works.

By following these foundational principles with your money, the impact of your money mistakes will be minimal rather than nuclear.

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Weekly Tip: Set timelines for your goal so you know which ones are short-term, which ones are medium-term, and which ones are long-term. Generally, short-term goals are the one to be accomplished within the next 12 months. Things like vacations and concerts would fall into this category. Medium term goals are one that take between 1 and 5 years to accomplish. Think new vehicle and down payments on a home or a business. Long-term goals are those that will take longer than 5 years. Common examples are retirement and paying off a mortgage. Once you have a timeline, then you’ll be in a better position to prioritize where your money goes and to segregate your money so that each goal is funded.