Planning My Retirement

Too all my loyal reader, I'm sorry I missed last week. I was in Mexico and while planning to post, didn't quite find the time to pull myself away from the sunshine. Learned some interesting things there and I'll have to gather my thoughts before posting about it. In the meantime, let's carry on...

Seeing as I asked the question about what you plan to do in your retirement, I figure I should try and answer the question myself.

My answer has always been travel. Well it has, since I've been married anyhow, as my wife loves to travel. Have to admit, that it didn't take me long to get on board though! :)

But what does it mean exactly to travel in your retirement? How often will we travel and for how long will we be gone? Where do you go? I have to admit after about two weeks anywhere, I can't wait to get back home. We do live in the most beautiful place in the world after all! Also, my family and friends are here and if I can't take them with me, I'd at least want to run home to see them again.

I think the answer for me, is to go whenever and wherever I want. Probably every few months or so.

I also have plenty to do in between trips. Big assumption here, but I'm sure I'll have my hands full with children and grand children for one. When I'm not traveling or spending time with the family I'm sure you'll find me fishing a lake or more likely playing in a poker tournament somewhere.

On top of all that, I don't actually think I'll ever stop working entirely. I'm planning on having some businesses to over-see as well as a few rental/investment properties. I'm also thinking of working as a financial planner at this point for a few select customers. If they'll have me. ;)

I want to work without having to work. I want it to be my choice. So obviously to make that work I'll need to make sure my investments are capable of taking care of themselves while I'm out playing.

I'll eventually be talking about how I plan to get there, but I think it's helped me at least to get it written down. Let me know what you think.

One last thing....before anyone suggests golf, I'd rather get all my teeth extracted!

Retiring at 45?

I've stumbled across a very interesting blog that I've been following. Tim has decided he's going to retire at 45. That really intrigued me and got me thinking about my retirement plans again.

At first the idea of retiring at 45 seemed just crazy to me. So I was intrigued and had to read on. I thought maybe he was just a little bit crazy and/or naive. I decided to read his blog starting from the beginning and I've only just now gotten to 2007, but already I can tell that Tim has given it some thought and has a viable plan.

The "conventional wisdom" or the notorious "they", recommend 70% of your last years income. The Wealthy Barber recommends 100% and I thought he had some good reasons for it. Tim figures all he needs is 40% and again he has some good reasons for it.

I was already planning on writing about retirement and advocating for the 100%. However, I was falling into that same old trap again. There are no magic numbers and no one should give you a number without knowing what it is you want and plan to accomplish. That number is going to vary for everyone based on the answers to a number of questions.

• Why do you want to retire?
• What does retirement mean to you?
• What do you plan to do in your retirement?
• When do you plan to retire?
• How much money do I need realistically to make that happen?

I know its hard to plan for something so far in advance, but I also think it's necessary. Especially if you have high hopes for your retirement. The younger you are the more options you have. Compound interest is amazing and the younger you start investing the more impressive the results will be. However, deciding you want to retire at 55 when you're 53, might be a tad too late.

I have a hard time forcing myself to go in to work, so retiring at 45 does sound kind of appealing. Tim wants to write full-time and by having enough to pay his expenses through his retirement savings. Allowing him to focus on his writing career without worrying about having to make a living from doing so.

For me, that's the key issue. Why do you want to retire? If you're happy doing what you love to do, why would you want to stop? 45 is still 13 years away for me and I don't think I could handle the software industry for that much longer. Heck 6 more months, is feeling quite painful. That's why I'm studying to be a CGA and at least right now I can see myself working as an accountant that long past the age of 65. Doing what you love has to be the most important thing and I don't think you'd want to put that off any longer than you have to.

I'm not sure how the retiring at 45 plan would work here in the lower mainland though. Tim's home and mine have about the same value. However, he plans to retire in that home. I figure I have at least 2 upgrades to go before I'll have a home to retire in. He's in Saskatchewan by the way.

I think 70% is probably a safe number to throw out to the masses. Especially if you don't take time to determine what you want to do when you retire. I still recommend sitting down and figuring that out. Hmmmm... I suppose I should do that myself too. Maybe something else to blog about. :)

I'm still leaning towards supplying 100% for a few reasons, but I'll get to that on a future post. The point here is to think about what you want to do in your retirement and when you want it to start. Also, I really encourage you find your passion and find a way to make a living at it.

If you want to share your retirement plans, I'd love to hear them!

In Favour of the HST

I was getting ready for work this morning and watched the news as I normally do. This morning I was watching the Restaurants take on the government as they try to get the HST removed from dining out. I'm actually all for their fight, but I thought some of the scare tactics they used to be little over the top.

I probably won't make any friends saying this, but I'm actually all for the HST in general. I'd like to see a fee more exceptions added like hair cuts and dining out, but on the whole I think it's a good idea.

Combining the GST and PST in it's own just makes sense from a collection and administration stand point. The less government workers we have to pay the better. My apologies to any government workers out there, but from a tax payer stand point it just makes sense.

Also, what most of us don't realize is that you're already paying the PST on a lot of items that are "exempt". If someone has to pay PST on a component somewhere along the line and they're not allowed to claim it back, it becomes part of their cost. They're not going to lose money so they increase the price. Not only that, if that product is bought by a manufacturer, they pay the PST on the component that already includes PST and because they can't claim it back they pass it on to you. So in some cases you're paying PST multiple times over.

Once these companies are able to claim the PST back they'll be able to exclude this from their prices. Now, every time I've said this people tell me that companies won't do this. Well, now that I'm knee-deep in my Economics class, I'm reminded of what these people are forgetting or are unaware of. The Laws of Supply and Demand.

All other things being equal, if the price of a product increases the demand will decrease. Pretty straightforward. People polled are already saying they expect to spend less once the HST is implemented. So, if this happens businesses will start to sell less. Given they have the ability now to lower their prices without an impact to their bottom line, which will in turn increase demand, they'd have to be stupid not to. All other things being equal, if the price drops the demand will increase.

In fact some products like computer hardware and lumber exports are already looking for every opportunity to get their prices lower. This gives them that opportunity and I don't think you'd have to wait that long to see these drops.

On the other hand, services like haircuts and restaurants don't have this cascading tax to draw from. So they're left having to lower prices without the savings, or live with a reduced demand. So I can understand them being concerned.

It's possible that the decrease in prices elsewhere will alleviate the strain people will feel in these areas and they won't decrease their demand. Although I don't really see I have an alternative to getting my hair cut other than doing it myself (like I said no alternative). As for food...

We're still going to have the PST portion exemptions on certain products, not completely finalized yet. Also, if you didn't pay GST on something before you're not going to pay the HST on it either. I'm not going to stop eating out because of an extra $2 on a $30 bill either. Eating out has always been much more expensive than the alternative of eating at home. But we do it when we're in a hurry, to celebrate, to see friends, etc. I don't see those things changing.

I'd still like to see the restaurant exception added, but I don't like the restaurants saying people will be let go, tips will go down, etc. Restaurants will close, carnage, end of the world in 2012!

Like everyone, I'd rather pay less taxes. However, as taxes go, this is probably the best one I've seen.

Love to hear your comments, although I do expect a little backlash. Assuming anyone is reading this ;)

Emergency Funds

I was planning on posting about something entirely different today, but something came up that I thought I should write about today. I already had the other article written along with several others, but they can wait. Assuming anyone is reading this I don't want to overwhelm you by posting them all. :)

I took the car in for servicing today and I got the bad news that our transmission is shot. He seemed to expect me to just buy a new car. Having talked it over with my wife, we took the advice from the adage "the cheapest car to own is the one you have". I plan to talk about that one day and how we plan to buy a new car with cash up front. But, for now, I thought I'd look at how we're going to pay for these $1500 repairs.

So of course we had to draw from the 3 months of savings from our emergency fund right? I wish! Who has that kind of money sitting around anyhow? The truth is if, I did I'd have better uses for it anyhow. After all why would I want to earn 1% in a savings account when I'm paying over 5% on my mortgage and 3.25% on my line of credit.

Don't get me wrong, I think an emergency fund is a good idea. I just don't think 3-6 months salary is feasible or even smart. Once the other debt is taken care of think it makes sense to save enough for some unexpected repairs. The amount would depend on your comfort level, but I'm thinking a few thousand should suffice for my needs.

I wish I can say that's where I'm taking these funds from this time, but no such luck. I haven't built it up at all. What am I going to do now? What would I do if I needed more than I had, or was laid off for an extended period of time? My answer, is the Home Equity Line of Credit (HELOC).

If you think of it as an insurance plan it works a lot better than any others that I'm aware of. You don't have to pay a monthly premium until you actually borrow the money (also known as interest). The minimum is usually only the interest payment.

You will of course need to pay it off and you can't (and shouldn't) abuse it for non-emergency use. However, it can help you to get through a pinch. Like the one I'm experiencing today.

Just thought I'd share in case you were thinking that saving 3-6 months salary would be next to impossible too. This might be a better alternative.

Spending Plans

If I titled this posting as Joys of Budgeting, I wonder how many people would have read on. Most people I've talked to, aren't big fans of budgeting. I think it's because most of us look at budgeting as restricting our spending. However, it's income that restricts our spending, not the budgets. At least we should be restricted by our income. Spending more than we make is a recipe for disaster.

A budget is just a tool to help us to ensure that our money goes where we want it to go. It doesn't mean the end of all fun shopping. You determine what you want to spend the money on. Whether it's movies, clothes, a new car, etc. It's a plan on how to spend the money the way you want and it's only as restrictive as you want it to be, or your income allows. That's why I used the term spending plan, as I think budgets make everyone immediately think of "tightening the belt".

In fact I personally find it quite freeing and not restrictive at all. When money is tight we have a tendency to avoid spending all together and when we do spend we feel guilty. At least I do! With a spending plan in place, I know what I have money set aside for. So if I have a video game budget of $50/month, I don't feel guilty about buying a $40 game with an otherwise tight budget. The savings and the debt repayment were already included when I added the video game budget.

Also, I think it helps to have a little bit of flexibility built into your plan. Wiggle Room, Fudge Factor, Mad Money, or whatever you want to call it. Just some unaccounted extra money, so that if you eat out a little more one month, or spend a little extra on clothes you don't feel guilty. If you start resenting the plan you're not going to want to use it.

Making your plan unrealistic or too restrictive is just going to make you hate it as well. Maybe you'd like to pay off your house in 10 years, but if that means no fun at all, it's not going to last. I've kept a very tight budget for several years while my wife was in school and we both started to go a little bonkers. It just can't last.

If you've tried budgeting before, you probably noticed that the money you planned to put into savings, after all your expenses, never seems to be there. You tell yourself it's just this month and next month will be different, but it never is. I think the reason this happens is because wants often become needs (or feel like needs) and when the money is there you spend it. Therefore, it's important that you pay yourself first.

This doesn't mean that you don't pay your bills, as I think your personal credit is your second most valuable asset beside financial knowledge. What it means is that you put some money aside for your savings automatically. Whether that is off of each pay cheque or at a certain date is up to you. The key is that money is moved so that you don't see it. Out of sight, out of mind. If you're building your RRSPs you're probably already doing this.

So after you pay yourself and you pay your bills, you're free to spend the rest of the money however you want. So if you end up not following the budget exactly, you're still OK. If you eat out more month you don't buy the video game that month for example. As long as you don't exceed your income you're fine.

If you find that your expenses are greater than your income, you are left with two options. You either need to make more money, or you need to reduce the expenses. Either way, the spending plan will be a useful tool in identifying these areas and allowing you to choose what is the most important to you.

If you don't already have a budget in place and you're not sure what things cost, just record your expenses for a month or two with no changes. You might be surprised at how much money is going to different things. Eating out always seems to catch people by surprise. Then decide if that's really the best way for you to spend your money. Keep in mind this is how YOU think you should spend your money, not how anyone else thinks you should. It's your choices and your money!

Home Sweet Home

Last week I discussed home ownership vs renting. This week I wanted to take a look at owning a little bit more.

Someone once told me to buy the largest home you can afford. I didn't really discuss this with him at all, but it certainly was an appealing statement. After all, who doesn't want to own a large beautiful home. Since then though, I've heard some compelling reasons to do the opposite.

The argument is that if you can afford to make the higher payments for the larger home, you can afford to make additional payments to a smaller home. Most banks allow you to make both increased payments every month and a lump sum payment every year (usually on the anniversary). The amount of these prepayments vary from bank to bank, but they all go directly to the principal amount.

The other way to increase your payments on the home is to get a shorter amortization. Meaning you pay your home off in 15 or 20 years instead of the standard 25 years (or 35 for a lot of people in Vancouver).

By paying this less expensive home down faster, you pay less interest and more principal. You can then end up owning the home you originally wanted (or a better one) mortgage free faster.

Stealing some number from a seminar I just had with Doug Fordham, CA, here's an example. Although the number are a little low for the Vancouver area. For simplicity it ignores housing value increases.

If you have $20,000 down and can afford $1,500 per month you can either purchase a $250,000 home with a 25 year amortization or a $175,000 home with a 12 year amortization. If you choose the $175,000 home after 12 years you're mortgage free and can then sell the home and then buy the $250,000 home. It would then only take you 5 years to own the $250,000 home. 8 years sooner than buying it directly. You can then either move to a bigger home again or invest the difference. Either way, you are way ahead by not buying the largest home you can afford.

The other nice thing about buying a home that is more affordable, is that you don't have to panic when interest rates rise 1%. Which also means you can take advantage of choosing a variable rate interest rate. Or, if you're not comfortable with going variable at least you can choose a shorter term.

The Wealthy Barber Recommends a 5 year fixed rate and it is one of the only things I disagreed with in the book. According to Dr. Milevsky's Research Findings, choosing a variable rate mortgage would have saved consumers $20,000 in interest payments over 15 years (based on a $100,000 mortgage). It also states, consumers would have been better off borrowing at prime rate (variable) compared to a 5-year fixed rate 89% of the time.

With Variable your mortgage is generally lower than the fixed rate too. So if you pay the same as you would have with fixed you end up paying more of the principal down every month.

Couple other things to consider when you are purchasing a home. If you put less than 20% down you will have to get a high ratio mortgage, which means you have to pay for CMHC insurance. Also, you may want to look at the different mortgage options available. Right now I'm looking at the RBC Homeline plan. It's a mortgage with a line of credit (LOC). As you pay down the mortgage, the room on the LOC automatically increases. So you don't have to go beg for money at the bank when you need it later.

Something I seriously considered and ran the numbers on over and over again was moving. BC is the most expensive province to live in, in all of Canada. Over $200,000 more to live in Vancouver than Calgary or Toronto for example (the closest cities in pricing to us). BC in general is $100,000 more than any other province.

However, we decided we love BC too much to move. Living in BC is a choice though and we recognize that it has a cost. So while we could own a large single detached home 20 minutes out of Ottawa, we've decided we'd rather buy a town home and stay here in Surrey, BC. The cost for the two homes is about the same. Now that I recognize that as a choice though, I'm not resentful about owning a town home when I'd rather have a detached home. Like I said before, it's all about the choices we make.

Throwing Away Your Money

I used to be quite convinced that renting was just throwing your money away. Over time though, I've learned that everything is not quite so black and white.

I like what was said about it in The Wealthy Barber. It states that shelter is a necessity and there are only two ways to get it. You either rent or you own. It's no more throwing away your money than buying groceries or clothes.

If you think of owning as an investment, like most investments, you need to be in it for the long term. Prices fluctuate, there are market corrections, and in the short term the value of your home could decrease. So one obvious time where renting makes the most sense is when you don't plan to live in an area for very long. Also, sometimes the area you want to live in might not be a great investment area. So you can't count on the home increasing with value or increasing with a decent return on investment.

So like everything else you need to evaluate whether renting makes sense for you and for your situation. Regardless of owning or renting, you don't want to spread yourself too thin. So, if you can't afford to own, Don't Do it!

Now that I've said that, given the right circumstances, I still see more benefits in owning over renting for most people in most normal circumstances.

The biggest argument I've ever heard for renting, is that you can invest the money you save by renting. That is assuming that renting is cheaper of course, which it probably will be if you put less than 20% down. To make a fair comparison of rent to mortgage you need to add the maintenance costs and/or strata fees to the mortgage. So if for example you save $100/month by renting you could then invest that difference.

While I think it's theoretically possible to make more money renting and investing the difference, I haven't seen it in practice. The problem with that theory is that you need to be able to make more money than the increase in the value of a home would have been.

The magic number everyone seems to like to use for housing price increases is a 6% per year increase on average. Of course the real number will vary drastically based on a number of factors including location. But, for arguments sake, let's assume that 6% is correct for you. It almost seems logical that if you could earn more than 6% on an investment (say 8%) you'd be better off renting. The problem is that this doesn't take into consideration the 6% is on the total property value not just your personal investment.

Let's say you put $7,250 down on a $145,000 condo. The following year the value goes up by 6%. That's 6% on $145,000, not $7,250. That's $8,700 which is more than 100% increase on your investment. Before you say I ignored the interest payments to the mortgage, I haven't really. Ignoring the equivalent in rent which you'd have to pay as your alternative, you paid $7,250 plus 100 more per month. Even then, you invested $8,450 for an increase of $8,700.

In my case I put nothing down and the value of my condo has increased by about 41% in 4 years. Now that's a higher than normal growth and it was luck and not skill on my part that I got in when I did. There is no investment I could have made that would have gotten me the same growth if I had invested it elsewhere. None that I know of anyhow!

Some other benefits I find to renting over owning:


As long as you don't experience sky rocketing interest rates, your payments will generally remain unchanged. Whereas rent will continue to increase and close that $100 gap. When you do sell, you also get some if the rent equivalent money back which would never happen with renting. Or if you stay put and don't move, eventually your mortgage is paid off, all you have left to pay is the maintenance fees and taxes. That certainly leaves you with more money to invest than the renter at that point.

Even without selling you build up equity in your home. Equity is the difference between what your house is worth and what you owe. So another advantage is that you can borrow against this money. Like anything this can get you into trouble too, so you need to be careful. Using this money allowed me to get out from a debt burden I couldn't have done without selling my place.

Another example of using the equity would be if you needed to make repairs in order to sell, but couldn't afford it until after it was sold. Also, at some point in the future I'd also like to purchase a second home for and investment and this is likely the best way for me to have the down payment.

So while rent is a valid option for providing shelter and might be the best option for some people, I still see more benefits to owning in the long term. Hopefully this helps someone. If not, I still enjoyed getting my thoughts written down somewhere. Feel free to correct me on anything you think I went astray on.

Financial Choices

This may seem to be a strange way to start off a financial blog by talking about choices. Actually, it was the realization of the choices I have available to me that got me on the path to financial enlightenment. My wife and I were struggling with a very serious debt load and were wondering how we were going to be able to pay our bills for the month. It was then that I picked up the book Rich Dad, Poor Dad and started reading.

It opened my eyes to a whole new way of looking at my finances. I started to take serious looks at statements I had just taken for fact, like "your home is your greatest asset". I'll get into the specific things I re-evaluated and the conclusions that I came to in future articles. The point here is that I learned to do my homework, look around at my current situation and evaluate if I was making the right decisions or not.

Really finances are all about choices. Do I spend my $20 on a new Barenaked Ladies CD, go out for dinner, or buy the new Star Trek movie. Do I pay down my mortgage faster or contribute more to RRSPs. The choices are endless.

I think we all feel "trapped" at some point in our lives. Like the choices have been made for us and we're not happy with where we're at. I know it was that way for me at least.

I was at a point where I hated my job and my financial condition. Yet, I felt like I had no choices. Like I was trapped. I couldn't get another job because of previous choices I had made. I didn't have my degree. I didn't have experience with the main stream programming languages. I couldn't get a raise. The list goes on and on.

Then one day it just "clicked". I wasn't dead yet. Nothing was written in stone. So, if I wasn't happy with my choices, it was time to make new ones.

So, I decided I wanted to go back to school. I didn't really want to pursue programming anymore so I was looking for something more along my interests. I weighed all my options and decided to go for my CGA designation. I could do it part time so I didn't need to quit my job while my wife is finishing her nursing degree. Besides I hear they pay well when you're done ;)

Even though I still have a long way to go and I'm still working my crappy programming job, I have hope again. I'm making the choices for my future instead of letting them control me.

Then I noticed choices everywhere. Even the things I decided not to change are still my choices. After reading Rich Dad, Poor Dad, I scared my wife as I contemplated selling and chosing to rent. With the equity we had it would have been enough to take us straight out of debt. Instead we decided to use the equity to make our debt more managable while keeping our home.

I even contemplated the idea of moving to Ontario where the housing prices are MUCH more reasonable. While I still think that would give us a leg up financially, I can't tear myself away from this beautiful province I grew up in. But at least it gives me perspective when I think I can only afford this 2 bedroom condo. That's a choice in itself and no one is forcing me to live in this beautiful place.

The choices that everyone has are virtually endless. So it's always frustrating for me to hear someone say they have no choices and they're stuck. You won't always like the choices you have, but you'll always have choices.

Some choices are opposites and you have to choose the best one for you. For example, I want to be an accountant, but I don't want to go to school. So I had to decide which one was more important to me. Obviously I'm now enrolled. :)

Some choices just take time. Like I want a large detached home in the lower mainland of BC right now, but it's not going to happen over night. However, I am making decisions that will make that dream a possibility one day.

If you're not happy with your current choices, make new ones. You are the only one stopping yourself from being happy. Sometimes it's easier to just do nothing and blame circumstances or other people for your situation. Let me tell you what I realized though. It's not them it's you. Avoid the temptation to be lazy and let things happen. Evaluate your situation and if you aren't happy do something about it. Once you start to look you'll be overwhelmed with the choices you have available.

In future articles I'll talk more about the specific decisions. Like renting vs owning, which mutual funds to invest in, etc.