Author Topic: Will We Be Ready?  (Read 1057 times)

Cantwait2521

  • 5 O'Clock Shadow
  • *
  • Posts: 6
  • Age: 47
  • Location: Canada
  • Striving for freedom 55
Will We Be Ready?
« on: September 12, 2017, 09:42:18 AM »
Hi Everyone - New here and hoping to get started and learn from everyone.

My husband and I are planning to retire when he is 55 and I am 54 (six years - give or take a couple of months).

We currently have $280,000 in investments, which, at 5% along with $18000 in contributions each year should grow to $500,000 in six years.

Our house is currently worth about $1,600,000 and I expect it's value may stagnate as we live in the Toronto area and the government has put new laws into place to slow the housing market down - anyway, I am going with a moderate worst case scenario and estimating our house does not go up or down in value. 

I am also starting a part-time job in a couple of months and estimate that saving that entire income will result in an additional $70,000 saved.

We will own two relatively new vehicles and our home will be paid off with no credit card debt at that point (we are working towards that now).

We will then sell the equipment from our business (we are self-employed) and use the money from that to buy the RV that we can afford.  We intend to establish a residency with family for tax and our health insurance purposes and live in our RV.  I have estimated our monthly needs at $6600/month gross - at a 25% tax rate that is about $5000/month.

When DH is 58 (three years into retirement) he will b e eligible for his union pension of $1200 (gross)/month.

At 65 we will receive a combined $700/month in CPP (Canada Pension)

At 67 we will receive old age pension which is indexed to inflation and should be at minimum $1400/month combined.

Hubby also has the opportunity to work in the summer months when we are staying in trailer parks near our current home.  He can work for former customers and make some additional income.  He would only want to work a few days a week so I would estimate his potential gross at $15,000 for a summer.  We don't want to rely on this though - he wants to retire without ever having to work again if he doesn't want to.  He only wants to work for the social aspect or to keep busy if he gets bored.

I estimate our net worth after selling our home will be
$1,600,000 - house
$   500,000 - Investments
$     70,000 - Additional saving from part-time job

$2,170,000 - TOTAL

We will have to pay Real estate fees and clean-up or moving costs of about $100,000 and we want to give $100,000 to each of our 2 kids 

So new TOTAL = $1,870,000

TWO QUESTIONS:

1)  Is this enough to retire on?  I have seen some calculators that say it's more than enough and others that say we are nowhere near the mark. 

2)  Our money is in mutual funds right now.  We will soon be maxing out our RRSP availability and our TFSA's - then what do we invest in?  I really need direction on how to invest this money because right now we are just with the bank in their funds and I feel like that isn't a smart move.

Thank you!!!
Candis
Looking forward to the RV and a retirement full of new discoveries and adventures.

Lady SA

  • Stubble
  • **
  • Posts: 207
  • Age: 25
  • Location: Midwest
Re: Will We Be Ready?
« Reply #1 on: September 12, 2017, 10:11:41 AM »
1. Impossible to answer this if we don't know your spending/living expenses. If you spend $40k per year, $2 mill is MORE than enough to retire on. If you spend $100k per year, not so much.

2. I'm not familiar with the Canadian system, but it sounds like keeping your money tied up at the bank (in their mutual funds?) wouldn't give you the return you need to sustain a retirement. The 25X expenses rule depends on that 25x number being invested in the stock market, not sitting in a savings account. At MMM we recommend investing in a broad index fund to give you exposure to the entire market.
https://www.earnest.com/invite/lillian2 --> Use this referral to refinance your student loans with Earnest and get a $200 bonus!

Cantwait2521

  • 5 O'Clock Shadow
  • *
  • Posts: 6
  • Age: 47
  • Location: Canada
  • Striving for freedom 55
Re: Will We Be Ready?
« Reply #2 on: September 12, 2017, 10:35:30 AM »
1. Impossible to answer this if we don't know your spending/living expenses. If you spend $40k per year, $2 mill is MORE than enough to retire on. If you spend $100k per year, not so much.

2. I'm not familiar with the Canadian system, but it sounds like keeping your money tied up at the bank (in their mutual funds?) wouldn't give you the return you need to sustain a retirement. The 25X expenses rule depends on that 25x number being invested in the stock market, not sitting in a savings account. At MMM we recommend investing in a broad index fund to give you exposure to the entire market.

1)  Sorry, I posted that I estimate our monthly expense needs at $6600 before tax or $79,000/year.  Because we are making a drastic change in our living situation it is impossible to predict it entirely but I have done research on what our expenses for RV'ing will look like and that's the number I came up with that will give us a comfortable lifestyle.  $79,000 x 25 is $1,980,000 which is more than we estimate we will have ($1,870,000 - so we are short $110,000) ... but we will have the additional $1200/month starting 3 years later - is there a way for me to plug that in somewhere and see if that works for us and will sustain us?

2)  Yes, our money is currently in bank mutual funds which are spread across the stock market, mortgages, bonds etc..  Some of our funds are riskier than others but I wouldn't consider myself a huge risk-taker.  I will look into the fund you have suggested and educate myself in that regard. 
Candis
Looking forward to the RV and a retirement full of new discoveries and adventures.

nereo

  • Walrus Stache
  • *******
  • Posts: 6666
  • Location: la belle province
    • Here's how you can support science today:
Re: Will We Be Ready?
« Reply #3 on: September 12, 2017, 10:49:38 AM »
you've thrown out some numbers so let's start there.

You estimated your monthly 'gross' spending needs at $6,600 (or $79,200/year).
First quick-and-dirty calculation:  with a 4% WR you'd need invested assets of $1,980,000 to sustain that spending rate.
Hmm... not quite to your target.

But wait!  3 years in you'll have an additional $1,200mo, assuming all goes well, and an additional $2,100/mo about a decade later.  That will knock the amount you need from your investments from $6,600 to $5,300 (3 years in) and to $3,200 after a decade.  Plug those into a simulator like cFIREsim (which accounts for future pensions) to see how they would do in historical scenarios and.... woot!  100% success rate! 

...so you're golden, right?

Well... not so fast.  I worry that two aspects of your plan may be on shaky ground.  The first is the idea that your home will be worth the same that it is today, i your words a "moderate worst-case scenario".  This may be, or it may not be.  People have been yelling "bubble" for the Toronto market for some time, but for perspective look at what happened to cities like Phoenix, Las Vegas or Bakersfield.  a 30% drop (or worse) is possible for large cities.  Unfortuantely for you, so much of your net worth is tied to your home (a whopping 73% of your expected portfolio, and 84% of your current portofolio!!).   It wouldn't surprise me to see Toronto's market take a big hit.

Second - while 5% real growth just shy of the historical average, its not guaranteed.  Even a moderate recession might lead to a 20% loss over the next 5 years, knocking your expected $500k in six years down to about $296,000 even with annual contibutions of $18k/year* 5 years.  Recessions happen and its histically unliklely that we'll get by another 5 years without one.

Plugging more pessimistic numbers into cFIREsim (home value of $1.12MM, investments of $296k) gives you a stash of just over $1.3M, and a WR of $56k/year.  Not quite high enough to hit your target, but still nothing to sneeze at given some pessimistic assumptions.
Bad news: if you keep your spending rate around $79k, even with your expected pensions you have a 30 year historical success rate of just 56%.  Not bad but certainly not golden.

So what to do?  Well, your expenses do seem rather high, particualrly for this board.  Cut that back to just $5,500/mo (still a whopping $66,000, or more than the median income of Canadian households) and your success during the more pessimistic scenario jumps to 75%.
It's also worth pointing out that you could quit today sell your house for $1.6MM and have $6k/mo ($72k) to live off of indefinitely with a 4% WR.
"Do not confuse complexity with superiority"

Cantwait2521

  • 5 O'Clock Shadow
  • *
  • Posts: 6
  • Age: 47
  • Location: Canada
  • Striving for freedom 55
Re: Will We Be Ready?
« Reply #4 on: September 12, 2017, 01:26:15 PM »
you've thrown out some numbers so let's start there.

You estimated your monthly 'gross' spending needs at $6,600 (or $79,200/year).
First quick-and-dirty calculation:  with a 4% WR you'd need invested assets of $1,980,000 to sustain that spending rate.
Hmm... not quite to your target.

But wait!  3 years in you'll have an additional $1,200mo, assuming all goes well, and an additional $2,100/mo about a decade later.  That will knock the amount you need from your investments from $6,600 to $5,300 (3 years in) and to $3,200 after a decade.  Plug those into a simulator like cFIREsim (which accounts for future pensions) to see how they would do in historical scenarios and.... woot!  100% success rate! 

...so you're golden, right?

Well... not so fast.  I worry that two aspects of your plan may be on shaky ground.  The first is the idea that your home will be worth the same that it is today, i your words a "moderate worst-case scenario".  This may be, or it may not be.  People have been yelling "bubble" for the Toronto market for some time, but for perspective look at what happened to cities like Phoenix, Las Vegas or Bakersfield.  a 30% drop (or worse) is possible for large cities.  Unfortuantely for you, so much of your net worth is tied to your home (a whopping 73% of your expected portfolio, and 84% of your current portofolio!!).   It wouldn't surprise me to see Toronto's market take a big hit.

Second - while 5% real growth just shy of the historical average, its not guaranteed.  Even a moderate recession might lead to a 20% loss over the next 5 years, knocking your expected $500k in six years down to about $296,000 even with annual contibutions of $18k/year* 5 years.  Recessions happen and its histically unliklely that we'll get by another 5 years without one.

Plugging more pessimistic numbers into cFIREsim (home value of $1.12MM, investments of $296k) gives you a stash of just over $1.3M, and a WR of $56k/year.  Not quite high enough to hit your target, but still nothing to sneeze at given some pessimistic assumptions.
Bad news: if you keep your spending rate around $79k, even with your expected pensions you have a 30 year historical success rate of just 56%.  Not bad but certainly not golden.

So what to do?  Well, your expenses do seem rather high, particualrly for this board.  Cut that back to just $5,500/mo (still a whopping $66,000, or more than the median income of Canadian households) and your success during the more pessimistic scenario jumps to 75%.
It's also worth pointing out that you could quit today sell your house for $1.6MM and have $6k/mo ($72k) to live off of indefinitely with a 4% WR.

I completely agree with you regarding our home.  I worry about the 'bubble' bursting but my husband seems to think things will bounce back like they are starting to do in Vancouver.  I hope he is right but part of me worries that it's wishful thinking on his part because he doesn't want to give up his big garage.  I have been pushing to sell, rent, pay off all debts and invest the rest and then continue to work for a few more years until we pull the plug (our daughter won't graduate college for 3 years so we'd like to stick around for a while to make sure she is ok).  Maybe if I show him your calculations he will finally agree. 

I would agree with our monthly expenses coming in on the high side.  I estimated this way for 2 reasons.  1) Historically we haven't been very frugal with our money - we are learning.  and 2) I wanted to err on the side of caution because this will be a completely different lifestyle than what we have lived so far (RV vs. 'sticks & bricks')   I think I could cut back $1000/month and still be ok and live pretty comfortably (I added in $900 for dinners out and entertainment and overestimated our needs for dental, clothing, hair, etc.)

I found the cFIREsim calculator (thank you for mentioning it - I haven't navigated here enough yet to have found it myself) and entered the pensions as well as our current net worth (if we sell and retire now) at $1,500,000 - then deducted $100,000 for real estate fees and moving costs and $200,000 as a gift to the kids (which I think I will invest on their behalf so they don't blow it while they are young).  That leaves me with $1,200,000.  If we work for 3 more years with a $100,000 income/ year and pay rent of $24,000/year and invest at our current rate of $18,000/year we should have a 100% success rate.  If I did the calculations correctly.
Candis
Looking forward to the RV and a retirement full of new discoveries and adventures.

nereo

  • Walrus Stache
  • *******
  • Posts: 6666
  • Location: la belle province
    • Here's how you can support science today:
Re: Will We Be Ready?
« Reply #5 on: September 12, 2017, 01:48:04 PM »
I was trying to stick to the numbers given. 
For a more thorough analysis on how you might cut expenses while still maintaining your QoL you could post your budget in another thread.

This may also be helpful to you: https://forum.mrmoneymustache.com/canada-tax-discussion/
There are many strategies to reduce taxes in Canada in retirement - your estimate of being in the 25% tax bracket could be much too high (allowing you to withdraw considerably less each year).

My biggest concern is the among of your net worth (NW) tied up in just one largely illiquid investment - your home.  There are strategies to reduce this, including refinancing, withdrawing equity and investing the difference.  If you have room in your RRSP/TFSA your tax savings alone might cover the refinancing fees.

good luck and keep asking questions.
...and don't negate the power of frugality.  With just a bit of optimization you could be FI now.
"Do not confuse complexity with superiority"

Cantwait2521

  • 5 O'Clock Shadow
  • *
  • Posts: 6
  • Age: 47
  • Location: Canada
  • Striving for freedom 55
Re: Will We Be Ready?
« Reply #6 on: September 12, 2017, 02:12:14 PM »
Thank you Nereo.

I will continue to go through the website and check out the Canadian thread for taxes as well.  There is so much information here that I do appreciate you pointing me in the right direction to start. 

I'm also thinking that it may be wiser (if we don't sell) to invest our extra money instead of using it to pay down our mortgage.  This will help deal with the liquidity problem, at least to some extent. 

Thank you for the advice.  Your information and experience is much appreciated and I look forward to continuing to learn from you and everyone here!
Candis
Looking forward to the RV and a retirement full of new discoveries and adventures.

Laura33

  • Handlebar Stache
  • *****
  • Posts: 1469
  • Location: Mid-Atlantic
Re: Will We Be Ready?
« Reply #7 on: September 12, 2017, 03:09:12 PM »
I'm also thinking that it may be wiser (if we don't sell) to invest our extra money instead of using it to pay down our mortgage.  This will help deal with the liquidity problem, at least to some extent. 

ITA.  Your home will sell for whatever it sells for in 6 years regardless of whether you owe $1.6M or $0; throwing more money at the mortgage will not increase the selling price, nor will it decrease your ongoing expenses since you plan to sell the home.  Unless your mortgage rate is crazy high, you are very likely to do better putting any extra money in the market than throwing it at the mortgage.  But beyond that, diversifying your assets will provide better protection against the worst-case downside, because you are more likely to have at least some eggs in some baskets that aren't as badly affected. 
Laugh while you can, monkey-boy

Cantwait2521

  • 5 O'Clock Shadow
  • *
  • Posts: 6
  • Age: 47
  • Location: Canada
  • Striving for freedom 55
Re: Will We Be Ready?
« Reply #8 on: September 12, 2017, 04:50:09 PM »
I'm also thinking that it may be wiser (if we don't sell) to invest our extra money instead of using it to pay down our mortgage.  This will help deal with the liquidity problem, at least to some extent. 

ITA.  Your home will sell for whatever it sells for in 6 years regardless of whether you owe $1.6M or $0; throwing more money at the mortgage will not increase the selling price, nor will it decrease your ongoing expenses since you plan to sell the home.  Unless your mortgage rate is crazy high, you are very likely to do better putting any extra money in the market than throwing it at the mortgage.  But beyond that, diversifying your assets will provide better protection against the worst-case downside, because you are more likely to have at least some eggs in some baskets that aren't as badly affected.

Thanks Laura for your input.  Our mortgage rate is 2.54% locked in for another 4 years.  It makes much more sense now that you've both pointed it out to me that diversifying my eggs is the way to go.  In addition to that I will hopefully be earning much more interest than I am paying. 
Candis
Looking forward to the RV and a retirement full of new discoveries and adventures.

Goldielocks

  • Magnum Stache
  • ******
  • Posts: 4799
  • Location: BC
Re: Will We Be Ready?
« Reply #9 on: September 15, 2017, 03:17:56 PM »
You are good to go, as long as you are ok with the risk that you will have only $50k (before tax, the guarnateed pension portion only) to live on after the age of 67..OR the risk that you have to add a couple more years.

Why?

So many of your estimates rely on making the average, no bumps in the road, in the short term (10 years).   We have had quite  a run of home price appreciation and stock market appreciation in the past few years.  Remember, from 1994 to 2001, homes declined in value 2% in Vancouver.   The overall stock market was stagnant 1999 - 2006, and net of mutual fund fees, may have declined slightly for most people.

I don't actually think you would drop net to $1 million from your position today (you need roughly $1million to pay for 13 years until all pensions are in).  Perhaps drop $360k on the home, and have zero gains on the $280k, is a more realistic worst case, etc.  It's just that until you sell the home, and convert some of your funds to allow for sequence of returns risk, you won't know.