Author Topic: Can We Retire by 40?  (Read 2662 times)

amazeballs

  • 5 O'Clock Shadow
  • *
  • Posts: 4
  • Age: 37
  • Location: British Columbia, Canada
Can We Retire by 40?
« on: December 15, 2018, 12:40:49 PM »
Hey there! My wife and I are somewhere along our journey to early retirement and think its time to get some feedback from the community. We believe we're on track to retiring by 40. Do you see any major flaws in our plan? Any tips to stay on track? Thanks for taking a few minutes out of your day to take a look at this.

I'm 34 and my wife is 31. We live in a major city in British Columbia, Canada and have no kids. We plan on having a kid sometime in the next few years, but not immediately. As you'll see we are aggressively paying down our mortgage while we don't have a child in the picture.

Gross incomes: Me: $82,000. Her: $85,000 (167K combined) from our full-time jobs. After tax combined incomes: Roughly $125,000/year or $10,500/mo. I co-own a software company and she works in a bank.

----

My assets/investments:

* My company is roughly valued at 1.3M today and I own 50%. I plan to exit in the next few years when it gives me 1.2M after tax (the company is rapidly growing and that scenario is realistic in roughly 2 years).
* $9000 TFSA (in ETF's)
* $5500 RRSP (in ETF's)
* = total $14,500 (plus potentially ~1M once business sells, but not liquid yet)

Her assets/investments:

* $72,000 RRSP (stocks, averaging +15%/year returns)
* $24,000 TFSA (stocks, averaging +15%/year returns)
* $24,000 RRSP cash
* $30,000 RRSP mutual funds (w/maxed employee contribution limit)
* = total $150,000

Our shared assets:

* home purchased for $400,000 6 years ago
* our home is valued at roughly $750,000 in todays market but we don't plan on moving (enough room for a kid if we have one)
* mortgage remainder: $210,000
* = $540,000 home equity if we were to sell in todays market
* $15,000 car (paid off)

----

My monthly expenses:

* $750 TFSA contributions
* $100 RRSP contributions
* $70 life insurance
* $40 MSP (BC health insurance)
* $1,300-$1,500 personal expenses (food, gym, everything else)
* = total: roughly $2275/month

Her monthly expenses:

* $650 TFSA contributions
* $350 RRSP contributions
* $900 everything else + personal expenses (life insurance and all personal expenses)
* = total: roughly $1900/month

Shared monthly expenses (equally shared):

* Mortgage: $4,850 (average per month) - we are making much higher payments on purpose because we want to be mortgage free as soon as possible
    * roughly $4600 to principle, $250 to interest every 2 weeks (2.57% is our mortgage rate)
    * anticipating payoff in 2022 because we plan to increase payments by ~$400/month every year until its paid off (we average 3-10% raises/year and plan to keep expenses roughly the same)
* $1400 everything else (shared groceries, strata fee, car insurance/gas, etc.) we share a car
* = roughly $6250/month

--

We have no debt other than our mortgage. Credit cards/LOC's all paid off in full each month.

Once we're mortgage-free, our shared monthly expenses will drop down significantly. Hopefully by that time I would have sold my business and able to FIRE with 1.2M, by investing in index funds and living off 4% (48K/year). She would be able to majorly increase her investment contributions and hopefully do the same before she's 40.

Our plan is to be mortgage free by the time we have a baby. Mat leave gives her 85% of her income for 1 year (or spread over 1.5 years) so we'll be able to keep up our mortgage payoff as she plans to stop investing during that period). We won't have big daycare costs if we have a child because both our parents are retired and live close by, and are willing to babysit often. Also, I'm more than willing to be a stay-at-home dad at least part-time when I'm FI.

So, what do you think? If I end up selling the business and walking away with 1.2M and she keeps her job/income/investments on track can we retire by 40?
« Last Edit: December 15, 2018, 12:47:44 PM by amazeballs »

Kronsey

  • Stubble
  • **
  • Posts: 169
  • Age: 35
  • Location: Midwest
Re: Can We Retire by 40?
« Reply #1 on: December 15, 2018, 12:56:09 PM »
A couple of observations:

1. Your entire plan is based on a future valuation & successful exit from your software business. That seems extremely risky and uncertain. Not saying you don't know your numbers nor valuations, but things can change REALLY quickly with a business. I personally wouldn't be putting all my eggs in that basket.

2. Why are you in such a rush to pay down a 2.875% mortgage? If a fixed rate for a long term, I'd recommend paying the absolute minimum and investing the rest. I'm no expert on Canadian mortgages nor the Canadian income tax system, but even if there are no other benefits available with keeping the mortgage, the 2.875% is unbelievably cheap!

3. Your monthly savings in retirement vehicles (not the biz nor house) is only roughly 17.5% combined. That isn't nearly enough IMHO (see reasons why in first two points above).

Assuming everything works out ok with the sale of your business and you receive the after tax amount of proceeds stated, I think your plan seems doable, but you've put all your eggs in two baskets (house and biz). Basing retirement plans on the premature sale of your business seems less than prudent IMO.

amazeballs

  • 5 O'Clock Shadow
  • *
  • Posts: 4
  • Age: 37
  • Location: British Columbia, Canada
Re: Can We Retire by 40?
« Reply #2 on: December 15, 2018, 01:14:19 PM »
A couple of observations:

1. Your entire plan is based on a future valuation & successful exit from your software business. That seems extremely risky and uncertain. Not saying you don't know your numbers nor valuations, but things can change REALLY quickly with a business. I personally wouldn't be putting all my eggs in that basket.

2. Why are you in such a rush to pay down a 2.875% mortgage? If a fixed rate for a long term, I'd recommend paying the absolute minimum and investing the rest. I'm no expert on Canadian mortgages nor the Canadian income tax system, but even if there are no other benefits available with keeping the mortgage, the 2.875% is unbelievably cheap!

3. Your monthly savings in retirement vehicles (not the biz nor house) is only roughly 17.5% combined. That isn't nearly enough IMHO (see reasons why in first two points above).

Assuming everything works out ok with the sale of your business and you receive the after tax amount of proceeds stated, I think your plan seems doable, but you've put all your eggs in two baskets (house and biz). Basing retirement plans on the premature sale of your business seems less than prudent IMO.

Thank you for the thoughtful reply!

1. I understand. I'm taking a huge risk here as the business is worth nothing unless someone pays for it. Based on what I know so far, and the advice of a few other entrepreneurs in our market that have sold similar businesses, selling it for enough money for me to take 1.2M after tax is realistic in the next couple of years. The business is in its 10th year of consistent growth, and arguably if it continues I could hang on and exit at a later date for even more. The good news is that if we do not end up selling it for the amount we want, we will continue to take an income from it (its a recurring revenue model) while building something else or working for another software company. So the worst-case-scenario is that I don't retire that early and just continue a decent job.

2. Mathematically speaking you are right, it doesn't make sense. This is a decision we've made because we believe being debt-free is the first stage to freedom and the feeling it gives is invaluable to us.

3. Our first goal is mortgage payoff, then we believe we'll be able to make dramatically higher payments towards retirement vehicles.

Kronsey

  • Stubble
  • **
  • Posts: 169
  • Age: 35
  • Location: Midwest
Re: Can We Retire by 40?
« Reply #3 on: December 15, 2018, 01:39:33 PM »

Thank you for the thoughtful reply!

1. I understand. I'm taking a huge risk here as the business is worth nothing unless someone pays for it. Based on what I know so far, and the advice of a few other entrepreneurs in our market that have sold similar businesses, selling it for enough money for me to take 1.2M after tax is realistic in the next couple of years. The business is in its 10th year of consistent growth, and arguably if it continues I could hang on and exit at a later date for even more. The good news is that if we do not end up selling it for the amount we want, we will continue to take an income from it (its a recurring revenue model) while building something else or working for another software company. So the worst-case-scenario is that I don't retire that early and just continue a decent job.

2. Mathematically speaking you are right, it doesn't make sense. This is a decision we've made because we believe being debt-free is the first stage to freedom and the feeling it gives is invaluable to us.

3. Our first goal is mortgage payoff, then we believe we'll be able to make dramatically higher payments towards retirement vehicles.

You are welcome. I appreciate when people comment and provide helpful advice on my posts, so I try to do the same.

1. You seem to have a realistic view of the possibilities. I'm an accountant by trade and have seen many successful businesses become not-so-successful in a very short amount of time.  As long as your worst case scenario is "find another good job and keep saving" and you are fine with that, then by all means keep building your business! I am definitely in the camp of build a business rather than take a corporate, soul sucking job. I just like to be cautious with retirement plans based around the sale of a business.

2. If you have time, read this thread (with an open mind and ignore some of the banter): https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/. Separating emotional feelings from the facts of investing is hard to do, but if your goal is FI then you owe it to yourself to explore the alternative options fully before writing it off. Being debt free is not the first stage to freedom. Having enough assets to provide you the necessary income that exceeds your expenses is by definition financial freedom. There are many elderly people in my life (friends, family, & clients) who have a paid off house and absolutely terrible cash flow to live off of. Not trying to rain on your parade, just encouraging you to view all options before making your mind up completely.

3. I understand, but please give point #2 above some thought before continuing down this path.

MDM

  • Senior Mustachian
  • ********
  • Posts: 10624
Re: Can We Retire by 40?
« Reply #4 on: December 15, 2018, 05:01:07 PM »
2. Mathematically speaking you are right, it doesn't make sense. This is a decision we've made because we believe being debt-free is the first stage to freedom and the feeling it gives is invaluable to us.
For your sake, I hope the feeling lives up to your current expectation.  For some it will.  For others, it will be more "is that all?"

Quote
3. Our first goal is mortgage payoff, then we believe we'll be able to make dramatically higher payments towards retirement vehicles.
Or you could make dramatically higher payments toward retirement vehicles now. ;)


There is no correct answer on the "invest with higher expected, but not guaranteed, returns" vs. "pay debt" question, except in hindsight.

If you can get a guaranteed after-tax return that is higher than your after-tax mortgage interest, however, some mental gymnastics seem necessary to choose the lower guaranteed return.

frugaldrummer

  • Pencil Stache
  • ****
  • Posts: 840
Re: Can We Retire by 40?
« Reply #5 on: December 16, 2018, 04:35:10 PM »
If you are serious about having a child, don't put it off. Fertility declines after 30 and really starts to go down after 35. Rates of chromosomal abnormalities go up.

Now if you are on the fence about having a child, and both of you agree it's no big deal if it doesn't happen, fine. But if you genuinely want a child I wouldn't wait.


terran

  • Magnum Stache
  • ******
  • Posts: 3453
Re: Can We Retire by 40?
« Reply #7 on: December 16, 2018, 08:34:35 PM »
One thing to note for those discouraging mortgage payoff is that (at least based on a discussion I had with one Canadian I know) 30 year fixed rate mortgages aren't really a thing in Canada. As in much of the non-USA world they get 5 year fixed rate mortgages that they then "re-up" at that point at prevailing rates. I could be misinformed, but if that's the case I don't think the idea of paying off a low rate mortgage is quite as crazy as it might be in the US where we're guaranteed a fixed rate for the life of the loan.

Kronsey

  • Stubble
  • **
  • Posts: 169
  • Age: 35
  • Location: Midwest
Re: Can We Retire by 40?
« Reply #8 on: December 17, 2018, 08:21:46 AM »
One thing to note for those discouraging mortgage payoff is that (at least based on a discussion I had with one Canadian I know) 30 year fixed rate mortgages aren't really a thing in Canada. As in much of the non-USA world they get 5 year fixed rate mortgages that they then "re-up" at that point at prevailing rates. I could be misinformed, but if that's the case I don't think the idea of paying off a low rate mortgage is quite as crazy as it might be in the US where we're guaranteed a fixed rate for the life of the loan.

Agreed if they were maxing out reitrement options first, bit that isn't the case. Again, I'm not Canadian tax expert, but I would assume they are flushing money down the toilet by trying to payoff their mortgage within a few years.

I do agree on fixed rate being a much different scenario, but if they have sub 3% interest rates locked in for five years, they should be taking advantage of that opportunity for all five years at minimum.

https://forum.mrmoneymustache.com/investor-alley/investment-order/

If you scroll down to the Canada section, it appears they agree retirement vehicles should be the priority regardless of interest rate on the mortgage.

Scandium

  • Handlebar Stache
  • *****
  • Posts: 2358
  • Location: EastCoast
Re: Can We Retire by 40?
« Reply #9 on: December 17, 2018, 08:50:49 AM »
1. I understand. I'm taking a huge risk here as the business is worth nothing unless someone pays for it. Based on what I know so far, and the advice of a few other entrepreneurs in our market that have sold similar businesses, selling it for enough money for me to take 1.2M after tax is realistic in the next couple of years.

So those who have successfully sold their business say it's realistic? Sure, what a surprise...
https://en.wikipedia.org/wiki/Selection_bias
How many have you talked to who could not sell their business and have gone bankrupt or are now struggling? They might not be talking to you because that's not something to brag about, or they're busy working 90 hr weeks to survive..

I agree with others you are way too undiversified for my taste. A business that you now guesstimate is worth $650k pre-tax will give you twice that after tax in a few years?! A quick calc I estimate that to 62% CAGR? Yeah, maybe it's possible, but still seems like a pretty long shot to me.

Is it correct that your who income is from your small business, but you have almost no cash savings? Also seems very risky. I've seen recommended 1 year of expenses in cash in that situation, at least 6 months seems prudent. You maybe be one patent suit or cease and desist away from loosing all your income, would you be able to life off your wife's only? What if you have child expenses in addition? Your half paid off house will do nothing for you in that situation. With cash/stock assets you could live of that a while. 

The whole mortgage payoff is a giant debate as you've seen, but owning a small business it's probably the last thing I would do; tying up even more of my finance in a single (overvalued/bubbely?!) asset. Having that much cash locked up in my house makes me less comfortable, not more.. I would want as much liquid, diversified stock assets as possible if I were you.. (obviously if your comfortable with it keep on going, but just IMO). I hope for my plan's sake that investing now will yield more than 2.8%, so that's another reason it's better to do that first, and mortgage later.


amazeballs

  • 5 O'Clock Shadow
  • *
  • Posts: 4
  • Age: 37
  • Location: British Columbia, Canada
Re: Can We Retire by 40?
« Reply #10 on: December 17, 2018, 10:32:53 AM »
Thank you to everyone for posting your thoughts and insight. This was the exact type of insight and feedback I was looking for, and will certainly spend the next few days diving into the literature to get a better understanding of the points raised.

I think some more context into why we are pursuing our current strategy is in order.

My life likes her job but still wants to be financial independant by 40 in case she wants to go down to part time or just have more options that we can't foresee from here. I've been offered high-paying jobs as well, which I could always jump into if things go south. Please consider our current strategy is our moonshot plan (that seems to be working).

My Business is a SaaS (software as a service) and has a recurring revenue model. It's generating roughly 85K/month in revenue and growing about 30%/year. In our industry, selling at 2X ARR (annual recurring revenue) is realistic if you have revenue that high.. the multiple is lower at our current ARR/MRR. If I exit at 110K/mo at 2X ARR (2.6M) I'd be left with roughly 1.2M. Based on conservative projections we will get there in less than 2 years. The business is in its 10th year, highly streamlined and not founder-reliant. Most people would say just keep the business and either sell at a higher point down the line or have it pay you dividends while you do something else with your time. I would rather exit completely because I'm not excited about the industry any longer and want to spend my time elsewhere.

The good news is that I have a close relationship with 3 potential buyers that have expressed interest and 2 of them have made an even larger acquisition in our space. I understand this could fall through but its better than starting from scratch.

If the business starts to fail it will not disappear overnight because of the recurring model. The "nuclear option" is to cut down the staff/expenses/support to a bare minimum while my founder and I take most of the money in dividends until it dies (multiple times my current salary).. during which time we'll find a decent software job or start something else, or both. The "decent software job" route in our city would pay higher than the current salary I'm giving myself.

The reason why we are paying the mortgage down so aggressively is because of
3 reasons:

1) Realistically we both have a strong mental bias towards being debt-free. This was instilled in us from childhood and how we were raised.. so that is most likely the largest factor that will overtake logic/math.

2) We don't believe the market is going to continue to give 7-8% annual returns in the next 3.5 years. Because of this short window, we're not looking at the "average" return on index investing over a long period of time.. we're looking at the next 3 years which we believe will have a correction/deleveraging.

3) Historically mortgage rates are around 5-6%. We've locked in the 2.57% rate for 5 years (~4 years left with that rate) and if we keep making payments according to plan we'll have it paid off in <3.5 years. If we don't do that we will have to renew the mortgage in 4 years with the rate at that time (which may be back to normal levels).

As for having children... we do want at least one, and have put a 1-2 year timeframe on starting the family plan. My wife is 31 so we're not too worried but I fully understand that door is only going to close as time goes by.. and the risks go up. We're also prepared to adopt if for some reason we can't conceive.

Either way.. I have a lot of reading and considering to do. I'm not saying we're stuck to the current plan 100% but I wanted to give a bit of background into why we're doing it.

Thanks again everyone! Open to more feedback.

Car Jack

  • Handlebar Stache
  • *****
  • Posts: 1836
Re: Can We Retire by 40?
« Reply #11 on: December 17, 2018, 01:06:58 PM »
Maybe I missed it, but what is the total that you currently spend?  You need that to be your 4% (or ideally 3% or lower) number to draw from your investments post FIRE, post business sale. 

Every state/country/province/agency has different costs for adoption.  We adopted 2 infants many years ago and are in a high cost US state.  Being a car guy, I always equate things to car cost.  Each adoption required a certified check to the agency before boarding the airplane (both were in US) for the full MSRP of a new BMW M3.  Look around and know ahead of time.

Fortunately, you can time your exit to some time after the sale of your business.  If you are not able to sell at a price high enough....you just keep going and building your business up.  At some point, hopefully it will meet what someone is willing to pay.  Offering to stay with the business for a set period of time is usually seen as a big plus.  My mom sold the family business a couple years after my dad passed and worked for the buyer for one year.

FallenTimber

  • Stubble
  • **
  • Posts: 110
Re: Can We Retire by 40?
« Reply #12 on: December 18, 2018, 06:53:16 AM »
If I were in your shoes, Iíd be feeling great. Iím surprised by a lot of the posts with a negative tone. Yes, thereís always risks, but you clearly have the skill set and business smarts to do just fine regardless of the exact business sale price.

By 40, you and your wife will be sitting very pretty at your current savings rates. Youíre already in a great spot. Congratulations and well done!

Laura33

  • Magnum Stache
  • ******
  • Posts: 2908
  • Location: Mid-Atlantic
Re: Can We Retire by 40?
« Reply #13 on: December 18, 2018, 08:14:44 AM »
One thing I'd suggest is to try your damndest to be objective about the data.  For example:  you are paying off your mortgage super-fast because you do not believe the market will continue to generate @7%/yr gains -- and yet you also believe over the same period of time your business will grow by multiple-tens-of-percent every year, that the buyers will still be there, and that the purchase multiples will remain the same.  Have you considered that tech is a huge portion of the "market" that you think is going to crash, and that the most likely reason for that crash would be a significant drop in the tech sector, which would cut demand for your business?  And that if/when that happens, those high-paying jobs in the same sector may not be there?  And that if your particular part of the world is highly invested in tech, you might not even be able to sell that paid-off house to move to another job, because all those other laid-off workers are trying to sell, too, and no one is buying? 

IOW, if you're going to plan for the worst-case scenario, plan for the real worst-case scenario -- not the one where one thing goes wrong, but all the rest stay the same.  IME, all those sorts of bad things are correlated with each other.  In the late-'90s, we moved to an area with a bunch of tech companies.  We thought we were safe, because even if DH's company struggled, there were at least 5 others where he could get a job.  What we didn't plan on was the first tech crash: not only did his company shut down, but 3-4 of the others did, too, and the one or two that were left sure weren't hiring.  He was lucky to get a new job one state over; his friends who stayed put were literally delivering pizza for a living even several years later.  Unfortunately, with so many people laid off, the housing market crashed, and we couldn't drop our price fast enough to get ahead of the curve.  We ended up carrying two mortgages for over a year, then selling for @20% less than we had originally listed it for.  Oh:  and I had just had our first child and couldn't work very much.  But we got by ok, because we had always kept our expenses to what we could support on one income, and we had lots of savings to cover things like ongoing repairs to the house we were trying to sell.

I hope you will never experience anything like that; I want your plan to succeed!  But please, please make sure you guys are both protected if the tech sector crashes again, because you guys are heavily invested in that sector, to a much greater extent than you realize.  At the very least, you need a significant EF more than you need the mortgage paid off in 3.5 years.

Goldielocks

  • Walrus Stache
  • *******
  • Posts: 6969
  • Location: BC
Re: Can We Retire by 40?
« Reply #14 on: December 19, 2018, 08:29:40 PM »
You are on the right track for this.

Currently, your investments excluding the house and company are sufficient to pay out a resaonable / modest retirement at age 65 if you keep them invested until age 65.

Don't count your company value until you realized the money.   DH has worked for 4 different small / start up firms, programming plus his own.  (vancouver / Calgary)  Hard to extract / sell a small business, but it does happen for major wins sometimes.  Sometimes the money is paid out over a series of years, sometimes things go wrong even with a deal.

Second point -- good plan to keep your personal RRSP room large, if you think you will have a large payout (or series of large payouts) from the business in future.  RRSP is a terrific place to sheild from top marginal tax rates.

If you two work until age 36 to 40... then you will have a paid off home and more funds saved.   I would build up the TFSA and max it out before the mortgage is paid off.  After that, it is personal preference, really although the math says to invest first versus a 2.8% mortgage rate.

The key here is that you can certainly FIRE at 40, depending on how things go or not with your business, you can just work enough to pay for your annual living expenses, and be mostly not working even if you do decide to add a bit to your bottom line.

amazeballs

  • 5 O'Clock Shadow
  • *
  • Posts: 4
  • Age: 37
  • Location: British Columbia, Canada
Re: Can We Retire by 40?
« Reply #15 on: December 21, 2018, 03:42:38 PM »
I love the feedback, thanks everyone. Lots of good info to consider.

I came to this forum because I believe the FIRE community would offer a very objective/reasonable/safe view of our circumstances and plans... and that's exactly what it has done. So THANK YOU for that.

Being surrounded by entrepreneurs has been a huge gift on the other hand because it's driven me to take risks and often ignore conventional wisdom. Without that mindset I would have never gotten to where I am with the business, and "settled" for a decent high-paying job, saved most of my income and followed the regular FIRE path like my wife. There's absolutely nothing wrong with that, but I want that to be my plan B.

I'm going to try my best to objectively read the resources so that I'm prepared for all scenarios... BUT keep in mind that there's yes there's always risk of a business failing.. but that should never hold you back from setting massive goals. If every business owner thought like that nothing revolutionary would ever get done. There's also a real risk of entire industries collapsing and leaving me without marketable skills in this field, but you know what I'll do in that scenario? I'll learn and adapt and revert to plan B some other way. It's more likely that I'd correct course (sell condo to pay for rent, decrease savings short term, move to a cheaper city, learn new skills, etc.) before a big wave hits anyways.. I'd guess the same is true for most of the smart people in this community.