Author Topic: How to reduce the time to financial freedom  (Read 3717 times)

cardshark

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How to reduce the time to financial freedom
« on: April 24, 2014, 08:33:55 AM »
I've been crunching the numbers to see how much I would need to live financially independent and how long it would take to save enough money. Here are the numbers I am working with. For context, I live in Ottawa, Canada. The biggest cost of living driver here is real estate. Rent is $1,500 or about $350,000 to purchase outright. Also, taxes are very high here.

Annual expenses: $26,000 (this includes $18,000 in rent)
Using 4% rule, I would need to save $650,000

After taxes, deductions and DC pension plan contributions (18% of pay, or about $17,000/year in contributions), I have a net annual income of $54,000/year available for spending and investing. Subtract the $26,000 in annual expenses, that leaves me with $38,000/year to invest. Total savings are then $55,000/year.

Q1: $650,000/$55,000 = 12 years of working, ignoring investment returns. At a 6% return assumption, this reduces to 9 years. This seems very long. How can I shorten this? Is it even possible to shorten this?

Q2: Because I would be needing to live off of the $650,000 for so many years, my annual withdrawals will need to be interest only. I am questioning if this even possible at 4%. I would need to earn at least 5% on my money once we include taxes. 5% risk free doesn't exist (here anyway). Because I would need this money to sustain myself, I can't be a risky investor. I might be able to buy and hold some corporate bonds (AAA corporate does not exist in Canada, so I will be relegated to AA) at 3% to 4% yield. I would be willing to accept the risk associated with holding AA corporate bonds to maturity. But this is still short quite a bit. Not sure where to go here.... do I need to increase my $650,000 to something like $850,000 to take this into account?

bugbaby

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Re: How to reduce the time to financial freedom
« Reply #1 on: April 24, 2014, 08:53:39 AM »
I've been crunching the numbers to see how much I would need to live financially independent and how long it would take to save enough money. Here are the numbers I am working with. For context, I live in Ottawa, Canada. The biggest cost of living driver here is real estate. Rent is $1,500 or about $350,000 to purchase outright. Also, taxes are very high here.

Annual expenses: $26,000 (this includes $18,000 in rent)
Using 4% rule, I would need to save $650,000

After taxes, deductions and DC pension plan contributions (18% of pay, or about $17,000/year in contributions), I have a net annual income of $54,000/year available for spending and investing. Subtract the $26,000 in annual expenses, that leaves me with $38,000/year to invest. Total savings are then $55,000/year.

Q1: $650,000/$55,000 = 12 years of working, ignoring investment returns. At a 6% return assumption, this reduces to 9 years. This seems very long. How can I shorten this? Is it even possible to shorten this?

Q2: Because I would be needing to live off of the $650,000 for so many years, my annual withdrawals will need to be interest only. I am questioning if this even possible at 4%. I would need to earn at least 5% on my money once we include taxes. 5% risk free doesn't exist (here anyway). Because I would need this money to sustain myself, I can't be a risky investor. I might be able to buy and hold some corporate bonds (AAA corporate does not exist in Canada, so I will be relegated to AA) at 3% to 4% yield. I would be willing to accept the risk associated with holding AA corporate bonds to maturity. But this is still short quite a bit. Not sure where to go here.... do I need to increase my $650,000 to something like $850,000 to take this into account?

1. Math alert: 54k-26k =28k
2. Not enough info given e.g. living situation - can you decrease housing even further e.g - sharing with a roomie or partner or buying an income property such as a twoplex to rent out a half, or retire to a lower housing cost area
3. You'd get much more useful feedback by posting a Case Study.  pls see guide at the top of the thread. Good luck!

Baron235

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Re: How to reduce the time to financial freedom
« Reply #2 on: April 24, 2014, 09:27:11 AM »
3 ways to shorten the time frame: 

1.  Increase your income
2.  Decrease your expenses
3.  Increase your investing risk (related to 1)

There are really the only ways to do it.  As to which method is best depends on the individual.  Maybe you can pick up a roommate to lower an expense? Or maybe start a side business to increase your job? Or maybe move to cut expenses and raise the income with a new job? 

To determine what is really best, will depend on your individual circumstances. 

TrMama

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Re: How to reduce the time to financial freedom
« Reply #3 on: April 24, 2014, 09:49:49 AM »
You could also retire somewhere cheaper.

totoro

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Re: How to reduce the time to financial freedom
« Reply #4 on: April 24, 2014, 09:52:05 AM »
IMO the a good move could be to buy a multi-family and live in the less expensive unit if you are a single.  This will bring down your monthly shelter costs significantly and will add to your long-term equity and leave you more to invest each month. 

You can cash out in future for retirement at a time when the market rises, or keep the income stream when it is paid off.

A short viewing of realtor.ca turns up interesting options like:

http://beta.realtor.ca/propertyDetails.aspx?PropertyId=14076533

http://beta.realtor.ca/propertyDetails.aspx?PropertyId=14240118

You need to do the math and evaluate all costs including maintenance, repairs and vacancy.  Buying the right place at the right price in the right location is key.  A ten year low rate mortgage may make sense.


MarciaB

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Re: How to reduce the time to financial freedom
« Reply #5 on: April 24, 2014, 09:55:08 AM »
And don't forget that there are lots of income opportunities after FI too, and those can supplement your investment income. This might take some pressure off of having to determine exactly how much that FI number is.

KMMK

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Re: How to reduce the time to financial freedom
« Reply #6 on: April 24, 2014, 11:16:36 AM »
Also you indicate you have to save the entire amount. Do you have any savings at all right now? If not, why? Are you young and just got a job?
And if you have savings that would give an indicator of your previous investment returns. And yes, you can't use the 4% rule unless your investments are making 4% plus inflation (usually 7% is the target). If your investments are only making 3-4% (and you aren't comfortable with the steps needed to get a potentially higher return) the rule would be living off of 1-2%, which is a much different scenario.