Freedom to Ride!

Stoked I get to ride more!

Stoked I get to ride more!

I’m going to be 46 this year. Yikes! While I still have my health and a decent level of fitness I have noticed some changes in how long I recover from injuries as well as my energy levels that have reminded me life is not forever. Given a limited amount of time left that I can do all the things I love [bike, surf, kiteboard, camp, ride motos and travel] my thoughts have turned to the end game aka retirement.

I’m very aware that if I wait too long I’ll not be able to do the same stuff as I would right now. On the other hand I need to fund my life so it’s not as easy as saying “I’m done working. Let’s party!”

What I do know is that if I don’t come up with a plan and follow it I’ll be bumbling along for another couple decades without much hope of stopping. So I’ve been reading about retirement and personal finance online to see what other folks are doing. Based on what I’ve read and my own situation I’ve come up with a plan. I thought I’d share it since I can’t be the only person who’s been thinking they’d like to ride more and work less as they get older. πŸ˜‰

The Plan

  1. Reduce my costs.
  2. Save aggressively.
  3. Invest wisely.
  4. Move to part-time work.
  5. Allow investments to grow.
  6. Reduce work load to zero.
  7. Stay flexible.

If I was 25 I’d just save aggressively and invest while working full-time until I had enough to live off of and then quit working. However, if you are starting this process at my age and want to stop working full-time before the conventional retirement age [60-71] you have to save a ton of money in a short time to reach financial independence. If you are making a shit load of money and can reduce your costs savagely this may still be a good plan, but for most people [me included] it’s not workable.

By shooting for part-time work you can give yourself the gift of more and more time off without needing anywhere near the same amount saved before you start.

Kill your debts!

If you have any debt other than a mortgage treat it like an emergency. Do not buy anything non-essential – which includes beer, new clothes, movie tickets, eating out, etc.. If that sounds grim than see if you can get rid of debt – for example sell the car and ride your bike/take the bus. You literally can’t get anywhere if you have consumer debt.

I was lucky despite living on my own since I was 15 yrs old [and never receiving support from my parents/relatives once I left home] I didn’t have any student loans or spend more than I earned.

You don’t need all the stuff you want.

It’s very easy to let your spending grow with your salary. That means you’ll always chew through your money and never get anywhere.

When I started looking at retirement I came up with a budget I figured I could live on. I kept reviewing it and reducing it. I now realize that I can actually live an awesome life on 50% less than my initial estimate and I can be just fine on 50% less than that…this includes paying a mortgage.

Being honest at this stage is critical. If you need $50K/yr to live that’s a lot harder to fund than if you need $20K/yr to live.

I’d love a fancy new mountain bike every couple years, but I don’t want to work full-time to pay for it so I am going to get a less fancy mountain bike every 5-6 years which means I can work part-time.

$25 saved and invested = $1/yr for life!

If I had realized the above was true when I was 25 I would have been retired at 35 and never looked at money the same again. Fancy new tires for your bike cost $100. If you just look at it from the perspective of how much $100 is compared to your salary it’s easy to spend that money. If you ask yourself “would I rather have the new tires or have to earn $4 less per year forever?” it becomes a lot clearer that you want to keep riding the old tires on your bike until they are truly worn out.

Make your money work for you!

There are a number of ways to invest your money so it gets a reasonable return. You can buy a rental property, invest in the stock market, buy a business, etc… The key is to not let it sit in a savings account being eaten away by inflation. Personally I’m investing in stocks because I am too lazy to do the rental property thing while working full-time. I’m running a consulting business which is great for deductions, but it’s not scalable the way a manufacturing business would be. I’m too lazy to start a second business.

Wealth is spending investment income.

Once you’ve invested your money never take out the principal. If you have $10K in investments earning 10%/yr after inflation think of that as $1K/yr of income. Never spend more than the $1K. Ideally never spend more than part of that $1K. That way your investments will always grow.

If you make $120K/yr at a job and spend it all each year you aren’t wealthy. You are a highly successful wage slave.

If you make $30K/yr off your investments and live happily off $20K/yr you are wealthy.

Part-time work is still a ton of awesome!

It’s nice to dream about giving your job the big Fuck You! and never working another day of your life, but if you can’t do that working part-time is still a pretty awesome option. If you are right now working Monday to Friday with 4 weeks off per year including stat holidays and you start going part-time here is what it means:

  • Taking Fridays off = 38% more time off per year
  • Taking Friday and Monday off = 77% more time off per year
  • Working 2.5 days per week = 96% more time off per year

So you can nearly double your free time in a year while still earning 50% of what you do now.

If you earn $40K/yr now and a can live off $20K/yr you can save $20K/yr until you get enough investments then switch to part-time and ride that bike a lot more.

If you save $1 working full-time then invest it at 7.5% after inflation and switch to part-time work you will have $2 after 10 years and $4.25 after 20 years. So you can save hard and then start enjoying your life while your money grows to whatever amount you need.

Example:

  • $40K/yr salary after tax
  • Cost of living $20K/yr
  • Save $20K/yr for 7 years
  • Invest at 10% after inflation
  • Work part-time earning $20K/yr for 10 years
  • Stop working and earn $20K/yr from investments for the rest of your life

That’s 7 years of full-time work and 10 years of relaxing part-time work with a lot of travelling and bike riding. Then no working at all if you want.

When to stop?

So you have saved a bunch of money and invested it then started working part-time when should you quit working entirely?

Once your investments are making more [adjusted for inflation] than you need to live in a year you don’t have to work. Since the stock market changes returns over time you need to decide on a safe withdrawal rate which a lot of people will tell you is 4% of your principal. That’s where the save/invest $25 = $1/yr for life comes from. You can decide to go with 3% or with 5% depending on your view of the risks.

My own view is don’t fixate on a number. If you have a few years when you make a lot of investment income maybe that’s the time to replace your roof and paint the house? When you have a couple bad years maybe that’s the time to skip buying any bike bling? If you let your spending vary with your investment performance you need a lot less money to buffer the bad years.

Now once you don’t have to work that doesn’t mean you shouldn’t work. It just means you shouldn’t do any work you don’t enjoy.

Part-time forever?

I’ve made it to stage 3 and I hope to get to stage 4/5 in the next few years. I think working part-time is going to be great. I can cover my cost of living and I can let my investments grow. At 10% returns adjusted for inflation $1 = $2 every 7.5 years. So if I don’t touch $1 from now until I am 65 it will grow to over $6 with today’s buying power. That’s awesome and makes saving enough to live off of far more achievable.

I’m not even sure I will ever stop working entirely between now and 71. I don’t love what I do enough to work forever at 40hrs/week, but once I’m down to say 20hrs/week and 148hrs not working each week I may well enjoy it enough to keep going for a couple more decades at a slower pace.

No matter where you are at it’s not too late too start.

  1. Kill your debt.
  2. Spend less and/or earn more.
  3. Save.
  4. Invest.
  5. Work out a plan based on your own reality.

If you are like me the key is to never forget that $25 saved and invested today is $1/yr forever.

Resources

Here are some sites I’ve found were useful to me if you are interested in learning more:

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15 thoughts on “Freedom to Ride!

  1. Crikey, Vik, you’re finally talking sense. I’ve been watching you shell out for bike bling for years and wondered when you’d wake up. πŸ™‚
    As an old retired character approaching the 60 yr mark, may I add my two cents (adjust that for inflation if necessary):

    It all started with a wise guy named Joe (and later lady named Vicki): http://www.mrmoneymustache.com/2012/12/18/your-money-or-your-life/ . That was the bible for us oldies. It worked well when interest rates/long strip bonds were running 6% or better — and I remember the salad days of 15%!! The stock market is not a sure thing so some of us simply worked longer and piled it higher and deeper. But we also took a year or two off to play now and again in case we dropped dead early. That’s a personal decision to make.

    My wife and I were following a Your Money or Your Life lifestyle from our twenties. It worked!

    Here’s a few of my own observations/rules/behaviour:

    1) Don’t drink — the government taxes it (maybe moonshine?)
    2) Don’t smoke — the government taxes it and it’s bad for your health
    3) Don’t eat out — okay maybe cheaply a few times on special occasions
    4) Get a library membership and use it for DVDs, CDs, online access, books — including early retirement titles — and assorted programs.
    5) Buy most of your clothes at Value Village or equivalent — I’ve snagged MEC, Patagonia, Helly Hansen and other great stuff there for a fraction of retail. Would you believe an HH thinsulate hooded winter jacket with waist cuff etc for $17 CDN! It needed a new zipper pull which I did with an old dog tag. Also, MEC down vests/jackets for under $25 etc etc.
    6) Get around by walking, bike or transit — or something like Car2go. I drive a well-maintained 25 yr-old vehicle that clicks up maybe 7,000km a year. I’ll likely croak before it does. I walk most places and bike for recreation.
    7) Speaking of bikes: Kijiji is your friend. The Dahon Speed D7 you paid full price for in 2010 I just snagged for $200 used gently. Got another in great shape for $300. (I’m selling two cheaper quality folders I got for FREE from airmiles.ca to cover that cost so the Dahons are almost free.) In the last year I picked up two classic Kuwahara ATBs from the mid-80s — think 4130 chromoly and friction shifting — for a grand total of $150. Yup, that was for TWO quality steel bikes that cost about $750 each back in the day. I added some new rubber to one (Smart Sams 2.25″) and had the mechanics at the LBS drooling. These oldies might not be as great as Bike Fridays or full suspension mtn bikes but they keep me smiling and riding.
    8) Bottom line? Live simply and enjoy the passing moments. I don’t think you have kids but we have one. That’s a precious gift to enjoy as well.

    Alastair Humpreys might be onto something here as well: http://www.amazon.com/Microadventures-Local-Discoveries-Great-Escapes/dp/0007548036 . Think globally, recreate locally. It’s cheaper and more environmentally friendly. Did I mention cheaper?

    All the best with your plans. They sound doable.

  2. I can’t complain. Because I never got into consumer debt I was buying new bikes and still saving something. Not nearly as much as I could have, but not nothing.

    You are right the other part of my blessings was that all my expensive hobbies involved being active so while I spent a bunch of money I could have saved it did keep me healthy so I can contemplate an active retirement.

    • Another observation: I’d watch that 10% return stuff. The old rule was a 2% real return was a reasonable long-term goal without drawing major risk and I don’t think that’s fundamentally changed over the years. I recommend you read The Real Retirement by Vettese and Morneau for their combined views on expected returns going forward. Those fellas are bean counters and know their numbers. What’s passed is past — enjoy the future!

      BTW that book is available for free from the local library; if they don’t have it, ask for an interlibrary loan.

      • If your investment plan really could only produce a 2% SWR I’d say it’s time to come up with a new plan because that’s not much return for your investments. You money isn’t working very hard for you.

        If you run the cFIREsim I linked to for a 4% fixed SWR over the last 91 years of US stock market results you get a 87% success rate which includes the Great Depression/WWII/etc..

        If you add in Canada Pension Plan and Old Age Security into the simulation above you get a 100% success rate.

        If you run the simulator with a variable SWR of 3% – 6% with averages of better than 4% over the period of your retirement you get a 100% success rate without CPP or OAS.

        That’s why some flexibility in your spending is key.

        I don’t expect 10% returns. It’s just an easy figure to provide examples with.

        7% is the historical average for stocks over a long run including dividends. So 4% is a safe withdrawal rate based on that.

  3. Great news Vik – after my last employer was bought out (no payday for me) I was looking at having to give up a sweet 20 min. commute for a 1+ hour car&train daily. I started looking at the overall picture and worked to find an employer that had someone working 85% time and it was working well, so they brought me on at 85% as well. The upside is that the work is seasonal, so 85% means crazy busy 3 months a year and 60% time the rest. So my “part time” phase is starting now.

    I especially like the $25 now= $1 annually for life metric, that is a great tool. When I was a kid I would measure things as video games and candy bars πŸ™‚

    Thanks for the extra notes Wayne, always good to hear opinions from those who are living it. I haven’t been living a strict YMoYL lifestyle but reading it definitely changed my relationship with the $.

      • Where people get into trouble is picking a number and sticking with it dogmatically.

        If you have to have 4% from your investments every year forever you run into trouble 13% of the time if you run your plan using the last 91 years of US stock market history to simulate what would have happened.

        Now that also means 87% of the time that plan worked just fine. And as we discussed above in Canada if you factor in CPP and OAS you are 100% successful with an early retirement 4%.

        A smarter approach is to adjust your withdrawal with stock performance. Just going from 3% to 6-7% you can average better than 4% and be 100% successful simulating using the last 91 years of stock market history and seeing what would have happened with your plan if you had started each year for 91 cycles. And that’s without CPP/OAS/Other income.

        In 2014 my investments returned 13% after taking off inflation. So I could withdraw 10% leaving the principal to grow 3%. I could spend 4% if that was my annual cost of living and turn 6% [equal to 18 months of living expenses] into cash or some other lower yield low risk investment that kept pace with inflation so I had a hedge against some poor year with stocks.

        Since I am trying to grow my portfolio at this stage I’ll just let the returns stay invested. As you can imagine if you get four 13% years of stock performance you can consider retirement faster than if you get four years of 4% returns.

        And if you get a large stock crash right when you wanted to stop working you have to keep going another 2-3 years until the markets recover.

        Like most things in life if you have a rigid plan with few contingency options you have to worry. On the other hand if you have a solid risk management plan and several ways to adjust to changes you don’t have to worry a ton.

      • Pfau gets discussed a lot on the MMM site. Just drop into the forum and do a search.

        Personally I find Pfau’s work overly pessimistic and not particularly useful as I don’t subscribe to the underlying assumptions he makes. In personal finance as well as cycling I think one of the greatest enemies to getting anything done is fear. Pfau is the Pers Fi equivalent to someone touting studies about the “rea;” dangers of cycling.

        For normal folks to really get anywhere with their finances they need to have a vision of where they are going that’s motivating. Pfau is quite the opposite.

        Not only would listening to him mean years more of your life lost to work, but you’ll very likely end up with massive investment account all out of proportion to your needs if you were a high savings rate person.

        If someone suggests shooting for a 2% WR because of Pfau I shake my head at the damage done. In many many cases a 4% WR will end up growing your investments to a large amount you’ll have to spend or give away.

        Ultimately [as I note in these comments] the smart plan is to save towards a 4% WR with the knowledge you’ll need to adjust your spending as you go along and potentially grab a small part-time job now and again to deal with the odd market crash. Stay flexible and enjoy your life.

        What Pfau fails to understand is that the real risk in worrying about WRs is not running out of money. It’s working years more than you need to. Because you can always earn some extra money if you need to, but you can never get a decade of the prime of your life back if you over saved listening to Pfau.

  4. Hi Vic, you’re on the right track with MMM. He and I both pay attention to Jim Collins, who offers a complementary approach to MMM; http://jlcollinsnh.com/. Finally, Tony Robbins has written a book about money and investing; I’ve been quite pleased with the discussion of asset allocation to avoid excessive risk, and the discussion of annuities. http://www.amazon.com/MONEY-Master-Game-Financial-Freedom/dp/1476757801/ref=sr_1_1?s=books&ie=UTF8&qid=1430167842&sr=1-1&keywords=tony+robbins+books

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