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Discussion Starter #1 (Edited)
Hi there,

I'm new to the forum, and would like to get others thoughts on early retirement.

Most retirement calculators and advice assume retirement at 65. I think many people dream of retiring early, but how much is required? Also, many calculators assume dying pennyless as well as relying heavily on government assistance.

I'm thinking that as soon as a portfolio hits $2 Million a couple can retire safely with a very high likelyhood of not outliving their funds. The idea is to keep the principal in tact as much as possible and live off the yield and gains alone. Things that would need to be considered include inflation, annual budget, rate of return, volatility of investments.

If the portfolio is diversified in both blue chip equities, ETF's, and bonds, perhaps a dividend yield of 2% and a capital gain of 2% may be reasonable. Due to tax rule, the dividend yield will for the most part be tax free (40K). The capital gain will also be taxed minimally and should provide another 30K, resulting in $70K in after tax income available to sustain a very comfortable lifestyle, while maintaining the principal.

Base on this theory, with $2M in the bank a couple can theoretically retire at 50, 40, or even 30 year of age. Now this does not take into account inflation, which may be a killer.

Can anyone see holes where this plan falls through? You will also notice that I am not including principal residence in the nest egg. Assume all debts and mortage are paid off and principal residence will not be touched.

If you don't think $2M is enough, what number do you think it should be for an after tax income of $70K a year for a couple that retires at 40? I guess my last question is for those who dream of early retirement, "How much would you need to retire today and be financially independant?" Thanks for your thoughts.
 

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It depends on where you to choose to live as well. Which country, which region, which city.

I am surprised at how much more expensive groceries are in Vancouver suburbs compared to Toronto suburbs.

And, for the past couple of months, I've been in Sydney, Australia. It is very expensive to live here (interest rates are a few percentages higher, groceries are much more expensive, gasoline, autos, etc. are shockingly higher).

Your 2% yield and 2% capital gains growth is translating into a 4% drawdown rate. The viability of that is briefly discussed here with a link to a full discussion: http://www.advisorone.com/article/milevsky-there-optimal-portfolio-drawdown-rate I'd like to have a much larger growth rate to counter an inflation rate of 2.5%. I would also defer retirement until I acquired major depreciating assets (newer cars vs. the 7 and 10 year old vehicles we have now) and pay for, or set aside funds for, major home maintenance projects (new roof, new appliances, furnace, water heater, airconditioning unit, etc.).

Of course, the after tax income is more important than the before tax income. If the hypothetical couple is anything like CMF's poster Lister, they may have most of their money in TFSA's rather than RRSPs! ;)

You've not made mention of social programs helping out later on in life. If someone were to retire at 40, I'd imagine that their CPP would be trivial even if they waited until they were 70. OAS (assuming it were intact) would be significant.

But, if I had:

  • $2M in investment assets of which
    60% in a non-registered account, 35% in RRSPs and 5% in TFSAs
    with an effective dividend yield of 2% and growth of 6%
    no debt
    owning my home
    retiring in the Toronto suburbs

then I would consider myself, based on my lifestyle, to be financially independent.
 

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Hi there,
If you don't think $2M is enough, what number do you think it should be for an after tax income of $70K a year for a couple that retires at 40? I guess my last question is for those who dream of early retirement, "How much would you need to retire today and be financially independant?" Thanks for your thoughts.
I calculated that a combined RRSP of $1.8M and full CPP and OAS eligibility would see the 40 year-old couple achieve an after tax income of $70K out to age 95. If there was a non-reg component, it would be less than 1.8M. If they wanted to leave an estate (i.e. not die broke) it would be more.
 

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Depends on how much you want to spend in retirement. Also the amount of other sources of income-eg pension, CPP,OAS, etc. Safe withrawal rates have been well discssed here and in other forums.
 

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Depends on how much you want to spend in retirement. Also the amount of other sources of income-eg pension, CPP,OAS, etc. Safe withrawal rates have been well discssed here and in other forums.
He indicated he wanted to spend $70K annually, after tax. CPP&OAS were included in the 1.8M calculation.
 

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Discussion Starter #9
Thanks Steve,

Can you give an indication on the asset mix of the portfolio or are you simply assuming a certain rate of return? Are the effects of inflation also taken into account?
 

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Thanks Steve,

Can you give an indication on the asset mix of the portfolio or are you simply assuming a certain rate of return? Are the effects of inflation also taken into account?
I assume 5% rate of return, 2% inflation, taxation in BC.
 

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Not guilty at all sir. Perhaps you could tell us more about what you do, services etc. ;)
I am a software author. My market includes financial planners as well as DIYers. The major aspect of the program is that it is both 'needs-based' and tax accurate. You specify your assets (RRSP, nonreg, TFSA, RESP, salary/pension, realestate, CPP/OAS, future windfalls...) and the program develops a projection of cash flows... monies flowing into, out of, and between your reg and nonreg capital pools in order to meet a prescribed after tax income profile. Income tax is handled, not as an approximated tax rate, but as the full and complete T1 with all surtaxes, credits, clawbacks and brackets (indexed), and includes both the fed and provincial tax algorithms/code.
 

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If I owned a 2mil portfolio, I'm positive I could get off the grid at any age.

Instead of assuming a 70k cost of living, can it not be done with a more modest living standard? As mentioned I'm sure it depends where you live.

I live a what I think would be an above average lifestyle about 30 minutes outside of the GTA, and it currently costs $5k per month for total living cost, but that's counting mortgage/interest payments of nearly $2k per month. Once mortgage is out of the equation I'd target an annual need of at most $45k per year, indexed through retirement. That should allow you a few restaurant nights per week, and a couple of vacations per year.

That $2 million figure becomes much more sustainable if your drawdown rate is lower.

I'd park it in GICs and live off the interest, even at 2-3%/annum on a 5 year ladder that's not too shabby, and interest rates will only go up from here. 2 million is essentially an infinite pool of money provided the lifestyle is sustainable.
 

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I've projected needing $42k after tax income in retirement for Canada and half of that in Panama. This assumes we are debt free and live a similar lifestyle to what we have now.
 

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I think the other thing to keep in mind is how much you want ER. People often reduce their spending in ER if they hate their job. For a longish retirement a very safe withdrawal rate might be 3-3.5% from a balanced type portfolio. I think in the withdrawal phase using simple assumptions on returns is risky. One should be concerned about what Otar calls the time value of fluctuations. His book is well worth reading.
 

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@Mike - you sound kinda jealous!

Re: Original Question:
As long as you don't spend money like it's going out of style, I would think $2 M would be plenty for retirement. Especially if you have a paid-off home. :D
 
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If I owned a 2mil portfolio, I'm positive I could get off the grid at any age.
Well put Mike, yet everyone has their own lifestyle dreams, and the relevant cost associated with those dreams.

I wanted to add: perhaps other planners do this too (I'm sure) and let me suggest we see the future in "time horizons". If we're 35 with $2M there are many many time horizons. A simple perspective for retirement 60+ is:
a) early retirement w active lifestyle, high expenses / drawdown / burn.
b) mid retirement, more sedentary, active but more local lifestyle, less burn.
c) later years, expenses of health & personal care.

Any discussion of retirement -- early or otherwise -- shouldn't track a straight-line expense to age 100 but factor in assumptions of changing patterns in lifestyle and spending over such seasons of life.

Yours truly,
BW
 

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You should not only contour your lifestyle in macro stages, but factor in repetitive 'bumps' such as a new car every 4 years, etc.
 
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Good point Steve. My concept of what I call "lifestyles analysis" (TM) above is more macro, as you say; and bumps occur along the way such as for car purchase, financial issues arising for adult child, etc etc.
 

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"How much would you need to retire today and be financially independant?"

Enough for food, shelter, clothing, and a life style you can live with. Next question.
 
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