In this Newsletter I’m sharing real world advice about retiring early. So maybe you have not been able to save a million dollars by age 50. Maybe life got in the way. Maybe you were busy raising a family, building a house, buying new cars and going on vacation. For the most part, you were just doing what everyone else was doing. In our twenties, we tend not to worry about retirement as that future seems so far away. However, time marches on and it waits for no one. The problem often only becomes apparent as we approach early retirement age and noticed that perhaps we are a little short on savings.
I am often asked by people in their late 40s and 50s: “what can I do to retire within X years from now?”. A big portion of the time I spend giving advice goes to people in this age group. It sounds like an older person topic but in fact, it’s a younger person topic and more importantly, something that people of all ages should be thinking about. As I have said before in past Newsletters, the education system does not teach us how to save, how to invest, or how to plan our financial futures. Instead, young people are bombarded with consumerist advertising telling them to consume and live beyond their means. It works so well that these habits are really hard to break. In essence, people are enslaved to an economic system that ensures they will work as long as possible.
Who Are “These People”?
The people to whom I give advice and for whom my advice is applicable are everyday normal people – family, friends, and neighbours – maybe even you! They are generally in their late forties and in some cases early fifties and are often either enthused or panicked about making retirement happen ASAP. It’s good that they are thinking about their retirement but unfortunately, it’s too late for traditional early retirement options. The compounding effect of growing assets over time has basically been muted. These individuals tend to be house rich, but financial asset poor. Some have pensions and some don’t. If they have a pension, then they are likely following a 30-35 year time line in order to receive 60-70 % of their work salaries at age 60. So the option of retiring early is not possible without having saved and invested while concurrently building their pension.
In the Ottawa/Gatineau area (Canada) where I live, there are lots of government jobs with really good pensions. If someone with one of these jobs is happy to work for 30 years, they can retire at 55, 10 years earlier than the Canadian average, without ever having to save much. But those that don’t have a government or well funded private pension are likely further behind with fewer options.
What Are Their Common Traits?
While each person and their life circumstances are unique, many of the people that come to me for advice share surprisingly common traits, lifestyles, and spending/saving habits. Here are some of the most common:
- They are smart, many are professionals, and they are hard working. Their incomes are good and in some cases, very high.
- They are tired of working and express the desire to retire as soon as possible.
- They have some assets, often a house, and some limited savings.
- Almost all have a low annual savings rate.
- They tend to know little about investing so they let the banks take care of that, or alternatively they know how to invest but like most small investors, make bad decisions and get low returns.
- They underfund their Canadian Registered Retirement Savings Plan (RRSP), and Tax Free Savings Account (TFSA) or their equivalent in the US retirement programs.
- They have little understanding of their spending and no strategy for saving. This goes hand in hand with a high standard of living, such as purchasing the latest technology, expensive phone and cable plans, many monthly subscription services, costly vacations, expensive gyms / yoga classes, frequent eating out, coaching services, etc.
- Almost everyone has a house/apartment/condo that is bigger than they need and drives a new or almost new car.
So Is It Too Late For Them? Is There Hope?
Are these individuals stuck in a system of their own making? Maybe, but maybe not. It depends on whether they are willing to adjust their lifestyle, habits, and expectations to create a workable post retirement model.
This is the hard part. Time and compounding are no longer the big engines of retirement at this stage of life. You can still use it, but it’s often not enough. Something has to give. I generally advise these people that their lives have to change in order to retire early or earlier. This is really difficult because by midlife, most people are accustomed to a certain standard of living and scaling back is hard. I find that most people can stomach dropping one level in standard of living (i.e. become a little more frugal, downsizing a bit, etc.) but dropping several levels seems crazy and unacceptable.
Big changes that can accelerate retirement include things like selling the big family home and moving to an apartment (gag), or maybe a small condo (gasp), downsizing to one older, smaller vehicle (or maybe no vehicle at all) instead of the 2 newish SUV battle tanks you currently drive, or traveling on a shoe string instead of in luxury. In other words, cutting living expenses drastically, simplifying etc. At the extreme, I have met people who have sold everything and now live full time in a van (crazy? …well, it’s subjective).
On the income side, getting a handle on your savings and learning the basics of investing (including reading Money with Marc ;)), makes a big difference. It’s important to get those returns up and maximize retirement programs like RRSPs/TSFAs (Canada) and the equivalent in USA or other countries.
They Want To Cheat!
A question I get often is: “How can I make allot of money by investing so that I can catch up?”. There is a misunderstanding that if you increase the risk factor, you will be rewarded. This is not entirely true, as I covered in a previous newsletter. My advice is not to bet the farm on the latest AI stock as it has a habit of ruining lives. A few lucky winners but mostly financial devastation. Rather, I would advise changing things up to invest in quality stock, which is better in the long run than cash or fixed income. Getting away from expensive bank mutual funds alone will get you 2% ahead, and that’s just for starters. But the takeaway here is that there is no cheating or fast money that will ensure a good retirement outcome.
Always Another Way
I have also suggested that people work part time or start a small service business as ways to retire from their “real” job earlier. Partial retirement can work well for some people. It’s possible to supplement your retirement income with part-time consulting, dog walking/pet sitting, house sitting, gardening or something else that is already a hobby.
In addition, after working decades, most people have some assets that can be reworked into the retirement plan. Whether it’s downsizing a home or maximizing their financial assets. They also have a few more earning years that, if combined with lower expenses, can generate lots of annual cash that can be re-invested.
The final retirement outcome may look different than what many would have originally thought. No more big house, no flashy cars, a much more simple life. What you get in return for these sacrifices is time to do what you want while you are still young-ish. You can travel, write that novel, volunteer etc. The alternative of working until the age of 70 or later at a job you do not like, then possibly getting sick and never doing the things you wanted to do is, well, sad.
So it’s never too late to change up and make things better for retirement. Of course there are those who, for any number of reasons – poor choices, bad luck, difficult circumstances – don’t have a lot to work with. Even for those people, there is always room for improvement, especially on the spending side. The reality is that some individuals may never be in a position to retire early, and may need to make drastic changes to retire at all.
Big Caveat
I make the assumption that everyone’s goal is to retire early and that working any amount of extra time is a bad thing. In most cases (including mine) this is true. But I have met some people who love their work. It’s rare, but if this is you, then good for you. You have already won and I envy your situation. Perhaps you get a lot of satisfaction from your job, or maybe you are just weird and love working – that’s ok too!
Marc’s Monthly Moves
- No buys or sells in the last 2 months
Marc’s Portfolio YTD Performance
- Portfolio return: 18 % (including currency gains)
- Portfolio return: 16 % (without currency gains)
- S&P 500 return: 20.5 %
- RSP ETF S&P equal weight 13 %
- TSX: 15.5 %
The portfolio is under performing the S&P 500 by 4.5 % points.
Money with Marc 