The idea of retiring at 35 sounds like a far-fetched dream to most, but Tim Stobbs of Regina, Sask., has done it.
Well, almost. Stobbs, who quit to his job a few weeks ago, is 39 (39 and a half, to be exact, as he points out on the phone to make sure there is absolutely no overselling of his story).
But when you consider that he has two kids and a paid-off mortgage, his newly acquired freedom-39 starts to sound even more impressive than freedom-35.
Stobbs, like many current and aspirant young retirees these days, is part of a growing movement often referred to as FIRE (Financially Independent Retired Early), whose most influential prophet is another Canadian (now expatriate): Longmont, Co.-based Peter Adeney, better known as the blogger Mr. Money Mustache.
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The math behind early retirement
Adeney, who kissed goodbye his job as a software engineer when he was 30, has a simple formula for those wishing to follow in his footsteps. How soon you can retire, he writes, depends on your yearly net income and how much you can live on. If you can make it on roughly 50 per cent of your take-home pay and save up the rest, you’ll be ready to rock in about 15 years, he reckons.
Basically, the more you save and the lower your living expenses, the sooner you’ll be ready to kick your feet up.
Now, you also have to invest. The money you’re setting aside must be earning extra money, and that extra money, in turn, earning its own return. You need compound interest to help you get there.
So how much do you need to stash up? Adeney recommends multiplying your living expenses times 25 to get a ballpark figure – compound interest, meanwhile, will keep working for you.
Since you’re going to have to live on that money for 60 or 70 years, you should act in a way that should ensure your stash will last forever. The way to do that, according to Mr. Money Mustache, is to only draw from your investment gains, not the principal.
Mustachians adhere to the so-called four per cent rule. That’s based on the assumption your investments earn a seven per cent return averaged over the long-term. Inflation erodes about three per cent, leaving you with four per cent a year to spend – for the rest of your days.
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Tim Stobbs did it
Stobbs, who started fantasizing about retiring in his 40s when he got stuck in an engineering job he hated early in his career, applied the Mustachian formula.
He and his wife were able to trim their yearly budget for a family of four down to $30,000 a year. They then reckoned they would put at least $600,000 in investments to cover that by drawing on their investment gains alone.
In addition, Stobbs’ wife, who enjoys her job, would continue to work part-time running her home daycare for another five years, in order to help bridge any gaps.
After saving and investing two-thirds of their income for years, the Stobbs recently crossed their nest-egg threshold.
Stobbs is currently in what he calls “the lovely grey zone”: He has officially resigned from his job and is using up his last few weeks of paid vacation.
At the end of October, he’s going to be officially retired and not yet 40.
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Can you do it?
The Mustachian math for early retirement “is a reasonably good equation,” says Jason Heath, a certified financial planner and managing director at Thornhill, Ont.-based Objective Financial Partners.
He’s quite familiar with it, in fact, as several of his clients have brought it to his attention.
“I have clients in their 30s who could comfortably retire right now if they wanted to,” he told Global News.
Like any other rule of thumb, the Mustachian formula has gross limitations, he notes. But it does contain two essential takeaways for anyone thinking about retirement, he notes: One, you need to plan for it; two, the higher your savings rate, the sooner you can retire.
But whether you can – or even should – attempt early retirement, depends on two fundamental variables, i.e. your preferences and your circumstances, noted Malcolm Hamilton, one of Canada’s leading thinkers on pensions and a senior fellow at the C.D. Howe Institute.
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Before you even do any back-of-the-napkin calculations, you should probably ask yourself the following:
How do you feel about your job?
If you love it, this almost certainly isn’t for you. Many people who pursue early retirement are trying to escape a job they hate or are horribly overworked, said Hamilton.
Stobbs didn’t hate the job he just left (his misery was tied to a previous gig), but he admits he didn’t love it, either.
“If you’re passionate about what you do to the point that you’d be tempted to go to work even if they didn’t pay you, then I don’t really see the point of retiring early,” he told Global News.
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What would you do once you’re retired?
Mustachians call it early retirement, but they aren’t really thinking they’ll be walking into the sunset for 70 years. Mostly, they just want the financial freedom to pursue passion projects. They want to be able to focus on what they want and when they want – but the plan is generally to keep working.
Stobbs fits the bill here, too. His retirement years will be devoted to writing fiction, with the occasional gig here and there when an interesting opportunity arises, he told Global News.
As for Adeney, he is now reportedly bringing in much more than he and his wife ever did before they both retired, with the Money Mustache blog making around $400,000 a year.
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Would you be happy living on a shoestring budget?
Unless you’re a wealthy heir, a tech startup star or a real estate investor who got very lucky, retiring in your 30s will require living on very little, before and after you retire, noted Hamilton.
If you’re the kind of guy who needs a cottage and a new car every three years, consider sticking to your job.
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Now let’s consider some of your circumstances:
How much do you make?
Theoretically, the early retirement formula works for every income level. In practice, though, there is a lower bound. It’s called “everyone’s gotta eat.”
Stobbs’ ability to squeeze his family’s expenses into a mere $30,000 a year already seems like a magic trick. But he’s the first to acknowledge that no amount of budgeting abracadabra will make early retirement work if $30,000 is all a four-person household has to play with.
“Many Canadians could feed on tuna every day, and they still wouldn’t be able to save enough,” said Heath.
Many Mustachians are just like Stobbs and Adeney: educated professionals with a good chance of reaching a six-figure salary fairly early into their 30s, or even in their 20s.
Where do you live?
Cost of living will largely determine how high or low your lower bound. If you happen to live in Vancouver or Toronto, where people are easily dropping $2,500 in rent or monthly mortgage payments, no amount of frugality will do, unless you have a rather large paycheque.
Those living in the countryside can also save in other ways, for example, raising their own fruit and vegetables and doing their own maintenance around the house, noted Hamilton. Condo-dwellers can’t.
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Do you have debt?
Speaking of mortgages, the Mustachian math assumes that you’ve paid yours off and that you have no debt in general.
That’s the case for Stobbs, who paid off his mortgage in six years before shifting resources to build up his retirement stash.
That’s a remarkable feat, but he acknowledges history was on his side. With a $40,000 downpayment, he bought the house for $190,000 before real estate prices started soaring in Regina.
The property he bought in 2006 is now worth $400,000.
Anyone who enters the housing market now, he noted, faces a different math.
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Do you have or want to have kids?
Little people will also significantly affect your ability to reach financial freedom.
The number 1 reason, of course, is that they drive up your living expenses. If you live in a big city, daycare alone will shave $1,500 to $2,000 off your monthly after-tax income.
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Combined with a mortgage, the cost of raising kids in big cities “is enough to chain people to their jobs for 20 years,” said Hamilton.
And while you might be happy to save every penny and feed on insects, your children might not be as keen.
The second thing about kids is they add an element of uncertainty to your budget, noted Heath. What if they need braces? Or private lessons?
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That’s not to say that early retirement is only for the childless. Stobbs is making it work. His boys, aged 9 and 12, are perfectly happy with their parents’ frugal lifestyle, he tells Global News. They add only about $2,000 a year to the family’s budget in non-routine expenses.
And the Stobbs are also saving for their children’s education. They do so via a Registered Education Savings Plan (RESP), a type of savings account where the government will match 20 per cent of parents or grandparents’ yearly contributions up to an annual cap of $2,500. Using only child tax benefits and family gifts, the couple has accumulated $75,000 so far.
“I always wanted to subsidize their education,” Stobbs said of his two boys. “But we never felt the need to pay for everything.”
READ MORE: No RRSP? No problem — not everyone needs one.
A few more asterisks about early retirement
There are a couple more things you should know about Stobbs’ financials. One: He has also saved for a slush fund. Right now, it’s worth about $20,000, which he plans to use for the occasional expensive vacation, emergencies and to tackle large expenses like replacing the family car. The plan is that he will take on ad-hoc work to replenish or grow the fund as needed.
Second, he uses no-fee index funds to invest his RRSP money and cherry-picked blue-chip dividend-yielding stocks for his TFSA. This matters because it sets him apart from Canadians who don’t feel comfortable investing on their own, which is the majority of us, according to Heath.
The four per cent rule doesn’t work if you’re paying 2.25 per cent in fees on the investment return from your mutual fund, he noted.
You should also know where that rule comes from. It is the product of a 1994 study, which, like any research, has a number of assumptions baked into it. A more recent study that looked into how the rule would have worked across developed countries shows that retirees in Canada would have fared even better by taking out just four per cent of their savings. But the rule would have worked in only five of 20 countries examined.
In general, the rule is based on historical records of investment returns, which aren’t necessarily a good predictor of future market performance.
Heath cautioned about using the Mustachean math as anything other than a starting point to build a more individualized plan. He also noted any retirement plan will need to be updated to take into account life’s pleasant and not-so-pleasant surprises.
As Hamilton put it: “Everyone should have a plan, and no one should think things will happen that way.”
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