Two expenses stealing your early retirement dreams (that are not coffee)

Two expenses stealing your early retirement dreams (that are not coffee)

In many personal finance headlines you’ll read or hear about these days, you’ll find that people (generally speaking) are not saving nearly enough for retirement.

That means the prospect of realizing any form of early retirement is even a bigger challenge or non-existent. 

Take a look at the table below, published by MoneySense some time ago that suggested what you might need in the bank for retirement – these numbers remain quite relevant today:

Savings targets by age

While this table seems daunting the fact is this represents years of compounding power included.

In fact, the formula for any comfortable retirement is rather easy to understand:

  1. Continually spend less than you make.
  2. Save and invest the difference.

That’s it.

I suppose you could add a third element to my short list above and include:

  1. Keep doing #1 and #2 for as long as you can to maximize that compounding power.

Latte factors and sweating other small stuff

Regardless if you’re a dedicated subscriber to My Own Advisor or not (and by the way, why aren’t you reading my free content?!), by now I’m sure you’ve heard of The Latte Factor®.

Financial guru David Back coined and trademarked the phrase The Latte Factor® years ago as a means to highlight how daily or periodic small purchases may be stealing your retirement dreams.

In principle, David has a nice thought. This factor brings real meaning to how small steps can help you realize any major changes over time. I mean, for anyone who deals with change in their lives, you know that starting small is often the key to making larger life changes over time.

The problem I have with any “Latte Factor” take is this approach largely ignores the major money traps and big behavioural decisions that often squash most retirement dreams. Sure, saving $5 on your coffee and muffin each day will definitely add up when invested wisely. But a preoccupation on the small stuff instead of focusing on your major financial decisions is really a waste of time.

Instead of blaming Starbucks for stealing your early retirement dreams I suggest you focus on these areas of your life and try and get these two life decisions right.

Housing

I don’t care if you rent or wish to buy a house or you wish to buy multiple properties. If you don’t get this decision right it could cost you your retirement.

According to Statistics Canada, accommodation consistently ranks #1 on our household expenditures list. Depending upon where you live in our grand country, that spending could amount into thousands of dollars per month.

Google PadMapper (no affiliation) a site that highlights Canadian rental trends.

You’ll find that even 1-bedroom units in Canada can vary widely in price:

Padmapper July 2020

A standing axiom tells us that we generally shouldn’t spend more than 30% of our gross (i.e., pre-tax) income on rent or housing.

Well, I see two initial problems with this:

  1. Housing costs are rising, often much faster than wage increases for many, and
  2. A 30% pre-tax spending guideline is useless because of course you pay tax on your employment income. I know I do.

With just these items in mind you really need to right-size your housing decision.

While it’s aspirational to have a low Gross Debt Service Ratio (GDSR) – % income required to pay “basic” expenses such mortgage payments, property taxes and heating costs – the point I am making is if you get the housing decision right in your life then you can spend your $5 on your favourite coffee per day (or anything else for that matter) guilt free.

Point blank: don’t let $5 decisions trump potentially hundred-thousand dollar decisions.

While my wife and I have been far from perfect on this over the years, moving a few times and increasing our very own mortgage borrowing costs, I suggest you get your housing decision in life right by determining the appropriate amount of house you need at the price you can reasonably afford.

Housing dilemma – Part 3:  decision made

If you need help with your affordability decision check out this free calculator from CMHC (Canada Mortgage and Housing Corporation) here.

Transportation

I read the average car payment in the U.S. is now up to $550 per month for newer vehicles.

That just seems crazy…

On top of that, both Americans and Canadians are taking on such car loans for longer stretches. I’ve read about some 8-year loans people are taking!

According to Lending Tree (no affiliation):

  • Auto debt makes up 9.5% of American consumer debt.
  • The average loan term is 69 months for new cars, 35 months for used and 37 months for leased vehicles.
  • Gen Xers are the most likely to have a car loan, and carry the highest auto loan balances with a median of $19,313.

A reminder: a car loan is borrowed money to buy a quickly depreciating asset.

According to most articles I’ve read over the years, newer vehicles generally lose about one-third of their value in the first year or two of ownership. On top of that, sadly, since the pace of any auto-loan repayments usually remains constant, you might find you’ll quickly surpass the value of your car and owe more money than what your vehicle is actually worth.

Point blank: continually buying newer cars is a great way to kill your retirement plan.

Summary

I’m all for making small changes to improve your financial life. I’m working on mine all the time.

Like I mentioned above, we’re also far from perfect since we have moved a few times in our married lives and we purchased a newer vehicle many years ago as well. But in doing so, we have lived very consistently below our means. Despite any major housing or transportation purchases in our lives we have saved and invested the difference. Going forward we don’t intend to move in our near future. Our next car will be another gently used one, likely paid for in cash.

My early retirement or financial independence advice to anyone reading this blog is unless you’re focused on analyzing your housing and transportation needs, I suggest you steer clear of any Latte Factor.

David Bach is absolutely correct in that small savings can add up over time. It’s a good message with good intentions. Yet saving $5 here and there on your coffee or other small indulgences that might add joy to your life is not going to help you one bit if you ignore the biggest expenses and debts you’ll probably ever have.

What are your thoughts? Do you agree? Share your experiences or thoughts in a comment. I read every one!

My name is Mark Seed and I'm the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, we're very close to realizing two major money goals: owning a 7-figure+ investment portfolio along with no debt to start semi-retirement with. Find out how we did it, what's next, and what you can learn from me to tailor your own financial independence path. Subscribe and join the newsletter! Follow me on Twitter @myownadvisor.

74 Responses to "Two expenses stealing your early retirement dreams (that are not coffee)"

  1. Great post (as always) Mark! We live on the East Coast and the housing cost is comparatively lower than most of Canada, but as my wife and I’s businesses have both grown over the years we’ve resisted the urge to upgrade and move from our 2-bedroom condo. We continue to have one vehicle, as my business is online and I work from home, a second one would just be sitting in the parking lot 95% of the time anyways. Living below our means enables us to invest heavily in our retirement, even though she is in her mid-30’s and me my early 40’s – it’ll come soon enough!

    Reply
    1. Very well done Matt and that’s impressive stuff to grow your businesses and stay put. We barely drive one car now let alone the two cars we needed before. Downsizing to our condo has had some benefits!

      Thanks for your comment and take care down East.
      Mark

      Reply
  2. Very good article which I happen to fully agree with! Especially the last line about the little things bringing joy in life. It isn’t worth it to me to give up having a few drinks every now and then just so I can invest the savings at 8% a year so I’ll be rich in my retirement. Yeah right!

    I still have a young family but we hope to stay in our new house for a very long time. We have a used 2014 Escape with 90K on it and I’ve sworn never to buy a new car. Certified pre owned is good enough for us! It is fully paid for anyways so hopefully we can keep it for a while until repairs and maintenance gets to be too much.

    The TDSR and GDSR are just measures used by mortgage specialists and brokers as far as I’m concerned. When taking out of mortgage I calculated it for ourselves, it isn’t even realistic anyways. Not something you can go by.

    Anyways, enjoyed the article! Spend less than you make and invest the difference..sounds about right to me.

    Reply
    1. “The TDSR and GDSR are just measures used by mortgage specialists and brokers as far as I’m concerned.”

      Those are decent guidelines but I don’t really like them too much since they consider gross income. I don’t know about you but I pay my taxes and I only keep what I can after I pay them 🙂 Hence, those ratios should focus on net income. Just me!

      Yes, spend less, save and invest the difference then live your life. It doesn’t have to be complicated of course as you well know!

      All the best,
      Mark

      Reply
      1. Thanks Mark. One other thing occurred to me which I see almost every day and that it’s habitual for people to focus on things they can control, and those things are often inconsequential. I’m sure we’ve all had a boss or two who is really good at making sure you work your 40 hours a week, but isn’t so good at valuing the work/output you’ve created. Some might call them lazy, but it’s mostly just being afraid to step outside your comfort zone and tackling the big ticket items, similar to your $5 coffee example.

        It really makes the work-from-home policies that these big companies are no doubt working on incredibly important. How is an office manager going to check in on their employees to make sure they’re working all the time? They can’t, of course (unless they book them in meetings all day, which kind of defeats the purpose). Office managers are going to be forced to take output into consideration and place greater trust in people – to me, this is one of the positives of COVID-19, and hopefully will end up helping people have a better work-life balance and a better relationship with their employer.

        We’ll see!

        Reply
        1. Ya, the fallacy is we think we can control the uncontrollable 🙂

          There are SO many things out of our control.

          To your work-from-home policy example, I will be interested to see what my own workplace does. I know I’m very accountable for my deliverables regardless of where I am. Not sure the same can be said for all roles. Thoughts?

          Reply
          1. It probably depends on the department and level of work. From experience and the people I know, departments such as Accounting, Finance and HR can easily get bloated, with just a few key people doing the majority of the work while others are maybe just starting out or lack motivation for whatever reason. These jobs may get more streamlined with WFH policies and will impact large companies more. For other departments such as sales and operations where deliverables are more defined, it shouldn’t matter…if you don’t get the work done, it is obvious to everyone!

            Reply
            1. I would think some employment policies will be forced to change when you cannot see your staff, or, you must really have a high-level of workplace trust. I don’t think the latter is very common these days!

              Reply
  3. This comment will seem hopelessly dated to most of your readers, but here goes. My preferred life plan was evident to me at age 11, when in the UK we had an exam that would make or break our options for the future….whether or not we could go to university. Mercifully kids are no longer in that bind, but the essence of the message remains. Secondly, my father was forever pressing the advantages of a job with a pension plan. This one really hit home, and from the age of 18 I never looked back, getting qualifications that would take me on that journey. To this day, and I am 80, I am receiving income from every day I worked after 1958 even from those hard nights sorting letters at the post office during Christmas vacations. I have been retired now for 24 years, and loving it. It took real resolve sometimes to stay in my job, seeing all the apparently golden opportunities in industry slip by. I have no regrets. My wife and I manage our modest RIFFs and TFSAs, but its more for entertainment than profit (we are not particularly successful). But I look aghast at what folks without defined benefit plans are up against today.

    On the matter of housing, why do so many Canadians look to a handful of cities for a living? There is much to be said for the smaller towns and cities, where housing is still affordable, good jobs to be had, and nice communities to join. Struggling to own a condominium in Vancouver, and a new Audi in the parkade ,is not my idea of good planning. Owning a nice house in Prince George or Carbonear would make a lot more sense to my way of thinking. It leaves some real cash for investing.

    Reply
    1. Great to hear from you Doug and thanks for your comment.

      Congrats on 24 years of great retirement.

      Re: “On the matter of housing, why do so many Canadians look to a handful of cities for a living?”

      No idea. I suspect be close to family and other things people enjoy. Case in point, we could likely retire now and not live in Ottawa but we enjoy it here and working at this time. Our property taxes are a bit nuts ($6,000 per year) but our cost of living is less here than Toronto or Vancouver – arguably both great cities.

      I know when it comes to us we want to have a nice place to live in (we do), a decent car for now (we do), and then money leftover for investing and to enjoy our future (we’re working on it). Too much house or too much car would rob ourselves from any good savings we have now.

      Stay well!
      Mark

      Reply
      1. The question of why people live in large cities is mostly answered as that¡s where the jobs are. The alternative of living in a small town usually means a brutal commute!

        For us baby boomers and few lucky millennials like Mark here getting into the housing market early was like winning the lottery. Not so much the equity but the more reasonable price.

        Reply
        1. We’ll see how the condo value keeps up over time. So far, so good but you never know Rob. I figure I have to live somewhere so I really don’t count on major gains from real estate. If it happens, great, but houses are expenses too!

          All the best.

          Reply
    2. Doug, My son took the 11 plus/transfer test when he was 10 years old, almost 20 years ago. Northern Ireland only recently abolished it, only to have schools develop ones in its place. I loved the education system there, so superior to Canada. We had only lived there for one year when he took the test; the principal called me in to say he could do a different form of evaluation because his education had been in Canada, but I said no, he was fine doing the exams. They were relieved. The training for those exams gave him fabulous study and exam skills that served him very well in the years that came after. I had wished they had more levels for results, because even an A did not get you into all the grammar schools, and there was no A plus grade.
      When we returned to Canada, all of my kids were so far ahead of their Canadian grade levels. The Canadian curriculum seemed like a bit of a joke.
      Yes, there are certainly some great smaller places to live in, in Canada. I think it mainly comes down to where the jobs are, where you end up.

      Reply
  4. Agreed. Also I think if you can find a solid house at a young age, and STAY in it I think in most cases you will be ahead of the game. We are on our second house now (should be our “forever” home). Had we stayed in our first, we’d be mortgage free by now (well before 40 years old).

    On the one hand, when I think of retirement I think of having a small apartment/condo and vacationing in the winters..but honestly, if our house is paid off – I think we will just stay here. We love the area, the bills are high now (with the mortgage payments) but once that is gone, the utilities/taxes, etc should be much lower than a much smaller rental, plus I like entertaining/making drinks for people:)

    I am with you on cars…I bought a brand new car (wife’s brother worked for a dealership) so we got a great deal, interest rates were basically zero, plus we got a 2000 govt rebate for buying a hybrid….and we’ve now had it for 10+ years. Since its a hybrid the big savings come on gas and add up the longer you drive it. I see a ton of people spending literally 10X on gas for their trucks than what we spend on our car each month…and we drive everywhere…. All that said..part of me kind of wants to build up enough money in retirement to just have a new car lease every 2-3 years…haha

    Reply
    1. That’s a big reason why we downsized actually….the idea of using this as our 2-bedroom “home base” and the ability to travel more frequently.

      We’re considering a hybrid for our next car since our condo hasn’t yet installed any plugins – but the conduit is there for it as I understand it.

      Yes, I can’t believe what some people spend on their cars. Some people can afford it, so great, go ahead. Most can’t and wonder why they can’t get ahead.

      We’re considering leasing at some point as well, just to try it and see if it works for us. I figure my operating costs are $250-$300 per month for one car on average (maintenance, licensing, insurance, etc.) We have no car payment so it would need to be around that range to make the math work assuming we need to save $20K or so every 10-15 years for a newer car.

      Cheers man,
      Mark

      Reply
      1. Hi Mark,
        Interesting comment on “home base” and the ability to travel more – how do you foresee this going forward in the current mess we find ourselves in? We’ve had a similar plan in place for a while but even travel domestically is curtailed – we used to do an annual sojourn on the east coast – not this year unfortunately (aside: the ‘plate-shaming’ incidents in PEI are just weird – funny how thin the veneer of civility is). Personally, until proven treatment protocol and/or a viable vaccine is available, I see little or no travel beyond day trips (not that is bad 🙂 )
        As to cars – I like my new cars (!) but only every 10-12 years or so – my take is get the car you want/like/enjoy and then drive into the ground (record so far – my 2000 Subaru – 16 years and 380k km in my hands and another 40k km in my nephew’s until it finally expired) – owed either one of us anything.
        Big surprise was the replacement (same Subaru model but 16 years younger with dramatically more ‘stuff” on it – base model) car’s cost in 16 year depreciated dollars was ~ $500 more than what I paid in 2000!
        Keep safe!

        Reply
        1. I think some return to normal travel is inevitable, I just don’t know when. Could be many months or years into the future. We’ll probably do some local trips (Prince Edward County for wine tasting, etc.) in the coming months but that’s about it. We have plans to travel to Belize in February 2021 but I don’t know if we should book. I’m worried a bit about that.

          I hear Subaru’s are nice cars. We might get one in a few years to replace our 2011 KIA Soul. Would you recommend?
          Mark

          Reply
          1. The trip to Belize would be great! It’s not the destinations that worry me as much (save the US – the situation there has gone totally pear shaped imo)- it’s the multi-hour confinement in the airplane to get there. The airlines stating that packing planes is ‘perfectly’ safe is a bit too self serving for my taste and the passenger screening before boarding is a farce – relies much to heavily on the passenger self-declaring – personal self-interest (‘gotta to get on that flight’) will cloud too many people’s caring for others – unfortunately even leaving appropriate space on (uncrowded) sidewalks seems to be beyond many people’s capabilities.
            As to Subaru I’d strongly recommend them – well engineered and assembled they represent excellent value imo. I’ve bought 2 of them, the second replacing the first (and I’ve only owned 3 cars in the last 30+ years) – certainly worth a long look. If you look through the Consumer Report rankings Subaru is always highly ranked. If you should be buying new it’s worth a look at dealfinder.org (local Ottawa enterprise btw) to assist in buying. Used dealfinder in 2000 – the ~$150 fee saved me about $2200 and zero hassles – literally bought over the phone. I contacted them 2016 and they told me couldn’t assist due the limited number of cars available (of the one I wanted) and free of charge told how to negotiate a good deal directly (ie. the bottomline price they would gone for, which is what I ended up paying! ) – can’t beat that 🙂 – a little more hassle than the first time but ended well.

            Reply
            1. I really, really want to go back to Belize but I just fear the timing isn’t right and we need to be vigilant so we might be cancelling any plans or we’ll need to make a last-minute decision as things improve. Sad but true.

              As for the Subaru they seem to be well rated and will likely buy any newer car to replace our KIA used; probably 2-3 years old or something like that to avoid my depreciation declines but also keep costs lower. I don’t see us buying a newer car for another 3-5 years. Likely the last major purchase before we start part-time work.

              Reply
      2. I agree about housing. Only start with what you can afford. We were lucky to get our first home from a relative, we got all the garden equipment,etc which people
        often forget adds up $$. We did not own a tv or stereo , we borrowed some things until we could afford them. We paid our first mortgage off in 6 years at 11.5% interest. Yikes and then built a new home and paid that off in 3.5 yrs. have been mortgage free since our mid-30’s. Raised 4 kids and now have net worth of 3.7 mil, retiring this year at 58 & 60. Husband is a mechanic so one new truck (Dumb) and one inexpensive new car which we sold to our daughter. Husband now drives a 1992 Jetta – and I drive 2007 Acura. We worked hard, saved hard with normal jobs and no Defined benefit pension plans. It can be done, just have to decide you want it, don’t try to keep up with the neighbours. Save save save.

        Reply
        1. Gosh, 11.5%. Can’t imagine but I know my parents paid something like 18% for a few months when they were starting out. I can’t see that happening again in my lifetime but you really never know.

          $3.7 M net worth raising 4 kids???? Jeepers. Incredibly well done and congrats on the retirement this year. You’ve absolutely earned it!
          Mark

          Reply
        2. Good on ya ! Well done – have a long and happy retirement !

          I can relate to the 11.5% mortgage rate – my first one was a variable at 14% which spiked at 18% – ouch! – reason for the variable was the unlimited principal prepayments allowed ($100 minimum which I used weekly if I remember correctly usually in multiples of the minimum ) which resulted in that mortgage being paid off very rapidly. Mortgage free since.

          Reply
  5. It never ceases to amaze me how people will step over dollars to get to dimes so to speak. I know that I’ve been guilty of it too. Trying to save a dollar here and there when getting the big decisions right (housing and transportation) can make such a greater impact. I would argue that if you optimize the big things the little things do not matter as much.

    The housing and vehicle industries are not helping. The concept of a starter home and then continuously upgrading will only benefit the housing industry and the bank. The longer you can stay with any purchase, the better. Even if you decide to buy a new car, owning it for the next 20 years helps make that a good decision. Constantly upgrading houses and cars will get you every time (as you’ve mentioned).

    We have recently moved to a new home (an upgrade) and have no plans on moving again anytime soon. The last home we lived in for 10 years (5 of them mortgage-free), I hope to live in this new home much longer.

    Thanks for taking the time to lay this out, Mark. The more people hear about it the more it will (hopefully) start to sink in.

    Reply
    1. I hear ya re: “the longer you can stay with any purchase, the better.”

      I’ve been guilty of buying new cars (did so in 2011) but we could a) afford it and b) we still drive that car 9 years later. We hope to have it for another 3-5 years.

      Thanks for your comment and you’re very busy on your blog!
      Mark

      Reply
  6. Great article! I have too many friends that spend close to $1,000 on their car expenses (loan, insurance, gas). Car insurance is so expensive in B.C, but that doesn’t excuse having a $600 car loan.

    Reply
  7. One factor to consider as a money vacuum is insurance costs skyrocketing, especially for condo owners and business owners. Put that on top of taxes fees and morgage:(

    Reply
    1. Yes, condos can be expensive to live in but nothing is a given when it comes to home ownership long-term either. At least our condo contents insurance is very minimal for what I think is about $150K worth of decent coverage.

      Reply
  8. A good blog, but who is reading it? Hopefully people who need to.
    Beware of trying to keep up with the Joneses with houses, cars, adult toys and international travels. We bought our first house in 1973 based on what we could afford on 1 wage even though we both were working. The real estate agent and the bank said that we could afford a bigger, fancier and thus a more expensive house. Just as well that we rejected their ‘advice’, as we had our first child 2 years later. Although I’ve moved 4 times since then, my main financial goal has been to have no mortgage which was achieved once again after we moved to Calgary in 1997. Amazing how much spare cash is available with no mortgage which gave me the security of knowing that if I got laid off due to ups and downs in Alberta, I wouldn’t really be at risk of losing my home. It annoyed me when our daughter got married and they saved for a couple of years and bought a house that they could reasonably easily afford (smaller and older), her mother-in-law told them that it was a nice starter home.
    Then for me, cars have always been a way of getting from A to B. Yes, I can look at expensive toys but come back to basic vehicles which apart from my first one, I buy new. My current one is a 2012 Honda Civic absolutely base model which we probably will keep for 15 years +/- and my wife was planning on trading her 2004 Subaru Outback this year for slightly smaller SUV, but COVID has delayed this for a year as our investments are down and we can’t travel very far out of town for a while anyway.
    We have had no toys such as RV, boats, dirt bikes or skidoo’s. I operated on the basis that I could have anything I wanted but only 1 anything. If I bought a Porsche, then I wouldn’t be able to travel, and if I started doing this earlier, we wouldn’t be mortgage free. We have done quite a lot of travelling but not to 5 star resorts.
    I doesn’t hurt to reject $5 coffees when you can have a McDonald’s large coffee and a muffin for $2.70. It does mount up and gets you consider most of your expenditures. Will I get an extra $2 or $3 enjoyment out of that $5 latte?

    Reply
    1. I hope to have the same feeling at some point Hugh: “Amazing how much spare cash is available with no mortgage which gave me the security of knowing that if I got laid off due to ups and downs in Alberta, I wouldn’t really be at risk of losing my home.”

      We’re almost at that point between my wife and I that we would be “just fine” if something happened. Another year or so away from that feeling….

      I see a car as A to B like you but I would like a nice one as long as I can afford it. Even my wife and I get to our $1 M portfolio goal soon, and have no debt, I could see up getting a nicer car but it’s certainly not going to be at the expense of our financial independence.

      Thanks for your comment and experiences,
      Mark

      Reply
  9. Great article, Mark and thanks for putting it together.

    Yes, housing cost differences can really make a difference in how much you need to save. PadMapper looks like a useful site.

    Since the banking for retirement table was from 2013, I went to this site from the Bank of Canada to update the figures–inflation does change them. $1.5 million in 2013 equates to almost $1.7 million in 2020 for example.

    https://www.bankofcanada.ca/rates/related/inflation-calculator/

    Reply
    1. Ya, a few comments on what seems to be an outdated table but I suspect those values are still very relevant even if inflation is not factored in. I doubt most Canadians nor Americans will ever have $1 M saved up and invested for retirement but maybe some will and those that don’t, might have pensions.

      Any gold-plated pension from our government is worth easily $1 M after 30+ years of service.

      Thoughts on that?

      Cheers Ramona!
      Mark

      Reply
      1. Yes, those government pensions are something else. I agree that the values are still relevant, and also like that the table gives numbers for couples and singles.

        Reply
    1. I hear ya. Those are big ticket items for us as well. Once the mortgage debt is done though, and we only have 1 car that is paid for, I suspect the real fun might begin! 🙂

      Thanks for the link.

      Are you fully FI now Court? Are you working part-time at all or just living off the portfolio with your partner?

      Cheers,
      Mark

      Reply
      1. Haha indeed the fun will begin. And sorry I didn’t mean you, Mark, specifically in that comment I meant the general public 🙂

        Yes we reached FI for our family of 3 in 2018. My wife retired then when our daughter was born. We are hopeful to have a second child next year so I’m working part time to build up a larger passive income stream for our hopeful larger family. The switch to part time in 2019 was definitely the right move for us, even though it took me forever to finally commit. The plan is once hopeful baby 2 arrives at some point in 2021, I take parental leave never to return again and we can withdrawal less than 3% of our passive income.

        Reply
          1. Thanks Mark, it’s been a fun journey!

            I just recently discovered you blog this year so I had not read those two posts, thank you for sending those over. Wow, so cool to be able to have Karsten on your site – he is incredible (and as a math and econ major I love geeking out with all his charts and numbers)! Everyone really should read through his Safe Withdrawal Rate series.

            The key to withdrawals is to be FLEXIBLE. I also really enjoyed the Bigger Podcast Money episode early this year with Michael Kitces – have you tuned in to that one?

            We’ve shifted out of our aggressive 90-100% equities portfolio during the accumulation phase to only 60% equites with the remainder in bonds and 5 years worth of cash in a high interest savings account to help mitigate sequence of returns risk. We plan to draw down the cash and bonds first and glide back to 90-100% stocks over the next 5-10 years. This is a very conservative approach (although I’m very glad to read I’m in line with Steve’s thoughts on this topic), and given our low withdrawal rate it’s likely unnecessary, but I am super fiscally conservative at this point and want to preserve everything (and still very weary of these markets!).

            Reply
            1. Thanks. I met Karsten at FinCon and wanted to have him on my site. He’s a good guy not to mention very smart.

              Michael Kitces’ work is great. I actually reviewed the BiggerPockets Podcast and provided a take here:
              https://www.myownadvisor.ca/why-the-4-rule-is-actually-still-a-decent-rule-of-thumb/

              I thought that episode was great Court and the hosts did a fine job with him.

              I’m also conservative so my idea (beyond my pension in the future) is to remain 100% invested equities but slowly increase my cash wedge to include at least 1-years’ worth of expenses in an emergency fund. I figure that’s $50K or so. You can see my personal bucket approach (my thinking so far) in that post. I would appreciate your comments since you seem to be on an equity glide path that I’ll likely keep intact with a mix of stocks and low-cost ETFs.

              Thanks for your details. Sounds like you’re in a GREAT financial position!
              Mark

              Reply
          2. I can’t seem to reply to your latest comment so hopefully replying here works!

            Wow you’ve got so much great content on here! I went down a rabbit role reading ~15 of your posts the other night but didn’t get to this one so thanks for sending it over.

            I think Karsten focuses on the numbers (which is fantastic) but Kitces throws in the dose of reality that we are rational beings and if you see the market crashing like the Great Depression you’re not just going to sit on the sidelines and think “welp this didn’t work out, oh well!”. People who reach FI are not the type of people to just sit back and let it ride down to $0 without taking action and instead be blissfully unaware sipping pina coladas every day. Hearing these two people (who I likely respect the most when it comes to withdrawals) both say 3.5% is “safe” is the assurance I need when looking at our set up. Like you, I also have some accounts in the background that I do not factor in to our portfolio (my small pension that I’m fully vested in from a previous employer, any future CPP/OAS, my HSA (from when I was in the States), our future car fund, our RESP for our daughter, an informal trust we set up for her, etc).

            And like many many many people have said (including you) it is HIGHLY unlikely that someone who reaches FI is going to be content doing absolutely nothing for the rest of their lives. I personally still like the term FIRE but I recognize that I am retiring early in the sense that I no longer will have any ties to my corporate life and now have the options to do whatever I want. For us, that means spending quality time with our daughter and actually being able to watch her grow. The plan is to not work at all for the first ~5 years (except for the blog which I don’t make money on yet) but I can totally see myself picking up some sort of flexible part time gig at a coffee shop or golf course or something like that just to get out of the house and socialize and bring in some sort of income. I figure we do something enjoyable and between my wife and I combined bring in about $10k/year (I know you’re thinking something similar for you’re set up too). That extra $10k will be to beef up the portfolio if need be or to go on extra luxurious vacations (although you could argue the idea of a luxurious vacation is likely not in the forefront of someone who’s not working because life is now one big vacation).

            Your strategy sounds great. The only thing I personally would do is have a bit more cash to start. Assuming you’re an avid reader of ERN, Karsten shows how long it can take for not only the market to drop but also to recover. That timeline is why I have all the cash in hand to start. I don’t want to be pulling from a down market to start things off. However, I can also see the argument to have less cash in hand too as it’s highly likely it won’t be needed and will just end up being a drag to your portfolio. I also personally would never invest in ~40 stocks to make up 1/2 my portfolio as I don’t see the dividend strategy as a solid long term strategy vs much more diversified indexes. But again, since you’re looking at sub 3% + pension + some sort of small income – you will be MORE than fine 🙂

            Reply
  10. I read Bach’s book and I read your blog religiously and I agree with both your opinions. My understanding of the latte rule is that it applies to all those small expenses over a day/month. For example, someone who buys a 5$ coffee and a 3$ muffin for breakfast, then has a 15$ lunch, another coffee and muffin in the afternoon, those expenses start to add up over the week. Instead if you saved that money your retirement would look different. Combined with the teachings of the compound effect (another great book), this had led me to go from paycheck to paycheck to saving over 50% of our income and clearing our debt in a few years.

    I agree with you, if you only look at the single small expense, it won’t result in much, but a lot of people spend more in small expenses than they do on transportation or housing. I was one of those people.

    Reply
    1. Definitely small expenses add up over time Danny – fully agree – I just question whether people are looking at the big picture enough and seeing where their money is going on houses or cars, first, before they nickel and dime the coffee and a muffin. Surely spending that everyday will likely cost a few hundred bucks per month.

      Rent and houses and cars will likely cost a few thousand per month. Best start there and see if you can afford that first! Everyone needs a roof over their head! 🙂

      All the best Danny,
      Mark

      Reply
      1. In my case I was spending more on small expenses than transportation or housing. Nickel and dimes can be a good start for some.

        Anyway would like your opinion on a particular situation, I’ll send you an email later

        Reply
        1. Sure, or add to comments here, would enjoy reading your take and other readers can chime in. I do believe small changes can and often do add up. Just don’t overlook those in context of getting the big money/debt decisions in life right. That’s all!
          Mark

          Reply
  11. Couldn’t agree with you more Mark, stay away from that Latte factor. I track my numbers meticulously (habit of being a CPA…) whether it’s for my portfolio or expenses and I try my best to keep the big numbers at their threshold and not worry about the small stuff (in accounting we call it the materiality principle).

    I do leave a bit of wiggle room in my monthly budget so if things do deviate, I’ve already accounted for it, and if not, it’s like found money.

    -DG Capital

    Reply
    1. Yes, I try and worry less about the small stuff as I get older but I’m guilty of micro-managing some moneystuff now and again. I always leave some wiggle room in my budget as well to enjoy unexpected but fun expenses. Dinners out are a good example for us.

      How is your YouTube channel coming along? I recall you have one?
      Mark

      Reply
      1. Eating out is also one of our guilty pleasures and that’s why it’s important to also enjoy the journey and let yourself have fun along the way.

        I just hit my first 100 subscribers milestone today! Still working on getting more traction, but so far, the feedback has been great, and I’m using questions I get asked frequently for topics for upcoming videos. I posted a video yesterday on my top pick Tech Sector ETF that has been really outperforming the major markets (also very tax efficient)

        DG Capital

        Reply
  12. Hi Mark,

    Another great post! I don’t know where you find the time to work, do family stuff, golf, and this! Awesome stuff.

    For most Canadians, I would put investment fees right up there as a solid #3 (or even #2) on your list. Perhaps this is not true for the readers of your website/blog, but definitely for the majority of our fellow countrypeople. While a 2.3% or 2.5% MER doesn’t seem like a lot (which is the average MER Canadians pay), thanks to the power of compounding it will steal hundreds of thousands of dollars + (depending on where you start and how much you continue to contribute) over 20 or 30 years. There are plenty of charts and calculators out there and the results are staggering! 40% to 50% of your wealth = gone due to high fees. I tell my clients they should be paying 1% or less.

    Steve

    Reply
    1. That’s a solid #3 Steve and you would know that well as a fee-only advisor.

      <1% would be at the high-end for sure I think.

      In terms of finding the time, I just go my best!! 🙂

      Cheers,
      Mark

      Reply
  13. Mark,

    I assume the “amount needed to retire at…” $ totals shown in the table above would have income streams like company pensions, CPP & OAS factored in. My question is how does one convert those monthly income payments into a total $ amounts?

    Reply
    1. Yes, from that MoneySense article they have included basically a total portfolio value except CPP and OAS. No pension either so you need to factor that income stream in. Essentially any company pension for the retire at 65 column assuming you worked 30 or so years at the company would slice that $1,750,000 in at least half.

      The footnotes mean the following from the actual article:
      https://www.moneysense.ca/save/retirement/how-much-money-will-you-need-to-retire/

      In future posts I’ll be posting what I actually need and where those income sources are coming from. I have a series in the works 🙂

      Hope that helps!
      Mark

      Reply
  14. Some say if you look after the dimes and nickels the dollars look after themselves ! Basically do a budget, see where your money is going so you can make cuts where you are wasting it. Most people would be surprised how much they really spend when they add everything up. Next, spend within your means, and one of those spend categories is SAVINGS ! Pay yourself regularly like you pay your reoccurring bills. Don’t bank on investment returns to fill in the blanks for your nest egg. I have been invested for over 30 years, and my average rate of return is 5%. Save as many of your own dollars as you can and start EARLY, and invest in solid performers. ETFs that cover the large portions of equity markets are great vehicles today. I wish they had these in the 80’s and 90’s . Don’t waste time figuring out how much you will need at 65, just save what you can now and every year until you retire. Once you are at retirement, you can calculate what you can do. What you think you want to do in retirement now, will change decade by decade and will be affected by your state of health in your “golden” years.
    Cheers

    Reply
    1. Well said John: “What you think you want to do in retirement now, will change decade by decade and will be affected by your state of health in your “golden” years.”

      That’s good advice to enjoy the journey and have some fun along the way. Life is short.

      Stay well John and thanks for your insights and experiences to share.
      Mark

      Reply
  15. I retired at 56 way back in 2006. I tracked our monthly/yearly expenses for 2 prior years and came out at $50K /yr. My wife loved her work so much she retired when she was 62 in early 2013. Using the above table. the closest amount I can use is the $950k needed to retire at 60. Checking our Statement of Net Worth dated 12/31/06, we had combined RRSP’s and investments totalling around $750k which is $200K lesser than the target. In our case, the lesser amount worked and we were able to retire much earlier.

    Reply
    1. Those are great insights Nicklabixa… I would think even if folks are shy of $1 M at age 60, in Canada, with CPP and OAS after that and modest spending needs that’s still a considerable amount of money saved and invested and something to be proud of.

      Kudos to your retirement plan working out so well and I appreciate your comments to the site. Stay well.
      Mark

      Reply
  16. Love this post! Yeah, Canadians love their houses. These are big ticket expenses that can definitely steal your early retirement dreams. I would also like to add taxes, too, haha. But I guess we have a bit less control of how much we have to pay in taxes, and I anticipate it’s going to be higher given the $343 billion+ deficit.

    Reply
  17. Regarding housing one aspect almost no one thinks to question is the IRD or Interest Rate Differential. More than one person has gotten a very nasty surprise when asking if they can break the 5 year term of a mortgage. I don’t know how much control you have over this but it’s worth considering when buying or renewing a mortgage. The second aspect is many people simply renew with same bank, but do some shopping around, may the interest rate might be the same but maybe better condtions.

    Secondly and much more importantly is to pay yourself first. I’ve always opted for the max deduction and after a few pays you don’t even notice the missing 5% taken away and it compounds surprisingly quickly!

    The final point for those that have a run of back luck, don’t wait to contact a bankrupcy trustee, Doug Hoyes (Debt Free in 30 podcast) says almost universally every client he meets has an income not a debt problem. That is life threw them a curve ball, divorce, sickness disability, job loss whatever and they were no longer able to afford rent/mortgage.

    Oh and interesting tibbit, the actual cost of a car, according to Doug, is closer to a grand per month, not just the 250 bi-weekly payment!

    and secondly most say they should have come 24 months sooner.

    Reply
    1. I think that’s the thing.. re: nobody sees the future coming. So, life has a way of surprising us and the goal is to be prepared as possible. Even then, things are tough for some.

      I will always try and pay myself first for the coming years pre- semi-retirement. That’s the goal 🙂

      All the best Rob and hope Germany is well!
      Mark

      Reply
  18. Noticed this comment on Reddit

    I’d also like to add that cutting spending becomes more and more powerful as your savings rate increases. Consider two scenarios, both with an income of $100k.

    In scenario #1, we have a savings rate of 20% (spend $80k, save $20k). To increase the savings rate to 21%, you could increase your income by $1,265 (holding spending constant) or decrease spending by $1,000 (holding income constant).

    In scenario #2, we have a savings rate of 80% (spend $20k, save $80k). To increase the savings rate to 81%, you could increase your income by $5,263 (holding spending constant) or decrease spending by $1,000 (holding income constant).

    That is over a 5:1 ratio!

    Reply
    1. Ah yes, Reddit! 🙂 I figure if I can even keep a modest savings rate (20-30% net income) then I can enjoy everything else. I don’t care nor want to be saving > 70% of my salary at this point in my life.

      Reply
      1. Yeah never noticed that till after I posted it, but it does bring up an interesting question. Court@Modern Fimily commented about hitting FIRE at age 30 and 32 which meant no only paying student loans plus a mortgage but also saving up a million dollars that seems to be the magic number everyone wants to hit.

        So to have a million bucks in a decade means saving a 100 grand per year (ignore investment) plus money to live on. So assuming 2000 a month (3000 CND) means a minimum take home of 130,000 year . So there’s a gaziion posts on how to live frugal but I have yet to see a post that shows how someone can get a job paying 150 grand a year at age 22.

        Perhaps 2 incomes 75,000 each.but that is even streching it.

        Reply
        1. You need to have VERY good paying jobs to hit close to $1 M portfolio in a decade or so. I can’t speak to what other people make (or save) but anyone hitting $1 M in portfolio value in their 30s or even by age 40 has invested very, very well.

          Reply
  19. I just Listened to you over on the FI Garage, and now I’m trying to listen to them while reading your blog post, I”ve got some serious catching up to do….

    I’m pretty early on in my FI journey/retirement planning but I’d have to echo Doug the 80 year old retiree’s sentiments about living in a small town, both my wife and I are nurses and we have moved to a remote Arctic town and bought a house and become active in the community, the pace of life is slower and its great to have the extra time to spend with our young kids. We’ve definitely made some cardinal mistakes along the way (new car purchase, CST Group RESP plans), but we fast tracked paying off our car, and live well below our means. Our mortgage is our only debt and were saving/investing, the rest.

    I’m not worried about the Latte Factor, I cant be, I wish I could but there no Starbucks or Timmies up here to waste money on, instead we have to brew our own coffee, a forced saving strategy. But, I think your right to examine the big ticket items, we still find joy in daily comforts, a coffee subscription brightens our mailbox monthly.

    Reply
    1. Thanks for listening – glad you enjoyed it!

      I’ve made my fair share of mistakes in life. I figure it’s hard to go through life without doing that. I try to learn from everything I do.

      I think if you get the big ticket items in life right, enjoy your life and the small pleasures as well. Life is too short to sweat small stuff.

      Thanks for your comment!

      Reply
      1. Yes and no, the cost of living is definitely inflated as all the food/goods bought locally have an inflated price, but if you’re clever you can shop online from some stores that ship for free, often requires a minimum purchase but if your buying non-perishables you just fill your pantry and reach said minimum threshold. Further to that there are only 3 restaurants in town so we save a lot buy never eating out. All that said part of why we moved here is our jobs, as nurses working in the Arctic you can earn more here then anywhere else in the country. In addition to a higher rate of pay each community has a set northern living allowance over and above your wage, for where I’m living that works out to an additional 12000 for both my wife and I which more then offsets the increased cost of living.
        Also because we live in the territory there’s no PST so it’s just the GST that we pay on our purchases, even if it’s from a online retailer that’s not located here.

        Reply

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