If you chose CFM because you wanted to become financially independent, yet you have this burning urge to do more with your life than just work like a dog to survive, then this article is for you. If you’re an aspiring dancer, traveller, musician, writer, foodie at heart…whatever dream you gave up on because ‘it doesn’t make money’, I’m here to shake you awake and tell you that whatever you do with CFM in the future, whatever job you take at graduation, you don’t have to be stuck with it forever if you’re willing to consider an unconventional path – the path of retiring early, so you don’t have to pursue your dream career while worrying about your next loaf of bread.
This Financial Mentor article boils the math of retirement down to a few simple equations. In theory, you can retire in 10 years if you save 70% of your income every month and figure out how to live on the 30%. With an 8% return and spending 3% of your retirement savings every year after retirement (which will last you at least 33 retired years), your retirement income will be greater than the 30% that you are already spending every year. The 8% return would completely replenish the 3% you take from the pool every year. Because the time period of savings is over 10 years versus 40, inflation will not have a big impact. Try plugging in your own income to an Excel spreadsheet and work out the time value of money calculations. Try reading the article yourself.
Sounds too good to be true, right? If your income is $48,000, which is a realistic and reachable bank salary after you graduate, you would have to commit to spending $800 or less per month. That’s extreme frugality. And what if you have debt, like OSAP, or you’re an international student living off a loan? Then you’ll need to focus on paying that off first so you can maximize your 8% return. The thing is, though, people have made it possible – through taking local transit, growing their own food, living in motorhomes, and so on. Mr. Money Moustache, who retired at the age of 30, as well as the Kaderlis who retired at 38 and are now 60, recommend getting at most one car for yourself and your family, because a car racks up a bill of $6,000 to $8,600, which takes up a big chunk of their expenses (less than $30,000 per year). A more conservative kind of financial thinking recognizes that there is a lot of planning risk involved, including inflation in a few decades, changes in interest rates and equity returns, as well as the chance of outliving your savings.
Such a strategy would force you to sort cut out all the crap you don’t really want or need in your life, all the luxurious shopping and the unfulfilling, endless loop of big spending that people find themselves trapped in, and focus and choose now what’s important to you. Which…actually makes sense to me! But it takes an abnormal amount of dedication and courage to do that. First of all, most of your friends and peer group will still be working and you will not have much in common anymore. Probably, you’ll want to surround yourself with other radical thinkers who have the same perspective on money or have similar dreams, so you don’t give up. If your family is anything like mine, they will raise an eyebrow even if you decide to save something small and not own a car, wonder if you are poor and going off the deep end for your dreams, and question your sanity. You’ll have to recognize that your values are different from theirs, that they love you and are worried about you, and still walk your own path without being influenced by people who are your age or older than you and think they know better.
Also, having to consider every penny that exits your bank account for the next ten years could make you more miserable compared to not having those restrictions – it would put you into a frame of mind called ‘poverty thinking’. If you value adventure and freedom, and want to visit South America next year, your values would not be honoured if you stick to “poverty thinking”. That’s why most people cannot bring themselves to follow this strategy of retiring. There is much to learn and understand about yourself so that you can create a financial plan that fits every curve, every aspect of who you are, and to motivate you enough to stick with it for the long run.
Indeed, there are other options out there. You have the classic retirement plan, working until you are age 65 and saving 10% of your income every year. That is the strategy most financial planners are comfortable with. Or, you can go into real estate, start your own business, invest in promising startups, or buy stock. Or, you can come up with a semi-retirement plan where you work for part of the year. Or, you can question if retirement is even worth it. One guy from the Globe and Mail got in touch with all the top guns: an investing guru, a successful business incubator, an exchange-traded fund manager, and a real estate legend (his advice for getting $500,000 in 10 years is worth checking out). They told him he had to get a 31% return, which not even Warren Buffett gets, in order to reach his goal of $750,000 in his RRSP (retirement savings plan) in 10 years. Finally the real estate told him to go to Vegas, where he spins the roulette wheel trying to double his wins. After his second game he lost $100, and upon seeing bored, soulless retirees playing at the table he decides that retiring is not for him anymore. So it is important to decide for yourself if retiring early is actually for you, or whether being forced to work for money actually does bring a needed balance into your life.
Regardless of what you want your future to look like, I would recommend reading and forecasting all the things that can go wrong with your plan, asking yourself deep and honest questions, and come up a robust strategy. This MarketWatch article lists 7 places to look at for retirement planning, and wikiHow gives you a list of things to watch out for. If you can have a straight talk with your parents and colleagues about it and convince them that you’ve done your homework and are not heading into financial oblivion, and if you can listen to their counter-arguments without having them distract you, you’re getting somewhere. (Or you can just ignore them and not include them in your life, which has its own share of benefits and burdens, including loneliness)
To me, this is where the real FM of our CFM is at – not in some textbook, but in real life where we are actively creating enough money to do what we want. “Contemplated financial mastery” – that sounds like one priceless degree that we don’t get in school.
And, for goodness sake, let’s have fun with it and not beat ourselves up about it. At school and at work, we’re so focused on learning foreign ways of thinking and trying to get it all right, whether to maximize our grades or our performance rating (which ends up being all about the money, which is itself not very motivating in the first place). So, if you’re like me and you want to retire early, can you promise me not to take any hardships and challenges so personally? If we want to succeed with our dreams in the end, we better stick with them for the long run. No use dwelling on how hard the challenges are, just accept them as is. Laugh, cry and move on.
You can tell that I’m very much into this subject – this is the longest article I’ve written so far because it’s important to me and I know it is to you too. You know what I’ll be reading more about, and if I do decide to continue in CFM, early retirement planning is definitely something I’ll consider doing as a career.
So do me a favour, okay? Go live your life and make the most of it. Life is short. I love you and I believe in you 🙂