Anyone remember this? Freedom 55? Imagine visiting yourself in the future… Inspirational. But everyone knows that it is 9-5 until your 65, or better yet 9-5 until you die…. right? If you went solely by the comments on this youtube video you would definitely agree.
Pan Son says “they meant freedom 2055” cheeriosinabowl – “Freedom 55 ??It’s a Myth” and paulrvass “I love this Commercial but unless you have a job with a pension, there’s no such thing as retirement at age 55”
Well amigos, I’m here to tell you that THERE IS HOPE and you don’t have to work until you die… don’t listen to the yahoo’s in the comment sections, it can be done.
So, can you retire at 50? How about 45? Maybe even in your 30’s? The answer is a big fat YES! It really depends on what type of lifestyle you currently live and what type of lifestyle that you plan on living during retirement.
I’m going to be using a concept borrowed from a book called “Your Money Or Your Life
and buy yourself a copy to your local Library and borrow a copy (It’s free).
What exactly is the “cross over point”? It’s the point when the returns from your investments exceed your living expenses. This means that you can now live entirely on your investment income and no longer need to work. Let me repeat – this means that you no longer need to work to cover your living expenses.
This doesn’t mean that you have to sop working or that you are now banned from making anymore money. Reaching your crossover point essentially gives you the opportunity to choose. You could work a part time job or start that side gig that you always said you wanted to do – but never had the time.
Ultimately, It means that you no longer have to be fully employed to cover the basics of life. Let’s take a look at a couple of examples to help illustrate the Crossover point in action.
Scenario 1 – Steve and Mary a 50 yr Old Couple W/Modest Savings and Average Incomes
Steve and Mary are looking to retire ASAP. They are fairly frugal and plan on moving to a country with a lower cost of living and more importantly one that serves Mai Tais on the beach. They have a decent amount of savings and home equity but not millions. Most people would say that they would both have to work to a minimum of 65 to fund a decent retirement. Let’s take a look.
1) Current income = $5,500 per month after Tax
2) Employer Raises = 0%
3) Return on investment = 7% – Capital Gains, Dividends and Interest
4) Rate of Lifestyle increase = 1% or inflation.
5) Total Networth = $205,000 Cash & Investments + 250,000 Home Equity = $455,000
The assumption is that this couple is planning on selling their primary residence and living the life of an Expat in a lower cost area with a total monthly budget of around $2,000 per month.
This is more than possible in several countries that have temperate weather and good health care.
For example in Ecuador $2000 per month would include an upscale, furnished, two-bedroom, two-bathroom home with Internet and satellite TV. This also includes eating out, massage therapy, fine wine, beer, transportation, cell phone and an annual trip back home. Hardly the life of a miser. You could also do this a bit more frugally if required and reduce your expenses to around $1600 or so according to several online Expat communities. Sound to good to be true? You can read more about Ecuador at internationalliving.com
Using the above assumptions the crossover point for this couple is…. Wait for it… it is RIGHT NOW. Their return on investments would surpass their estimated living expenses TODAY! They would actually become millionaires at the age of 94 if they were lucky enough to get that old and wrinkly.
Chart Continued…
Is it really all rainbows and unicorns? No, I’m well aware things can change and expenses can go up and rates of returns are not guaranteed.So, let’s lower the expected rate of return and see what happens.
1) Current income = $5,500 per month after Tax
2) Employer Raises = 0%
3) Return on investment = 4% – Capital Gains, Dividends and Interest – You can get 4% from Dividends only without any capital appreciation.
4) Rate of Lifestyle increase = 1% or inflation. You can be much more frugal to balance the lack of returns.
5) Total Networth = $205,000 Cash & Investments + 250,000 Home Equity = $455,000
According to this scenario the couple never reaches the crossover point and they would run out of money at age 77. Oops.
Are they are doomed to never retire? Maybe? Maybe Not? If they plan to “bounce the last cheque” the above assumptions would still work, I’ve heard of worse strategies. Ultimately, This scenario would still give them an opportunity to start their retirement journey early. However, they might benefit from some side hustlin’ AKA – part time employment to help subsidize their investments and lifestyle. Just in case they want to keep Cat food off the menu in their later years.
One thing that I wanted to make a point of is that I did not include any potential income from government retirement programs such as CPP & OAS. These programs could potentially start adding additional income to eligible Canadians as early as age 60. This would change the outcome of this scenario substantially.
Scenario 2 – Janet – Single 25 Yr Old – Earning entry level salary
1) Current income = $2,500 per month after Tax
2) Employer Raises = 2%
3) Return on investment = 6% – Capital Gains, Dividends and Interest – This is lower than the historical average.
4) Rate of Lifestyle increase = 0%
5) Total Networth – $10K in existing investments.
Janet is earning $30K a year after tax. That’s a fairly decent salary for an entry level position. She is looking to save at least 30% of that income towards retirement. She would end up saving about $9,000 a year. Sounds tough and it is. This is going to require that she takes a really good look at how she consumes and most likely reduce spending most luxuries. It doesn’t look like she will have a lot of mocha frappuccinos in her future. This strategy might not be for everyone and of course might not even be possible in high cost of living areas.
Using the above assumptions Janet would reach her cross over point at age 43.
Once her spending is reduced to the minimum. Janet could also look at raising her income level if possible. Let’s say Janet gets a promotions and now makes $40,000 per year. If she decides not to inflate her lifestyle and continues to live on $21,000 per year she will reach her cross over point almost 10 years earlier.
In this scenario Janet would reach her cross over point at age 36.
If Janet could further reduce her spending from $21,000 a year to $20,400 per year – about an extra $50 a month. Using this assumption Janet would shave one whole year off her target and would hit the crossover point at age 35 instead of 36, just by saving $50 more per month. At this point she could also invest the entire amount in her TFSA and not pay any taxes on her investments.
In this last scenario Janet’s investments would cover ALL of her daily living expenses at the tender age of 35. WoW. Freedom 55….pfft. Whatever.
To achieve early financial freedom you must be willing to live below your means and invest the difference. This doesn’t mean that you have to start eating “Christmas Tinner” but it probably means that you will be brown baggin’ it and leaving the Mercedes at the dealership. The key to reaching the crossover point early is understanding the most basic concept of personal finance and that is to spend less than you earn.
In summary, Financial Independence is not just about retirement. It’s about the ability to make life choices free from pressure and fear. It’s about the fact that you are no longer required to trade your life for the sole purpose of accumulating more money. With Financial Independence you are free to use your time to engage in pursuits that are truly fulfilling to your soul.
Download a copy of the Crossover Spreadsheet Here. Use the file menu and save a copy to your computer for editing.