By Mark Seed, MyOwnAdvisor
Special to the Financial Independence Hub
Whether you agree with the FIRE (Financial Independence, Retire Early) movement or not – it’s a big thing.
Personally, I’m a huge believer in clear goals. If FIRE at age 50 is your goal, go for it.
Goals can be positive, purposeful and motivating. I think goals are great because they force you into choices.
Pursuing financial Independence is a choice.
That said, I’ve learned to let go a bit. Spend a bit. Relax a bit. Enjoy things just a bit more.
In case you missed it, some people can work too hard, too long and save too much for retirement.
Make FI a goal but not life’s final destination
I make financial goals like these every year to help me/us stay focused on our choices.
Whether you are in your 20s, 30s, 40s or 50s aspiring for some form of earlier retirement than most – if that’s your choice – just consider what you’ll do with your time when you get there. FI is a great goal, just don’t make it a final destination.
Millennial FIRE at age 50 case study
I’ve been fortunate to receive emails from dozens, if not hundreds of readers in recent years asking me what it takes to build a 7-figure portfolio, can I retire with X amount of money, and what would a world of living off dividends and distributions could be like.
Well, I will tell you my goal to live off dividends and distributions remains alive and well!
I will continue to answer those questions from readers as much as possible – so keep them coming.
But given those questions, I figured I’d share yet another case study for a reader/lurker on my site.
Before we get to that new case study, a reminder you can check out these previous posts about folks striving to retire or semi-retire earlier than most AND what that takes:
Here is one proven path to retirement ignoring any 4% rule.
Karla and Toby are 54 and 56. Can they retire soon with $1.2 million in the bank and no company pensions?
Mike and Julie want to spend $50,000 per year in retirement starting in their 50s…how much do they need?
This 50-something couple wants to FIRE at 52. How much can they spend?
Millennials want to FIRE at age 50 – can they do it?
A reader of the site emailed me to discuss their early retirement dreams. Let’s look at their case study and find out what it takes to FIRE at age 50.
Here is their profile and what they told me:
- Judy (F), and Shane (M), aged 35.
- Judy is currently pregnant, and they are expecting their first child later this year.
- They live in Kingston, ON.
- They both work full-time for now.
“Mark, can we FIRE at 50?” If so, “what will our assets look like at age 50 assuming we try and max out contributions to our TFSAs at minimum every single year?”
To help answer these questions, I once again enlisted some help. Welcome back Owen Winkelmolen (no affiliation) who is a fee-for-service financial planner (QAFP) and founder of PlanEasy.ca. Owen specializes in budgeting, cashflow, taxes & benefits, and retirement planning – working with both individuals and young families to help them with comprehensive financial plans from today to age 100.
Owen, thoughts for Judy and Shane?
Thanks Mark and glad to be back on your site. I love these case studies!
First, before we share the results, let’s provide some inputs and background data for context. Based on their information to you, we’ve included this information below in their projections with some assumptions as well:
- Judy works full-time, for now, making a solid $95,000 per year as engineer with performance bonus opportunities at work of up to 15% (although the latter is never expected).
- Shane is an HVAC mechanic making up to $80,000 per year.
- They have a sizeable mortgage: $350,000. They hope to have it paid off in 10 years and as of now, with a child on the way, they have no plans to move.
- For the most part, they’ve been quite smart – owning both cars/vehicles. They plan to replace Shane’s truck in another 5-7 years so they have established a “car fund”. They have $15,000 saved up already!
- They’ve read your site Mark (about your emergency fund and have gone well beyond that with a child on the way) and keep about $25,000 in cash as an emergency fund.
Mark to Owen: we did it – why we have an emergency fund.
- They’ve worked hard and investing wisely. Mark told me they have about $100,000 invested inside each of their TFSAs – contributions are now maxed out since they’ve been contributing to their TFSAs since account inception.
- RRSPs are not yet maxed out – there is only so much money to go around. Judy has an RRSP value of $110,000; Shane about $90,000.
- They have also told Mark they intend to start contributing to a Registered Education Savings Plan (RESP) in the coming years for their child.
- Neither Judy nor Shane have any workplace pension.
We’re going to make a few assumptions based on the information they also provided:
- That their home has a value of $500,000 now and they will pay off the mortgage as planned as best they can.
- Their interest rate is about 2.3%, with payments estimated to be about $2,200 per month.
- They have no other debt – no credit cards, nothing.
- We’re not sure if they plan to have other children so we won’t make any assumptions there!
- We’ll also assume Judy sticks to her plan and stays at home for a bit but will return to work/work form home after about 6 months have passed. Shane also wants to be at home a bit. For daycare, they are lucky, they told Mark they have some help!
Owen: here is what the FIRE at 50 math says!
Judy and Shane have done an excellent job setting themselves up for financial independence and early retirement. Their plan is very robust and includes lots of flexibility. That flexibility will allow them to choose to spend more in the future and find a better balance between saving and spending or retire earlier than they planned.
The couple are excellent savers. I’ve calculated based on good jobs, smart living, they save 42% of their after-tax income each month. Great work! This savings rate actually increases when CPP/EI contributions have been maximized part way through the year and also increases with some large tax returns as they catch up on their available RRSP contribution room.
I’ve included a cashflow management chart I use with clients:
This savings rate, coupled with the great bull market of the last 10+ years, has helped drive their net worth upward. Even though they’re only in their mid-30s, they’ve managed to accumulate just over $400,000 in investment assets in the last ten years with a market bull run.
They’re looking forward to starting a family and have purchased a home. Their timing was very good – the real estate market has pushed their home up to $500,000 with a $350,000 mortgage remaining at 2.3%. With regular payments, I believe they’ll have the home paid off in 16-years (not 10 as they believe). With interest rates so low, and with available RRSP and TFSA contribution room, I actually wouldn’t recommend making any extra payments against the mortgage. Invest instead.
(Mark: this aligns with my thinking on this subject, here is my definitive answer to paying down your mortgage or investing.)
Judy and Shane are also expecting their first child in a few months. They’re planning to each take 6-months off in succession. Judy will take the first 6-months off and Shane will take the following 6-months off. With maximum employment insurance benefits their household income will drop slightly over the next two years but not by a large amount. This may impact their savings rate a bit, but their cash flow will still be very manageable on one income plus EI benefits.
I’ve included some tables to demonstrate this.
If they’re expecting another child in the future (who knows!), that’s great but they will have help that other millennial couples might not have. Both Judy and Shane’s parents live close by in Kingston and with some juggling they expect to avoid daycare costs for the first 4-years, a huge savings.
Still, even beyond one-time expenses for strollers, car seats, cribs etc., I have assumed they can expect extra costs in their future/for the next 20 years:
Judy and Shane also want to take advantage of RESP contributions and the grants that are available. Rightly so!
We’ve planned contributions of $2,500 per year which will maximize the available grant of $500 by age 14 and a half. This will require $36,000 in contributions but the lifetime maximum per child is $50,000.
Judy and Shane have the opportunity to add an extra $14,000 to the RESP once their RRSP and TFSAs are maximized. They can always choose to take back this extra contribution once their child enters post-secondary but by adding an extra $14,000 to the RESP it will allow for additional tax-sheltered growth.
Note: reasonable expectations for the RESP growth assuming 90% stocks and 10% bonds ~ 6.13%.
Due to their planned maternity and parental leave, Judy and Shane won’t maximize their available RRSP and TFSA contribution room for at least a few years. But by 2024, if everything goes according to contribution plans, they may start to accumulate some non-registered investments. As a best practice we recommend they set up two joint non-registered accounts that are mirrored, with Judy “lead” on one and Shane “lead” on the second. This provides the benefit of a joint account from an estate planning perspective but allows for simpler tracking of adjusted cost base and income attribution.
They’re in similar tax brackets, so there isn’t a large opportunity for income splitting pre-retirement, but one small opportunity could be for Shane to accumulate slightly more of the non-registered investments in the future. With his lower income level this will help reduce tax slightly in the future. This type of income splitting will require Judy to cover more of the household expenses with her higher income, which would then free up a bit more of Shane’s income to be put into his non-registered investment account.
I’ve got them retiring based on their goal which should coincide nicely with two life events…
- Expected mortgage payoff,
- Entering post-secondary for their future child.
From a lifestyle perspective the timing works nicely, assuming nothing changes. They’ll benefit from some high earning years in their 30s and 40s. They’ll also benefit from some additional years of CPP contributions (especially now that CPP is being expanded for future contributions). As we’ll see below, an earlier retirement date could be possible, but at the moment since they like FIRE at 50 then everything else makes sense.
The projections for an age 50 retirement look great and based on their current level of spending and saving they’ll have no problem reaching their goal of early retirement at age 50. If anything, the projections highlight an opportunity to better balance spending and savings pre-retirement. As a household they have a very modest spending and a high savings rate. Of course, things could change, and they likely will once the new family addition arrives!
So, rather than scrimp and save now just to accumulate millions in the future, if they still want to aim for FIRE at 50 they can spend a bit more now and in early retirement.
Net Worth With Current Spending Assumptions (Today’s Dollars)
If we add an extra $2,000 per month in spending over their entire plan (both now and in retirement) their plan is still successful but avoids accumulating a large amount of assets in retirement.
By taking this approach they would increase their pre-retirement spending from $56,560/year to $80,560/year (not including mortgage payments) and they would increase their retirement spending from $49,200/year to $73,200/year.
Although their current spending numbers are reasonable, they are low versus the median, the extra $2,000 per month in spending would mean a lower savings rate pre-retirement but their household spending would be closer to the median for a couple in Canada. I suspect they will increase their spending over the coming 15 years.
Net Worth When Spending An Extra $2,000/Month (Today’s Dollars)
Success Rate When Spending An Extra $2,000/Month (Today’s Dollars)
Only in the very worst historical periods does Judy and Shane’s plan run out of money in the future. This assumes absolutely no change to discretionary spending. As we know by reading Mark’s site and in doing other case studies, a little financial flexibility can go a long ways.
Judy and Shane have a great plan ahead of them. Their savings rate will probably drop over the next few years with maternity and parental leave, but they’re already quite a bit ahead with diligent savings.
Assuming the continue in a positive, general direction, FIRE at age 50 can occur.
You can find more retirement essays from folks that have successfully “been there, done that” on this Retirement page here.
You can find some FREE retirement planning and draw down calculators on my Helpful Sites page here.
Another thanks from Mark to Owen for this case study. Owen Winkelmolen (no affiliation) is a fee-for-service financial planner (QAFP) and founder of PlanEasy.ca. He specializes in budgeting, cashflow, taxes & benefits, and retirement planning. He works with individuals and young families in their 30’s, 40’s and 50’s to create comprehensive financial plans from today to age 100.
Disclosure: I (My Own Advisor) along with Owen, have provided this information for general, illustrative purposes. This is not direct investing advice, nor should it be taken as such. Inputs and assumptions above are for general case study purposes only for Judy and Share. Your mileage may vary.
One thought on “Millennials want to FIRE at age 50”
I realize that the purpose of this post is to answer the basic question of can they retire at age 50, which it did, and not to plan out their entire retirement, but I’m curious, because it’s relevant to where I am today. Why is it that from age 50 to 65+, does the drawdown plan suggest they pull from their TFSAs and non-registered funds vs pulling more from their RRSPs, leveling out the tax over their retirement? Having so much in the RRSPs in those later years might result in OAS clawbacks if the government reduces or freezes the recovery threshold or if/when one of them dies?