How To Retire In One Year Part 3

The most common reason we give for being unprepared for retirement is that we have debts and responsibilities that do not permit us to leave our jobs. These liabilities generally revolve around financial commitments, but obligations go far beyond monetary debts. Family, friends and community duties play a role, as well. Oddly, the easiest debt to resolve is that involving money. Family responsibilities, often overlooked at the initial planning stages, bind us o our current situations more strongly than escaping or resolving the financial constraints. In many instances, the money concerns may not, in fact, be liabilities, but assets. 

We have been inoculated with the belief that, in retirement, we have obligations that are immutable, and that our retirement should be an extension of our current life. We are told that we need to leave a sizeable nest egg for our offspring. We have been led to believe that our only assets from which we can generate income in retirement are our savings and tangible goods.  All of these assumptions are incorrect.  Retirement changes our lives dramatically, and, with that change, alters our priorities, obligations, needs and wants.  We need to rethink retirement.

In the late 1970s, I constructed a machining facility for my new father-in-law in a remote northern community in Saskatchewan, Canada.  The building was to be nearly one hundred and eighty feet long by forty feet wide, with a roof line over twenty-five feet high – a sizeable structure in a farming village of fewer than four hundred people.  Yet, it was almost miniscule compared to the building next to it.  That building measured more than two hundred and fifty feet deep by four hundred feet long.  Not only did it reach five storeys in the air, but it also had a basement, a sub-basement and a tunnel below the bottom level.  It had been twenty-two years in the making.

While the immensity of this unit may have been extraordinary in that region, the architect, engineer, contractor and owner of it was even more extraordinary.

John Chimko had retired at the age of sixty-five, from one of Canada’s national rail lines. He had decided, years earlier, that he would build a hotel in his home community. He stuck to that plan for over twenty-seven years.  But why was that so incredible?

Chimko built the entire structure, by hand, paid out of his own pocket and from his pension income. The building would never have been adequate for use as a hotel.  John, being smaller than five feet tall, constructed each of the scores of rooms based on his requirements, with room dimensions of seven or eight feet by eight or nine feet.  There were no washrooms in any of the rooms.  The building never did receive full electrical power.  Its only heat source was a large wood furnace, significantly inadequate for the heat demands of a climate that saw six months of temperatures lower than 0 degrees Celsius. Aside from that, there never had been a construction permit or architect’s stamp of approval.  Yet, this tiny man had built a building that was more durable than most contemporary hotels.

He began by excavating the site down to bedrock.  Then he began working upward, recovering rock and stone, and chiselling each by hand, so that the outer edges were flat.  He had poured concrete, using a hoe and a wheelbarrow, and setting stone after carved stone into place.  At the base, in the sub-basement, the walls were more than four feet thick.  They needed to be: he originally intended to build an eight storey hotel. Day after day, week upon week, year following year, he laboured seven days a week, from sunrise to eight p.m. at night – typically, fourteen hours each day. Slowly, the hotel rose from the ground.

Chimko invested every pension cheque into his project, and, to supplement that meagre amount, he would buy fruits and vegetables from the locals cooperative, add a few pennies in price to each item, and sell them to people in the community.  Most neighbour bought their produce at least once each week from John, although they could have paid less at the coop.

When I met him, he was in his mid-eighties, but, when I would start my day working on the machine shop at 7:30 a.m., John already would have completed nearly two hours of work.  Trudging up the inclined slope of the concrete walls, he would push the wheelbarrow laden with wet concrete, set a few stones in place, wheel back down, and begin again.

John Chimko never completed his dream.  At 93, he developed pneumonia, and well-meaning community members decided to place him in a personal care facility so that he could enjoy his last few years.  He didn’t.  For twenty-eight years, he had been living his dream, but having his pet project taken from him sapped his will to live.  Although he recovered from his pneumonia, he never recovered from the loss of his source of happiness, and died a short time later.  For years later, it took nearly three months for the authorities to be able to demolish the structure, using a wealth of heavy equipment.  Dreams do not disappear easily, it seemed. 

Chimko’s view of retirement was unconventional at that time.  He saw it not as a time to sit back and relax, but as a time to do what he had dreamed of doing.  Part of the pleasure he derived from life while still working was to have a dream.  The town did not need a hotel.  It rarely saw tourists.  But he wanted one, even if he had no plans to make a huge income form it.  His plans for a commercial venture were not realistic, but his plans for a fulfilling retirement were.  He lived his dream.

Probably, your retirement strategies are more conventional.  But are they what you really would love to enjoy after your current working career?

When I retired, I had already changed major careers three times.  But my retirement was to be an opportunity to explore the areas of life that I had been unable to investigate while working.  I wanted to travel.  I do that.  I wanted to delve into alternative energy and environmental projects (more so than in the last five years of my working life).  I have done that.  I wanted to move to a yurt in the woods.  My wife and I did that, and now we build innovative yurt designs as a moneymaking hobby.  Most of all, I wanted to continue to embrace life.  I do that.  But, although I have earned a very good income throughout my career, I have not even a dollar set aside for “savings.”  I am living life today, instead of hoping to live life tomorrow.  My assets are my interests and abilities, and they have served me well.

So, is it time to re-think your retirement?  Let us start with what you believe to be liabilities.  And let us turn as many of them as possible into assets.  Indeed, money is far from our greatest asset:  our greatest asset in retirement is time.

From a practical standpoint, we do need to factor our financial burdens and needs into any retirement equation. We may have consumer loans, mortgages, operating liabilities (utilities, insurance, etc.), credit card debt, education funds for children or grandchildren, property taxes, and so on. Itemize each of these, but do not look at them and declare, “I have to pay this much each month when I retire.”  Many of those responsibilities can be either eliminated or mitigated.

One of the interesting aberrations in retirement planning in Canada, UK, Australia and many western countries is that we can conceivably earn more when we retire than we did when we worked.  In addition, with subsidized housing options, we may be able to afford better accommodations when we earn less, because of the affordable housing programs that provide 55 Plus (seniors) apartments at rates much lower than the general rental market may do.  A single senior in Canada, for instance, may be able to rent a good quality one-bedroom unit for under $600 per month, while receiving a minimum of $1,150 in income, either from the Old Age Security & Guaranteed Income Supplement, or Canada Pension Plan, if that person’s own retirement funds are sufficiently low.

Nonetheless, most homeowners in the western world have equity in their homes, and own homes that were appropriate for a growing family, but that now house just a retired couple.  Once the home is sold and the equity invested, myriad ongoing debts disappear.  Home repair, electric, water services and heating bills, property taxes, mortgage, insurance and other costs associated with home ownership now are eliminated, while the only cost is the cost of renting an apartment.  If a homeowner had been paying a mortgage prior to retirement, the rent may be very little more than the mortgage had been, while hundreds of dollars have been trimmed from the budget.  At the same time, the equity, invested, may be drawing a modest income.

Although, when working, extraneous costs such as vehicle maintenance, parking, fuel, insurance and travel costs related to work were ongoing, those costs are reduced dramatically upon retirement.  Many people, for instance, can obtain lower insurance rates once they no longer are using their vehicles for travel to work.  At the same time, multi-vehicle families may be able to eliminate one of their vehicles and contingent costs. Calculate your transportation obligations while working, as well as anticipated costs upon retirement.

Clothing costs and general grooming costs also drop upon retirement.  But the most significant costs are the direct costs of employment: contributions to government entitlement programs and other source deductions. Employees who participated in a company-sponsored retirement plan also will see their input costs eliminated. On average, these cost reductions amount to 12-17% of gross pay.  Lastly, when income drops, so does income tax.  Calculate your tax reduction based on your anticipated retirement taxable income.

These are the simple cost reductions associated with retirement that often translate into a decreased income requirement of 30-45%.  That is contrary to the advice of many financial planners, who forecast that you will need as much, or more revenue upon retirement.  Their motivation in offering that prediction may be self serving: having you save more with them provides them with commissions!

Sometimes, we find that, particularly after the crash of 2008, our home equity has dissolved.  In such instances, we may want to consider renting out part of our home to tenants, in order to create a revenue stream.  Foreign student programs at universities often seek homes in which the students can live while studying.  Revenues generally are several hundred dollars per month.  Two extra bedrooms?  Two students, and a thousand dollars in extra income.  Sometimes, seniors are looking for a smaller apartment.  If you have the space, or are willing to construct a “granny suite,” ongoing income can be substantial.

An anomaly of modern life is the incidence of “boomerang children,” who return home after living apart from their parents.  Yet, most of the parents, regardless of how inconvenient this reversal may be, are reluctant to charge rent.  Even more disconcerting is the number of parents whose grown children have never left home, but who  do not contribute financially to the household.  Why? If you have earned the right to retire, you also have earned the right to expect your children to input appropriately to expenses.

Ongoing maintenance costs of home ownership may be a lucrative source of cost cutting and efficiency.  Many of us have land line telephones, Internet, cable or satellite, cellular telephones with data plans, Blackberry or IPhone packages, and ongoing movie house fees. Within those myriad technology services, we have several redundancies. Do we need cable and movie access, or satellite and Internet? Netflix, for example, offers movies over the Internet which can be channelled directly into our televisions.  Instead of Internet access with our IPhones, why not move to a basic text package, and rely on our home-based Internet? Can we eliminate our land lines, and bundle our Internet only with our cellular packages? Can we plan our telephone calls so that we can reduce our peak-time packages and rely on off-peak calling?  The sources of savings in every part of our daily lives are numerous.

Even with the scores of ways to reduce costs or turn liabilities into assets, we need to know what it is that we want in our retirement, so that we are not cutting randomly, nor being inefficient.  Like the little engine, you need to know before you go.  Itemize the points in your saving strategy and your plan to reduce liabilities. Then take time to reflect on and refine those plans.  After all, this series of articles is about how to retire in a year, not in a day.

Learn To Know Before You Go

At forty-two years old, my brother chose to retire.  The timing was not of his choice: he had been laid off from his machining job.  However, because he suffered from extreme social anxiety, he was unwilling to face the task of seeking out another job, and opted to stay at home.  Over the prior dozen years, he had salted away close to $135,000, living in an extremely Spartan manner. He intended to live off the interest from his savings.  Investment certificates and bonds were paying 6-8% interest, so he figured that he would be able to draw about $9,500 per year; more than enough for his needs as a single person with no debts.

Unfortunately, interest rates plummeted.  Soon, he was drawing 2.5-3%, then even less.  His income from investments dropped below $3,000.  He persevered, and refused to tap into the principal.  After eighteen years, he drew a small government pension, then five years later, received his old age pension.  But the toll of extreme self-denial has inflicted damage on his health, and he is unable to fully enjoy his later years of retirement.

His strategy is not an effective or desirable one: no forethought, no back-up plan, and no plan for enjoying retirement. Yet, it is possible to secure a comfortable retirement, tailored specifically for your needs and wants, and to do so in a very short period of time.  In fact, retirement one year from today is viable for most of us.

Of course, simply walking away from one’s job likely is an undesirable option. Retirement, like employment, is a job, and needs to be evaluated carefully. In fact, evaluation is the first step in planning, preparing for and entering into retirement.

As a child, I loved the story about the “How The Engine Learned the Knowing Song.”  One of the lines in the story reads, “Steady, steady, till you’re ready. Learn to know before you go.”  But the little engine is in a hurry to be on his way, and keeps asking if he is ready to go. Many of us approach our goals the same way.  We are in such a big hurry to go that we forget to get ready.  The little engine had to take on water, heat his boilers, and so on, in much the same way that we need to prepare for our retirement, and know where we want to go before we leave.  It seems children’s bedtime stories are just as apt for adults!

The first step toward retirement, then, is to know where we want to go.  What do we expect from retirement, short and long term.  What is the path to get there?  What resources (and not just monetary resources) do we have to help us along the way? What is within our reach, and how can we design the best route to follow along the journey?

There are seven basic considerations in our retirement strategy: current assets, current liabilities, current & future priorities, risks to our strategy, opportunities that we may capitalize on, contingencies and dependencies, and the conversion potential (or mobility) of our resources. If we do not fully understand these factors and their impact, then we are doomed to be like the rally car driver who, on his own, sped off from the starting line, determined to lead the pack from start to finish.  After about an hour of driving madly and randomly, he looked behind himself and found no one following.  He was happy with that and continued to speed along, taking any road that suited him.  Finally, he came to a gliding stop, his car out of gas, and he had to walk back to the starting line. There he saw the crowd cheering on the race winner and his navigator, who had followed the route laid out for the competition, and had navigated his way back to the start and finish line.

“How did you manage to win?” the car-less driver asked of the winner. “My vehicle was much faster.”

“Yes,” replied the winner, “But I knew where I was going, and planned our route, while you dashed off without waiting to receive the route instructions.”

Be the little engine who learned to know before he went, not the driver without a plan or a path picked out.

First step: evaluate. 

Many of us expect what the investment salespeople tell us about retirement: how many hundreds of thousands of dollars that we need stashed away, how we should expect to be able to live leisurely and indolently in our last twenty-five years of retirement, and that we should not rely on company or government pensions to support us.  In reality, while pension funds and government pensions are suffering, there is every reason to expect that we will receive significant benefits, as promised, once we retire.  Even if we do not, we should build flexibility into our retirement strategies.

So where do we stand, today?  It is easy to list out our material assets.  This includes bank accounts, savings vehicles, pension funds, equity in homes and other investments, and so on.  While we itemize these, we should be able to project what they will be worth over five, ten and twenty years, given historical patterns. 

But we have more than just cash-convertible assets.  What skills have we acquired over our lifetime?  Can we use those skills, in our retirement, to generate revenue?  What friends and associates do we have, and can we share resources and skill-sets with them to maximize benefit? What assets carry liabilities, and which of these liabilities can we mitigate? Most importantly, what are our interests and passions?  How can we use those effectively in our retirement? 

Many of our current assets will have no value in our “lazy years.”  For instance, currently, I build yurts and sell them.  It started as a retirement hobby, but demand has compelled me to establish the venture as a business.  However, next year, I will be turning over the operation to one of my children.  That makes many of the woodworking tools that I possess obsolete, since I will be moving to a condominium in the city, and will not have anywhere to set up this shop equipment.  My cost, last year, was over $4,000, but I am unlikely to be able to recoup even $500.  So those assets have little retirement value.

On the other hand, our car is five years old, and, if we continued living in the country, we would need to replace it in four more years.  However, by relocating to the city, we will drive much less, and will be able to put off a new purchase for another eight years.  This means that our car has a significant retirement value, in excess of its current worth.

What about our passions?  I enjoyed building the yurts, and turned that passion into a money-maker. During the first years of retirement.  However, we also enjoy travel, and we have used some of our resources to purchase vacation options that, if we choose not to use in a given year, can be sold to others for a small profit.  Your interests, too, may be a resource for retirement, and should be evaluated as such.

Next week, we will look at an alternative way to look at liabilities, and how they will impact on our retirement.

How To Retire In One Year

Sixty-five.  It was the workers’ magic number for decades.  The ultimate target for retirement from the daily grind.  That was when much of the labour force was employed in manufacturing and the trades, when a job at sixteen or eighteen meant the same job at sixty-five. 

Then insurance companies changed the rules.  Or so they promised.  “Freedom Fifty-five” – clearly the most well-known campaign to convince Canadian listeners that they could retire at 55.  In the USA, the approach was different, with credit card companies suggesting that you could enjoy life now, and pay for it far down the road.  Both strategies had the same aim: use money to buy freedom.  And the travel industry kept the pressure on, with shots of exotic locales with sexy women (and occasionally, men) to lure customers. 

In reality, the early retirement targets were always unrealistic, given our propensity for acquiring both wealth and material possessions.  A target needs to be attainable.

The economic crisis of 2008 changed the rules again.  Most of us now believe that retirement will not be viable until we are in our early 70s. Saving almost seems a foolish, frivolous exercise, given poor returns and high risk, along with nebulous job security.

My ex-spouse epitomized the force of fear on retirement planning. Because of health and job issues, she hoped to retire at 58, from a thirty-five year career.  The pension plan with her employer, a local university, allowed for the standard “85” formula for retirement eligibility: a combination of age and years of service totalling eighty-five. Fifty-eight plus thirty-five meant that she was well over the minimum threshold, and would have received her full pension, equal to about 70% of her gross salary.

In addition, she had slightly over $110,000 in retirement funds (RRSPs in Canada). She had a home with a net value of $95,000.  Her retirement plan also carried extended health care after retirement.  She had almost no debt ($30,000 mortgage on a $125,000 home). She had no family obligations.  She was two years from being eligible for early benefits with Canada Pension that would have given her an additional $550 per month. In seven years, the government Old Age Security would have kicked in with a benefit of an additional $600.

In summary, she would have immediately received income from her pension and investments equal to her current salary.  If she had sold her home and moved to an apartment, she would have saved about $90-120 per month.  Her work-related costs would have decreased (parking at work, fuel and vehicle maintenance, vehicle insurance) by $150.  She no longer would be paying into a pension fund (7% matched by the employer), Canada Pension (3.5% of income), or Employment Insurance (3% of income), for a total saving of 13-14% of gross revenues.  That meant that she would be receiving a company pension of 83% of her original gross pay, plus other revenue streams and reduce cost.  The final tally in the first year of retirement worked out to an increase of income of nearly 12% over her existing salary.

In two years, that income would have risen by 20%, and in seven years by 42%, without ever touching the principal on her investments.

Yet, she was convinced that she could not afford to retire.  Week after week, she complained about needing to retire, but week after week she raised unrealistic barriers to that retirement.  Ultimately, she remained at work for another five years.

Her dilemma is typical.  Many of us want to retire, but are afraid of the unknowns involved.  Many of us have unrealistic goals and objectives for our retirement, and do not understand, fully, the impact of retirement on all aspects of our lives.  Ultimately, we all are duped by the misinformation that permeates the world around us about the costs and the needs of retirement.

Mostly, we build our retirement dreams around the fantasy built for us, and think that the retirement that we want is the retirement that advertisers tell us that we want.  We want to travel to exotic locales, we want to leave a sizeable nest-egg for our children. We want to increase our standard of living while decreasing our income.  We want to lounge around all day during our retirement, without obligation or motivation. We want to remain young forever, while we get older.

That is not retirement.  There is a reason why many corporate executives remain on the job long after their seventieth birthday, or academics remain teaching at universities, or scientists continue to do research well into their eighties. It is because retirement is not about forfeiting all responsibility at a specific age.  Remember the 65-year-old retiree mentioned at the beginning?  It turns out that, in the 1960s and 1970s, when sixty-five meant quitting work and relaxing in the easy chair, scores of those newly retired men died of heart attacks within months or years of the beginning of their so-called life of leisure.  We should never quit enjoying life, and for many of us, enjoyment comes from accomplishment.

A recent study found that the vast majority of octogenarians and nonagenarians continued to be active, with specific goals, and many with specific (albeit part-time) jobs.  They had a purpose, and a reason to embrace life.

This article series will look at how to retire earlier than you thought possible.  In fact, it is possible for virtually anyone over 45 to “retire” within one year.  The key is to know your retirement objectives, be realistic, and focus.  It will not teach you how to sit back in your Lazyboy, and watch sports all day.  It will show you how to work, step by step, toward retirement in a manner easier than you may think is possible, but in one that involves a lot of work.  That is not contradictory. 

My brother, for instance, “retired” at forty-two.  The lifestyle that he endured simply is not realistic or desirable for virtually every one of us.  He suffered through the next twenty-three years.

I retired at fifty-seven, then redefined my retirement two years later, while waiting for my wife to choose to quit work.  In her opinion, she already is retired, since she works part-time, has full company benefits, chooses almost all of her schedule, and enjoys months on end of vacation and travel time. Both of us are living the lives we want.

Each week, I will be posting a new segment in the “How To Retire In One Year” series. Next week, we will be looking at goal setting and planning.