Trying to refine my retirement plan

[UnknownXV]

Hi folks. I just wanted to say before I begin that I am extremely impressed with the people on this forum. In the few threads I've read people seem to have saved up more than I ever thought possible. Maybe it's my area, but not many people here that I know seem to save much of anything. It's a bit depressing.

So to business, I'm 22 years old currently, but for the past year and a half I've had little more than planning for retirement on my mind. Saving as much money as I could bear to during this period, and I have no intention of stopping.

I currently have $6,250 saved. I have no debt of any kind. I have a few basic electronic assets like a gaming computer and a big TV, but no car or house.

I work, but only part time (27 hours a week). I earn $10 an hour. I gross $519 every two weeks, after taxes. On average I save roughly $450 of this income per month by limiting my expenses. I live with two roommates, and don't do much else with my money besides eating. I live in Canada, so I don't need medical insurance. I don't have a car, so no vehicle insurance there or gas to pay for.

I also get back my tax refund every year for about $1,500. So that puts my current savings rate at roughly $7,000 per year since I save the entire tax refund.

I have plans to try and find a full time job that pays a bit better, maybe $13 an hour. Shouldn't be too hard to get that here. If my before tax income is $25,000 per year, I will be able to save a cool grand a month. I will be contributing the maximum to an RRSP which will reduce my taxable income, granting me at least $1,000 a year back in tax refunds. Maybe more with tax credits, not sure how that will be when my income is that much higher than it is now. To those not in Canada, an RRSP is very similar to a 401k. Although the perk with it is, the total you've contributed in one year you can subtract from your taxable income.

So that will bring my annual saving rate to $13,000.

That's not too bad I think, for someone my age at least. I would like some advice on what to do with this money. About $3,700 of that will go into the RRSP (the maximum I can contribute at that income level), but that still leaves me with almost 10 grand to invest. I've been looking around, and the best GIC I can find is 2.35% and locks my money away for 5 years. There's a tax free savings account which is nice in principle, but still depends on an actual investment, which I can't find any that yield decent interest rates.

I've used a few calculators online, and I simply will not be able to hit my target retirement age of 50 with anything less than an average of 3% yield on my investments.

I would appreciate any advice, and keep in mind I am trying to go for the safest possible investments. Safe and steady.

[disneysteve]

Welcome. I think it's great that you are thinking about retirement at your age. I also think it's great that you are debt-free and clearly committed to a frugal lifestyle. However, I also think you need to figure out what your goals are in life beyond retiring at age 50 (not that that's a bad goal - wish I could do it myself). Do you want to spend the next 30 years doing nothing but working and eating? Do you want to spend the next 30 years living with 2 roommates? Might you want to get your own place someday? Might you want to get married and have a family someday? Maybe you'd like to travel? Go to some shows? Support some charities? Get your own car?

My point is that there is a lot more to life - or at least should be a lot more to life - than going to work, coming home and doing nothing but watching your savings grow. I'm curious what you think retirement would look like. Once you stop working at 50, what would you do with yourself all day?

By all means, keep saving and stay debt-free (except for a home loan at some point). Aim to save a minimum of 20% of your income. In your case, 30% is not an unreasonable suggestion.

How to invest it? At age 22, I'd forget about the "safest possible investment" route. You can certainly afford to take some risk and you'll need to if you want to earn at least 3% on your money. Diversify into stock mutual funds. If your risk tolerance is low, no need to go all in but you probably want at least a third of your money in the market to give you some growth. Personally, at 22, I'd suggest 80% but it doesn't sound like that matches your mindset, and that's okay for now.

[97guns]

looking to better your career should be constant, when i was working i was always on the hunt for better pay. i see your able to save and that is the key, now go make more and save more money

[UnknownXV]

Thank you for the replies.

Yes, you're right there is more to life than just working and looking at my pile of money grow. That said, I'm a pretty simple guy. My forms of entertainment are relaxing with friends, maybe going to a restaurant or a movie once every two weeks, not really that expensive. I also play video games, one of the cheapest forms of entertainment. I have netflix too, so I watch tons of shows, movies..

Then, I have a bicycle, and that's my form of transportation but it's also something I genuinely love doing. After I retire, I see myself doing cross country trips all the time. Waking up with the knowledge that I am finally truly as free as humanly possible. No obligations and responsibility to others. It's as close to heaven on earth as I can imagine, unless I was a multimillionaire. But even then, I'm not really into the excessive lavish lifestyle.

As for earning more money, I refrain from pursuing really high paying jobs because they tend to involve too much stress and responsibility. It's no good for me to have a job that pays 50k a year when one or two mistakes means I'm fired. If the job is hard and demands a lot of skill, that could easily happen. It would make me too nervous about my own security and life. I don't want that. That was part of my strategy I decided earlier. Modest income, but very low expenses.

As for living with roommates, no I don't intend to forever. It's getting old. The good news is that from what I am seeing, apartment prices are fairly cheap, even compared to living with two roommates. It's all about location. Since I'll be looking for another job (which is available even in smaller towns) I will try to get my own place in 8-9 months or so. It'll cost me $600 a month, roughly. So I might save a bit less than a grand a month, at first; but I know the job can easily increase in pay by a dollar or two after a year (happened to my step dad in the same field).

I do think my plan and lifestyle is a bit simple but reducing stress is critical since I intend to live very long indeed.

As for risk.. I am very risk adverse. It's one reason why I have no debt. The idea of taking on a mortgage truly does terrify me. I know in the long run, the amount I pay on rent tends to be wasted money, but you tend to pay an enormous amount in interest when you get a mortgage anyways. It may still end up being a better deal to get a mortgage, especially if you pay it off faster; but that's not for me.. at least not yet. For mutual funds, from what I gather, there's a portfolio manager that pools a larger quantity of money from mnay of us, and invests it all into a ton of different stocks.. that's the basic jist of it right? I was never clear on exactly what the fees and such were, and how much risk was involved in that. It does seem like something I might try, but certainly not with 80% of my saving income. :P

One thing I was considering doing as an investment is to buy a house in cash for 100,000k or so just a bit after I am 30 at the rate I am going. I am a dual citizen, so I could shop around in the states as well (houses in Canada are incredibly overpriced). I know in some areas 100k will buy you a hell of a lot. So then, I'd rent it out, I figure I could probably get 1k per month revenue from that. After property taxes and maintenance, maybe half of that would be actual profit, but that's still pretty damn good when you think about it. That's 6k a year in profit, on a 100k investment. 6% a year. Not to mention the fact the house can appreciate too.

It does seem too good to be true, so if anyone has experience with that, let me know what I am missing. I'm sure there is a catch or at least a few important things to consider.

[Petunia 100]

One thing I was considering doing as an investment is to buy a house in cash for 100,000k or so just a bit after I am 30 at the rate I am going. I am a dual citizen, so I could shop around in the states as well (houses in Canada are incredibly overpriced). I know in some areas 100k will buy you a hell of a lot. So then, I'd rent it out, I figure I could probably get 1k per month revenue from that. After property taxes and maintenance, maybe half of that would be actual profit, but that's still pretty damn good when you think about it. That's 6k a year in profit, on a 100k investment. 6% a year. Not to mention the fact the house can appreciate too.

It does seem too good to be true, so if anyone has experience with that, let me know what I am missing. I'm sure there is a catch or at least a few important things to consider.

Residential real estate can work out very well. Or, it can be a nightmare. I suggest you spend some time exploring landlord/tenant law in the area you would buy real estate. Here in the US, each state has its own landlord/tenant laws. Some are more landlord friendly than others. I would guess it is a similar situation in Canada with laws varying from province to province. Know what you are getting into before you buy.

Also, are you handy? Will you able to make repairs and perform maintenance yourself? If not, you will be paying someone else to do them. If you will be an out of area landlord, then you will likely need to hire a property mangament service. From time to time, you will have a tenant who does not pay. Once they have been successfully evicted, you may find you have repairs to make. In short, there will be years when you do not receive a full 12 months of rent. You need to factor in all of these costs as well.

[jpg7n16]

I would like some advice on what to do with this money.

Stock enough money away for a 3-6 month EF. Then buy well diversified stock funds. Hold for a long time.

I would appreciate any advice, and keep in mind I am trying to go for the safest possible investments. Safe and steady.

That all depends on what you mean by "safest." Safest in that your balance will not go up or down day to day? Or safest in that you'll be able to make your money last?

At your age, inflation and purchasing power risk vastly overwhelms principal risk. You should focus on how to invest for the next 30-40+ years to outpace inflation. That's the long term.

Long term, stocks are the safest way to go. Short term, they're nowhere close to the safest place to go.

Just some food for thought: Sustainable Withdrawal Rates: The Historical Evidence on Buffer Zone Strategies

(check out table 1, notice the higher the stock allocation, the greater chance of success at virtually all withdrawal rates)

[UnknownXV]

Thanks for the comments so far, I'll reply more in depth in a day, just a bit busy. I have another quick question, are there any legal rules or general things I need to be aware of when it comes to investing in mutual funds not based upon a market in Canada, or run via a firm in another country? The fund you spoke of is not from Canada.

Since I am a dual citizen, I need to make sure I won't end up paying taxes for both countries, that would defeat the point of investing outside of Canada.

[UnknownXV]

Okay, thanks again for the responses folks, sorry it took a while to reply, just been a bit busy.

Congratulations on being debt free and thinking about retirement at such an early age.

If I were in your shoes, here is what I would do.

Save 3-6 months expenses in a savings account or low interest checking account for an emergency fund.

Invest in your RRSP as you are planning.

Then I would invest in Mutual Funds. There are many funds with long track records that average 9% growth or more. For example, the American Funds Mutual Fund (AMRMX). This fund began in 1950 so it has survived the Korean War, Vietnam, the assassination of President Kennedy, Nixon's resignation, the attack on the World Trade Center and some recessions. As of the end of 2009, it had averaged 11.45% growth over the life of the fund. It had 49 years where it gained money and 10 years where it lost money. This is the type of fund I would look at investing in. I am not necessarily endorsing this fund, this is just an example of the type of fund you should be looking for. There are many other funds with similar records. You not only need to look at what the fund has done over the life of the fund, but also consider what it has done lately. I would also invest in more than 1 fund, including at least 1 international or global fund.

My expenses are fairly low, in fact, per year I only spend about $7,200 or so, and I can cut that down a bit if necessary. I'll have $6,500 available to me just in a basic savings account (1.35%).. decent emergency fund for almost a year. I also contributed to 2 grand to my RRSP, the maximum. So my income tax return will be very nice this year.

I think a mutual fund is definitely what I will consider, but I'm also wary of fees, especially for Canadian run mutual funds, the fees here are quite ridiculous if you aren't careful. But it seems to be the relatively "safest" long-term way to invest and get a decent growth rate. Lots of research required to pick the right one, and I will not be contributing everything I save to one, just a bit. A mutual fund is investing a small bit in a lot of stocks pooled together. Diversification, that's the way to stay safe. Tax free savings accounts, RRSPs, a few GICs, an emergency fund, a bit in gold, and a mutual fund. That's a decent investment portfolio I think. Hope so.

Residential real estate can work out very well. Or, it can be a nightmare. I suggest you spend some time exploring landlord/tenant law in the area you would buy real estate. Here in the US, each state has its own landlord/tenant laws. Some are more landlord friendly than others. I would guess it is a similar situation in Canada with laws varying from province to province. Know what you are getting into before you buy.

Also, are you handy? Will you able to make repairs and perform maintenance yourself? If not, you will be paying someone else to do them. If you will be an out of area landlord, then you will likely need to hire a property mangament service. From time to time, you will have a tenant who does not pay. Once they have been successfully evicted, you may find you have repairs to make. In short, there will be years when you do not receive a full 12 months of rent. You need to factor in all of these costs as well.

Yep, a lot of research will be required indeed. Finding the most landlord friendly state will be critical, as well as the lowest property tax rates. Making sure the house is in good quality, etc.. one advantage I do have is that buying houses in cash gives you leverage to negotiate the price down since it's easier for the seller's, closing the deal much faster.

I'm not very handy, no, and I probably won't be in the same state or close enough to maintain it myself. So I will have to have someone do that for me. I was figuring in, after property taxes, maintenance and general taxes, about 50% of rental income would be profit. That's a fair estimation I think.