Our financial independence assumptions
This article is inspired by Mark’s recent post on his blog where he revisited their financial independence assumptions. I have shared some numbers on this little blog of mine in the past like the Early Retirement/Financial Independence Spreadsheet Calculator where I estimated that we would reach financial independence between 8 to 15 years.
Today I’ll share a bit more of our financial independence assumptions.
How much is enough?
Based on our past 4 year annual expenses, our annual core expenses, which include housing expenses, utilities, food, insurance, gas and other essential expenses are roughly $32,000. That number adds up to roughly $48,000 if we include everything like vacations, dining out, charity donations, and business expenses.
But these numbers will most likely change given we have two growing kids. Let see take a quick look of what we need to cover in our future based on today’s expenses with some buffer designed-in.
Core expenses per month estimate
- House property taxes $350
- House maintenance $50 – luckily our house maintenance cost is low
- House insurance $100
- Utilities $100 – water, electricity, and natural gas
- Internet & cellphones $100
- Groceries $800 – two growing kids
- Healthcare $150 – based on current BC MSP premium. Only paying a small fraction of this today since my work pays for the majority of it
- Household supplies $100
- Clothing $100 – mostly for the growing kids. Mrs. T and I buy new clothes very rarely.
- Car insurance for 1 vehicle $120
- Gas for 1 vehicle $50 – probably will be driving less when reaching financial independence
- Car maintenance $50
- Buffer $200
As mentioned, our core expenses do not include expenses like eating out, charity donation, entertainment, side-business expenses, vacation, and education saving for the kids.
We estimate about $950 per month to cover non-core expenses.
So that means a total of $3,220 per month in expenses, or $38,640 per year, which is significantly lower than our average expenses in the last four years.
Because these numbers are just estimates, they will probably change. It’s tough to estimate how much the two kids will eat, especially once both are teenagers (both Mrs. T and I ate a lot as teenagers).
Expediting financial independence
One of our goals, after achieving financial independence, is to travel around the world. This may involve living in a country for an extensive amount of time. For example, Mrs. T and I have talked about moving to Taiwan and Denmark in the future and living there for a couple of years while exploring the surrounding countries (obviously we would need to figure out Visa situation). Our overall expenses will change depending on where we live. Living in Taiwan or South East Asia will probably be a lot cheaper than living in Vancouver or Denmark. Another option is to move to a small town in Canada and live off the land like what the Frugalwoods are doing in their homestead. Since Mrs. T grew up on a farm, raising live stocks and living off them is not out of the question (I’ll have to learn how to be a farmer 🙂 ). Living somewhere else than Vancouver with a lower cost of living can certainly allow us to expedite our journey to financial independence.
One key thing to keep in mind is that we’re not set on our post-financial-independence plans. We are flexible and are willing to work around the circumstances. I truly believe this is a very important factor. Life is fluid and things can change on a daily basis. Setting a rigid plan simply doesn’t work.
How to fund retirement?
Since we are in the accumulation phase of our dividend portfolio still, we are adding a lot of new capital each year. When we reach financial independence, we don’t anticipate adding as much new capital, if anything at all. We will, however, continue investing in kids’ education funds (RESP). Why don’t we anticipate adding more capital in our dividend portfolio? First of all, because we don’t plan to withdraw the principal and only plan to live off dividend income, as long as our expenses are below the dividend, we are set. Second, we anticipate the dividend income to grow as companies continue raising their dividend payouts each year. Therefore, our dividend income should keep up with inflation. While we plan to pass the entire dividend portfolio to our kids and future grand-kids (exactly plans to be determined), it may make sense to withdraw a small amount of principal each year once we are in our 60’s or later.
To summarize, below are our plans to fund our early retirement or post-financial independence lives:
- A dividend investment portfolio around $1 million. This includes all registered (RRSP, TSFA) and non-registered investments. The target dividend income is $40,000 per year based on the assumptions discussed above. We will most likely withdraw a small amount of money from RRSP each year and transfer that money in TFSA or regular account.
- Part-time income. Both Mrs. T and I have established side-businesses. We will continue “working” in our side-businesses in some ways or form. Since I am keen in personal finance, I may pursue in becoming a financial advisor as a part-time job to help other people with their finance.
- Contract work. Reaching financial independence doesn’t mean I have to stop working. I may decide to do contract work with my existing employer or work for other high tech companies. Given that I have both technical and marketing/sales background, my skills are highly transferable.
- Here in Canada we have two government programs called Canadian Pension Plan (CPP) and Old Age Security (OAS). Both provide some income once you are 65. Given that we aim to reach financial independence in our early 40’s, we do not plan to rely on CPP and OAS for income. The way I see it, CPP and OAS are bonus money that we will receive when we are older.
And that’s it! A very simple plan.
There are a lot of assumptions but having a plan is better than not having a plan. The estimates also give us something to aim for. We will continue to work hard to save money and invest in dividend stocks. Given that our net worth has increased by 250% in the last 5 years, we’re doing really well. Our net worth may or may not continue growing at such astonishing rate. Either way, we look forward to the future and are very glad that we had our financial epiphany to get us started on our financial independence journey.
Dear readers, do you have any financial independence assumptions? What are your post financial independence plans? I would love to hear them from you.
P.S. In case you’re wondering, yes that is the $1,000 Canadian bill that used to be available (ceased in 2000 due to concerns with money laundering and organized crime). Once I saw an acquaintance pulling one of these out from her wallet to pay a large group dinner. I was shocked as I didn’t even know the bill existed.
P.P.S. If you like this blog, I would really appreciate and be honoured if you would consider nominating us for the Plutus Award. Thank you!