Race to the Moon
Landing Neil Armstrong on the moon happened before I was born, but it was such a defining achievement that it ignited my imagination as a child. I had “space” wallpaper in my room in which I spent hours staring at the alien landscapes, astronauts, and rockets imagining what it would be like when I got to go to space. I don’t think that is going to happen. Buying a ticket on Virgin Galactic would pretty much blow up my FIRE plans and I am a lot more afraid of getting blown up in general than I used to be.
You need to know the target in order to aim at it. To be FI, you need to have enough money saved that you can live on the returns of the investment. Sounds simple on the surface, but when you delve into it, there are so many variables that it can seem as daunting as trying to launch a rocket to land on the moon did in the 1960s.
As a professional, it is also important to get it right because if you leave your profession for a long period of time because you think you’ve hit FI, there are barriers to re-entry. No one wants an Apollo 13 moment.
I am not a rocket scientist – I am just a physician. So, let’s try and break it down in a way that won’t cause intra-cranial hemorrhage.
F
I is a moving target with many moving parts
The Moon orbits the Earth while the Earth orbits the Sun. So, if you want to launch something there, you need to know where it is going to be in both of its orbits at the time you want to arrive there .
How much you spend, and on what, changes in your lifecycle. So does how much you earn and how you earn it, making FI a moving target on both sides of the equation also.
Costs of Living
Your cost of living changes as you move through the life cycle. Financial planning experts have given ranges of 40-70% of pre-retirement spending depending on the retirement lifestyle. The Sunlife Retirement Now Report was a survey of about 2000 retired Canadians done in late 2015. It showed 41% of them lived on 60-80% of their pre-retirement income; 29% lived on 40-60%; with 88% of retirees being satisfied with their retirement lifestyle. That is pretty reassuring, but applies mostly to “traditional” retirement. They didn’t give the demographics of the retirees surveyed. The people in the pictures looked healthy and active, but a lot more grey-haired than me.
I think that FI and RE would look completely different for someone with dependent children for example. It would also be completely different if I am not looking at retiring early, but rather RE-focusing by “working” less and spending more time on other priorities – some of which may cost more money like my hobbies or travelling.
Costs of Earning
Working also comes with costs. There are fixed costs like professional memberships and licensing. Office overhead may be fixed or possibly variable depending on your practice or business situation. Some costs depend on how much you work like transportation, parking, and possibly childcare/activities. Some depend on how disciplined you are and how you cope with the stresses of work – coffee, cafeteria food, and time-saving-but-costly convenience items come to mind. And potato chips. My potato chip pleasure centre is hyper-stimulated when I am tired or stressed.
Working to earn and the costs of earning affect each other just like the Earth and Moon’s gravity affect each other’s orbit.
Taxes are one of the biggests costs of earning in Canada
Taxes are a very big deal in Canada – especially as a high income earner.
We have a very progressive taxation system. The idea behind this is that those who make more have more discretionary money to spend after taking care of basic needs. So, it is only fair that they pay more of the tax bill. I support that notion and the tax revenue supports the social safety net and services we enjoy in Canada.
However, it also means how much is “fair” is subjective since it is not an equally applied tax. In 2014, 52% of the personal income tax was collected from 8% of the population (those who make over $100,000/yr) and the much maligned 1% pay 20% of the person income tax collected per year.
Is that doing their “fair share”? Our current Prime Minister feels that the wealthy “need to do a little bit more” and since 2014 there has been an increase in this further with the top marginal tax rate now being 48-53.5% depending on province. Fair is subjective and a matter of perspective and more of this type of “fairness” is likely on the way. The government is like a meteoroid that can suddenly strike you and knock you off course by changing the tax rules as we are currently seeing.
Working to get income is a game of diminishing returns financially – especially for high income earners.
In this chart, you can see the slope of the curve for employment income is much lower than the slope of increasing gross income. So, the more you work, the less you progressively take home per hour.
At what point is it not financially worth working more?
Currently, drawing income from investments in Canada is much more tax efficient with dividends and capital gains being personally taxed at lower rates. So, the gross amount of income you need is less when you are drawing more of it from your investment portfolio (like when you achieve FIRE) than when you had to work for it.
Inflation eats away at your buying power over time
The cost of most things increases by a few percent a year. It will likely cost more for your same basic expenses by the time you achieve FIRE than it does today. You can hope that your income and saving rate goes up by the same as inflation while working towards FI, but this is not guaranteed. Business and professionals in a free market can usually increase fees/prices with inflation. For those in medicine in Canada, fees are set with government and more related to the political and fiscal climate than inflation.
Over the course of retirement, inflation marches along and means that your investment income needs to increase by at least the inflation rate to maintain the same cost of living. This is especially adds up if you retire at a young age and hopefully live a long healthy life.
Inflation is also important to account for when, as an evil doctor, you make ransom demands.
All of these factors make finding “your number” complex
Using a percentage of working income as your retirement target is attractive because it is static and simple. Kind of like the Earth being the centre of the Universe.
Unfortunately, th
e reality is more complex and dynamic like the motion of a heavenly bodies. Uhm… I meant celestial objects 😉
In the days of the space race, it would have required a computer that fit into a building and people with pocket protectors weeks to figure this out. Now, with the highly sophisticated technology of an Excel spreadsheet and a geek like me, you can enter your current numbers into my Loonie Calculator and figure it out. You can also change your numbers to see how it affects your goal and track the progress over time.
There are a number of calculators available from other sites and blogs. This one is more detailed to account for the above discussed factors in the Canadian context. Click here to sign up for the blog and download the calculator [Not available yet – the Loonie Doctor Nerd Dept is furiously working away at it. Fear not, they shall not be fed or watered until complete. You are an early visitor. Please keep visiting periodically!].
I have read your site on and off for awhile now. I find it perplexing that you seem to agree that our taxation system is “fair.” I think there should be an absolute sum (say, $1,000,000) that if we “hit it” via income tax, we are DONE for life. Or adopt a “flat tax” system like in Hong Kong.
If you give people crap for free, they don’t appreciate it. This applies to children having their entire educations paid for, $5 daycare in Quebec, a Universal Basic Income or many other examples.
To partly nuance what I have written, I do give roughly 15 % of my gross income to charities (including faith-based / tithe). I’d just rather do this voluntarily than have the money pried out of my hands at gunpoint by corrupt bureaucrats.
Thanks for the comment Dave. That is an interesting idea about a lifetime cap. My wife and I have already paid our millions. There are aspects of our tax system that I think are fair and others that aren’t. The degree of taxation is also important.
“Fair” is subjective and different reasonable people can have different ideas of it. Hence, politics. My feeling is that some type of progressive system is fair since those with more money have more wiggle room above the basics. However, I do think that we have crossed lines of magnitude about how much is “fair”. It is also interesting how our leadership has painted the working wealthy as the 1% who need to do more and hosed them. Yet, the people that most of us visualize when we think 1%er aren’t the business owner or skilled employee/professional – but rather the elite class. Those folks with extravagant wealth (often inherited) have been spared by their actions. Not surprising, since they are amongst that crowd or depend on it. It makes me think of lawn mowing. The shorter blades of grass cheer as the tall blades of grass get mulched to fertilize them. They never look up to see who is really pushing the lawn-mower and the lawn-mower makes sure that they never get a close look.
In addition to fairness, there are some practical problems from over-taxation of the successful. One is that those who get things for free don’t appreciate them. Those who earn privileges actually enjoy them more too. We should provide for a basic safety net. However, again, we have seen a drift of what basic safety net means. Is it basic food, shelter, sanitation, policing, education, and healthcare? That is what was originally intended. There does seem to be a push to move beyond that.
Taxation also affects behavior. What message are we sending and behavior are we fostering when we punish productivity? I think 54% marginal tax rates are punishing and have crossed a line psychologically where they modify behavior. I have modified mine by cutting back and plan to further. The timeline gets shorter with each tax increase. It can also cause people to seek to avoid the system. For those of average incomes, it is using cash (just ask Greece how that works out) and for the very wealthy it is moving their money elsewhere or using shady schemes. Both are illegal, but we see very little enforcement. Shutting that crap down might enable lowering everyone’s taxes to a reasonable level.
I also have seen how this is damaging at the other end of the spectrum. I have talked with people struggling about whether to go back to work (they can and have high employable skill levels) because they’d pay more tax and lose subsidies and end up roughly the same financially or very little ahead after much more effort. Contributing is also important for people’s mental health as well as our society. We have also traveled extensively in the U.S. While Canadians love to thumb their noses at the lower social safety net in the U.S., I am always a bit surprised in talking to the average person there about it. Many would rather work hard with the chance of doing well or doing poorly than have a guarantee of stuff linked to getting pushed down if they start to get ahead. Interesting.
Americans also have philanthropy going on at a much larger scale than we do here. I think that much of that is because our money gets taken and given to the “charities” of the government’s choice. Our family has a similar donation strategy to you and we did need to scale it back temporarily as our taxes rose. It would be interesting to see if there has been a change in charitable donations with our last 4-5 years of tax changes. The tax credit now doesn’t even cover the highest tax bracket, by the way. It caps out around 50% and we are well past that in most provinces.
Some would say that our tax system is kind and fair. Others, oppressive. I am somewhere in the middle. It has the potential to be either and I do worry about the eventual fall-out if our governments continue down their current paths.
-LD