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Singing: “Oh, the weather outside is frightful, but the fire is so delightful, and since we’ve no place to go, time for a reader case, a reader case yo!”
Hi Kristy and Bryce,
I would like to first thank you for taking the “unbeaten path” and sharing your journey and knowledge with the world! We seem to have a lot in common 🙂 I also went to the University of Waterloo – but in the Arts and graduated with a degree in German History and Language. My husband and I both became teachers after the loss of our children’s fitness business and have spent the past 9 years teaching in Canada and in Kuwait! I have recently read your specific travel blog (How traveling the world made us money) and saw your pictures of Chiang Mai! We also visited an elephant sanctuary while in Chiang Mai and loved Thailand. As teachers in Kuwait we had the opportunity to fly way cheaper than from Canada and took our two children to 12 countries during our two years teaching in the Middle East. It was an incredible adventure.
I am writing to you specifically today as I have recently suffered a concussion (at my teaching job – I was coaching volleyball and took a serve to the head!) and it seems to have reshuffled my priorities! Truth be told… we do not LOVE teaching. My husband and I became teachers (French language teachers) as a means of supporting our family as we restarted our careers after the devasting business loss and subsequent consumer proposal.
At this point in my life, I cannot envision teaching until 2039! HA! Which is what my pension letter stated the other day! Not happening. I would appreciate any insight you have to MATH SHIT UP regarding a teacher’s pension… I will provide details below. We have a property on a lake in Muskoka that we are planning on selling in the spring which will hopefully provide us with our $1.5 Million dollars needed for our FIRE #.
Thanks for your inspiration and the encouragement to say goodbye to the 9-5 BS that so many people put up with. Life is worth living and living well!
- Your gross/net annual family income – $150,000
- Your monthly family spending – $5000
- For any debts you have, please include:
- Mortgage debt 2.29% $298,000 – HELOC 3.2% $140,000
- Any fixed assets you have Chalet in Muskoka- $1.5 Million, 2 vehicles $40,000, Recreational property $25,000
- And investments or savings you have (cash, bonds, stocks, etc.) – CASH $15,000, RESP $10,000, TFSA $6000
- Teacher’s Pension – Me $128,000 & Hubby $80,000
- If we retire before 50, we can convert our pension – 50% to a LIRA and then the other 50% comes out as a lump sum. Does it make sense to cash in the pension money and reinvest it or to wait until 2039 for a mini pension?
I appreciate all your help and wisdom!
Okay, first of all, I’m so sorry to hear about the concussion. That sucks. I sincerely hope you are okay. You seem very resilient, bouncing back as teachers from a devastating business loss, and now a concussion. Life has a habit of throwing shit at us, and those who can MATH SHIT UP will prevail.
So, without further ado, let’s MATH SHIT UP!
|Spending:||$5000/month or $60,000/year|
|Debt:||-$298,000 (mortgage) + -$140,000 (HELOC) = -$438,000|
|Investible Assets (excluding RESP):||$15,000 (cash) + $6000 (TFSA) = $21,000|
|Pension (cumulated value):||$128,000 + $80,000 = $208,000|
|Home:||1,500,000 (0.95) = 1,425,000 (after real-estate agent fee)|
Now typically, we don’t include real estate as part of your FIRE portfolio, but since our reader has explicitly said they plan on selling it to fund their retirement, we can include it.
We’re excluding RESP (Registered Education Savings Plan) because they will be using it to fund their kids’ education.
Total net worth: $1,425,000 + $21,000 + $208,000 – $438,000 = $1,216,000
With a family spending of $60,000, you’ll need $60,000 x 25 = $1.5 Million to be financially independent. So, you’re currently short by $284,000.
But, with a $150,000 gross income for the 2 of them, that’s $56,154 x 2 = $112,308/year net income. So, their yearly savings rate is $112,308– $60,000 = $52,308. Put another way, as a percentage of their take-home pay, they are saving $52,308/112,308 *100% = 47%. Not bad at all!
The concussion has made TF re-evaluate her life and consider quitting teacher earlier, but they don’t quite have enough for both to FIRE right now. But maybe that’s not their only option.
Option 1: Full FIRE
With estimated yearly savings of $112,308/year – $60,000 = $52,308 and a net worth of $1,216,000 after selling their home and adding in the current value of their pensions, their time to FI is:
Less than 3 years!
Now, they mention that if they quit, part of their pension will be put into a “LIRA” which stands for Locked In Retirement Account. In Canada, the LIRA isn’t accessible until age 55.
But, after they quit their jobs, the 50% in the LIRA can be accessed using the Cash Asset Swap method we mention in our book (this is exactly what we’re using to access my LIRA). If they retire early, 50% of the lump sum will be taxable and part of that can be put into RRSPs (or 401Ks for the American readers out there and ISAs for the British readers out there) if they have room. The rest will be added to their taxable income for the year. So, they may need to work a few extra months to account for this tax burden.
However, after they retire, their income will drop to $0, eliminating their tax burden going forward. (For a detailed breakdown of how taxation works on investment income, read our book)
Okay, but what if her husband continues working?
Option 2: Partial FIRE
Assuming he brings in 50% of the income (feel free to recalculate this number if that’s not the case), that would give them a yearly net income of $56,154. Since their family yearly expenses are $60,000/year, they are short by $3,846/year. They would need that to cover that shortfall with the passive income of their portfolio.
With a $1,216,000 portfolio, taking out $3,846/year would only be a withdrawal rate of 0.31%, which is way below the 4% safe withdrawal rate.
So, if they’re open to this idea, they could go for partial FI right now. The downside is that this means he will have to continue working until regular retirement since that single salary isn’t enough to pay for their living expenses AND continue saving towards full FIRE. If he likes teaching more than her, this can be a good compromise since it gets her out now and they still get the benefits of his gold-plated teacher’s pension.
Option 3: Full FIRE at age 50
But what if they were to both work until 50 in 2039 to get the mini-pension? They’d get more money but they’d have to tough it out for another 18 years! That might be fine if she loved her job but she says, “Truth be told… we do not LOVE teaching”. 18 years is a LONG TIME to stick it out in a career if you don’t love it.
Let’s find out if these golden handcuffs are worth it:
According to the OTPP (Ontario Teacher’s Pension Plan), they’ll get a “reduced pension” if they retire before 65.
To calculate this number, they’ll need to use the OTPP pension calculator to find out their pension at age 65. Let’s call this number P.
Then assuming their years of service will be 18 (years until 2039) + 7 (9 years of service – 2 years in Kuwait) = 25, use this formula:
Reduction factor: 85 – (50 + 25) = 10
Reduction percentage: 10 x 2.5% = 25%
Reduced Pension at age 50 = P (1-0.25) = 0.75P
Since I don’t know Tf’s 5 highest salary years and I don’t have a teacher’s access to the calculator, I won’t be able to figure out their exact P value. So, we’re going have to estimate.
Using her current gross salary of $75,000 * years of service * 0.2% = $75,000 * 25 * 0.02 = $37,500/year.
Since there are two of them, that would be $37,500/year * 2 = $75,000/year. Applying the reduced pension formula, we get 0.75 * $75,000/year = $56,250/year
A reduced pension amount of $56,250/year would require a portfolio size of $56,250* 25 = $1,406,250 to generate.
So, is giving up 18 years of their lives doing something they don’t love worth a $1.4 million dollars?
I could’ve also had at least a million more if I worked a few extra decades, but to me my time is worth more than the money. I only have one life to live and I don’t want to waste it doing something I hate. They may feel differently.
If they want to talk to another teacher for validation, they can reach out to Kyle, who gave up a sweet teacher’s pension to fast track his time to FI by teaching in Qatar. I don’t think it’ll be a big shock for them anyway since they already know what it’s like to like to teach overseas in Kuwait.
So, while they don’t have enough to retire yet, they’re pretty close. If they continue working for 3 more years and follow through with selling their house, they will reach FI.
They can also choose to stay on to collect their million dollar teacher’s pension by working until their 50s, but that’s not a decision I can make for them. Only they can decide whether the golden handcuffs are worth giving away 18 more years of their lives to teaching.
What do you think? Should TF continue working until age 50 or cash out early? Do you have any additional advice for them?
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