Never Retire Profile of the Week
Buck Martinez
We’re all missing live sports during this global pandemic, so maybe this is a good time to recognize an icon of Canadian baseball broadcasting: 71-year-old Buck Martinez. Before he became a colour commentator and then play-by-play announcer for the Toronto Blue Jays starting in 1987, Martinez played professional baseball for 20 years as a catcher (and, in one outing, a pitcher), with his final six seasons as a Blue Jay. He also managed the Jays for a few years and has written three books, the most recent being Change Up: How to Make the Great Game of Baseball Even Better. Since 2016, Martinez has also joined the team that brings us the World Series – an indicator of the respect he has earned in his long career as a player, manager, commentator, author and passionate fan of the game. If you’re ever in Dunedin, Florida for spring training, you’ll see Martinez watching in the stands with his family, chatting with fans, and catching up with the players before and after the games. Once we can have Major League Baseball again, let’s induct Buck Martinez into the Never Retire Hall of Fame!
There’s a reason why the most frequent question we hear from readers is, “When can I retire?” That’s because we all want to achieve personal financial freedom. For some people, it may be a primary life goal, or at least among the top ten. So it’s natural to ask, “When will I have saved enough money?”
Beyond its degree of personal satisfaction and challenge, your career or your business is a vehicle for achieving financial independence. With that independence, you are then free to focus on becoming your best self – which doesn’t necessarily mean leaving your work behind. It just means having choices to design your life as you desire.
We cannot be at our best with constant worries about money. Often, we can’t even fully enjoy the pleasures we already have, let alone plan for an exciting future. Instead, we’re cranky, stressed, short tempered, distracted, irritable and gruff. We all know how these feelings get in the way of our relationships at home and at work (check out The Ladder to Financial Independence.)
With financial independence comes the flexibility that lifts the dark clouds of worry and allows us to focus on becoming a better spouse, parent, sibling, citizen, co-worker, philanthropist…whatever we can and want to be.
The Dri Financial Group’s guiding philosophy is “Live Well, Stay Rich and Never Retire.” Achieving financial independence is the “Stay Rich” part. When you achieve your definition of rich, you can become your best self and “Live Well.”
So how much do you need to achieve financial independence?
The answer to that is a moving target. Obviously, the younger the desired retirement age, the higher the amount any business owner or professional needs to accumulate. To obtain the “right” number, we use financial planning software to model the family’s net worth from today until the date of second death.
The model must be flexible enough to include major outflows such as having children, buying a house, paying off debts, funding education, and so on. The model also makes assumptions on inflows, investment returns, tax rates, inflation, and life expectancy.
A plan that projects 40+ years into the future is bound to be wrong, so proceed with caution and be prepared to adjust along the way. Yet despite requiring course corrections, such a plan isn’t worthless in our decision-making process. Every major decision can be modelled into the projection for an estimate of its long-term implications. For example, if a couple wants to own a bigger house or increase their discretionary expenses or send their children to a private school, incorporating these costs into our financial planning software allows us to calculate the long-term implications of these expenses for the family’s long-term goals – which may include retiring at age 55.
The retirement projection provides the business owner or professional such as yourself with the annual savings requirement and the expected date of retirement. This information removes the vagueness around a question like “When will I achieve financial independence?” and is the first step in reaching your goal to Live Well, Stay Rich and Never Retire.
In addition to the approach I outline and advocate above, which involves creating a customized and detailed plan for financial independence, I can also provide two rules of thumb as rough guidelines or considerations.
1. Focus on the capital requirement
If we assume an annual withdrawal rate of 4% and a lifestyle expenditure of $50,000 in the first year of retirement, then you will need to save $1,250,000 ($50,000 *25= $1,250,000). Notice how simple the math is: no fancy calculator or PhD required! So financial independence is achieved when an investor accumulates a portfolio of $1,250,000.
We could also try the rule of 33, which assumes a 3% withdrawal rate and retirement savings of $1,650,000 ($50,000*33=$1,650,000).
Or the rule of 20, which assumes a withdrawal rate of 5% and a retirement savings of $50,000*20=$1,000,000.
2. Focus on the income requirement
This method considers an investor financially independent when their investment portfolio generates residual income (passive income) that exceeds their personal expenses.
For example, if a couple accumulates a $2,000,000 investment portfolio which generates $60,000 of net after tax income per year, and their annual lifestyle requirement is $50,000, then this couple will have achieved financial independence because their cash flow requirement is completely covered by the income generated by the investment portfolio (without having to draw down the capital).
There are just a few more requirements for this to work: a) The investor can only spend the income and never touch the capital, b) the income generated by the portfolio ($50,000) and the capital ($2,000,000) must both increase by at least the rate of inflation, and c) the investment portfolio must be diversified, the income must be generated from multiple and uncorrelated sources (for example, dividend paying stocks, income producing real estate, inflation indexed annuities), and the investor should consider any guaranteed pensions available from our government and from company plans.
Note: The above methods may not account for taxes, inflation, or unexpected retirement expenses and should only be used a guidepost and not as the basis for dependable long-term retirement planning.
In short, without a financial independence number, you – the investor – will wander throughout your career without being clear on the amount of savings and the type of investment required to become financially independent. This may cause you to experience lifestyle creep or complacency and result in postponing the time of life when it’s possible to live your best self.
My key messages are consistent and dependable. Create a detailed plan for financial independence that best suits your current situation and future dreams. Don’t rely solely on broad guidelines such as those above – instead, have a personalized plan uniquely tailored to the specifics of your life. And hold in mind what you are trying to achieve: the freedom to make choices about how much and what kind of work you will do – and how to Live Well.
Did this article resonate with you? What did I miss? Send me a note and let’s start the conversation.
The process of finding an Advisor can be overwhelming. Our process is designed with you in mind. Its structured framework helps you make an informed decision about engaging an appropriate advisor.
Call me if you in want to map out how you can Never Retire. You can also subscribe to our Never Retire Newsletter, contact us to order a complimentary book, register for one of our events, and call us to meet with a Certified Financial Planner. We offer you a range of services from a financial plan to investment advice or helping you take advantage of our investment models. Call me at 416.355.6370 or email me at richard.dri@scotiawealth.com.
source https://richarddri.ca/when-can-i-retire-and-how-much-do-i-need/
Dri Financial Group 