The Nine Year Plan

I’ve come to the conclusion that I hate work.

Well, let me rephrase that. I don’t hate work. I actually like work. I like the people I work with. The work is somewhat interesting, and occasionally challenging. But, I hate the idea of the structured daily grind, the rat race, the nine-to-five, whatever you want to call it. I also have a lot of side projects I’d like to work on, but with the newest edition to our family, I never have time for side projects. I work all day, come home, handle nightly duties (feeding, bathing, housework, paperwork, etc.), crash, repeat. On weekends I try my best to give my partner some time off from babysitting, and the rest of the weekend I spend time taking care of other errands and what not. In short: I spend so much time supporting life, I don’t have a life.

Now, don’t get me wrong.. This is all natural for me, at this stage in my life. A new family, a steady job, paying off car, house, condo, etc., all means that I have to make some sacrifices. Unfortunately, those sacrifices are things like pulling together a portfolio to participate in the annual Contact Festival, finish work on PART so that it is in a state that can be used by the public (truth be told I’ve used it for managing my investment portfolio for a few years now, and it works great), and some other side projects..

And for those reasons, I hate work.

So, what to do?

I’ve been crunching numbers, and mulling over what would be realistic goals, and pulling together my vision for my financial future. To that end:

  1. Retire from full-time work in 9 years, working at most 6 months out of the year
  2. Have an average before-tax salary of $100,000

There, one vision, two goals. As I said, I don’t mind work, but I want time to do my own things. And having six months of free time every year, will certainly afford me with the time to work on those things. The assumptions baked into the above:

  1. The $100,000 average before-tax salary will naturally adjust by inflation
  2. Any debt load I have in 9 years will be covered b the $100,000 salary, with enough to have a comfortable lifestyle

To accomplish those goals s going to take some fancy financial engineering. One of the biggest logistical challenges is that the bulk of my investments are tied up in either my LIRA or my RRSP; this means that any income and/or gains from those investments will not be available to satisfy goal #2. My non-RRSP/LIRA funds are relatively minimal at the moment: the past few years I have shifted many investments (primarily US companies) into my RRSP to take advantage of the zero withholding tax Canadians have when they hold US investments in registered accounts.

So, I am essentially starting from ground zero. If we do some quick back of the envelope math, to generate $100,000 in income at an average yield of 4% (a number I literally pulled out of the air, but it is fairly trivial to find reliable ETFs and/or individual companies to pay an average 4% yield) would require $2.5million in capital: $2,500,000 x 4% = $100,000.

Luckily the entire $100,000 does not have to come from investments. Up until recently I was a Project Management Consultant, and as such I still have my corporation. If I were to go back to project management consulting, it would be a fairly easy task to pick up at least one six month contract per year. If we do some more back of the envelope math, even at a very low hourly rate of $70/hour (which is the low-end of project management consulting rates in Toronto, in the finance sector), working six month yields:

Days per Week 5
Weeks per Year 26
Hours per Day 7.5
Total Hours 975
Hourly Rate $70
Total Revenue $68,250
Less CPP Contributions $969.15
Net $67,280.85

A prudent decision would be to take out the $50,000 salary I need and leave the other $17,280.85 in the corporation “for a rainy day”; an added bonus!

So of our $100,000 target, there is now $50,000 remaining. Looking at the March results, I am currently generating approximately $1,000 net annual passive income that is not locked into a registered account; this leaves $49,000. Generating that much passive income is not an impossible task, but it is a daunting one: how to generate $49,000 in annualized income in 9 years? This is a classical risk-reward problem: the more risk you take on, the higher your potential reward.

If we use the benchmark Canadian Couch Potato Returns from the Couch Potato website, the balanced portfolio has a 10 year CAGR of 5.38%. $49,000 in passive income at 4% yield is $1,225,000 in capital required. At 5.38% CAGR, that means we need $765,000 today, so that it compounds at 5.38% over nine years to result in capital of $1,225,000. Regrettably, I do not have $765,000 lying around.

Some other considerations:

  • I am gainfully employed at the moment at a major Canadian company; assuming I continue to be employed, my salary will go up each year (which I can redirect to investing), and I can continue to participate in the company’s employee share ownership plan.
    • The plan gives me an instant 50% through the company’s match (i.e. for ever $1.00 the company kicks in $0.50), so I am making huge gains.
  • Who knows where the housing market will be in 9 years? We may sell off our property and become renters: even after paying rent, $100,000 in pre-tax income will be more than enough, assuming that the relationship between $100,000 in pre-tax income and rents remains constant. I.e. if I were making $100,000 right now, I could still afford to rent. Assuming that the $100,000 inflation-adjusted in 9 years is enough to cover rent inflation-adjusted in 9 years, I would still be okay

So while I do not have the capital now, there are options available such that in 9 years I can fulfill my vision.

What are your thoughts? Knowing you require $49,000 annual income in 9 years time, what would you do?