By Richard Cleaver
Richard started working in the Canadian financial industry in the 1980s. Over the next few decades as Richard moved up the ranks and held various senior level executive positions within the banking and insurance sectors, he and his wife never wavered from a decision they made in 1991 which was to 'pay themselves first'. Now, Richard is at the stage where in the summer of 2018 he will be joining his wife in retirement.
This post explains what Richard and his wife have done to achieve financial freedom well in advance of most North Americans.
In addition to sharing what they did to achieve financial freedom, I hope you take away another message from Richard's story and that is the importance of 'retiring TO something versus retiring FROM something'.
It all seems so hard, doesn’t it? Setting goals and trying to make them happen?
Especially financial goals.
And especially one of the most challenging financial goals: achieving financial independence.
If I have learned anything about achieving financial independence it is this: wealth grows slowly, over a long period of time. There is no shortcut to gaining financial independence. Not for me. Not for most us.
I’m looking forward to sharing with you some of the steps that I took to achieve financial independence. Charles was kind to offer me an opportunity to tell my story about how I achieved my financial goals. My hope is that my experience will provide a perspective as you reflect on your own financial goals and how you might achieve them.
If I can achieve financial independence, anyone can.
The Importance of Setting Goals
I’m 61 years old. I’ve been working for 39 years mostly in financial services as an information technology executive. I’m currently the Chief Information Officer for a Canadian insurance company. I retire in another 4 months. A little later than originally planned but nonetheless ready to retire on all fronts: emotionally, mentally and financially.
My wife and I are so excited to begin a journey of new adventures and experiences during this time of life. We have a beautiful 40-foot diesel coach that we plan to take south during the winter months. And we have a new set of goals for ourselves. Different from when we were raising our family. We will continue to live our dreams, helped enormously by achieving financial independence.
In 1989 I read a book written by Stephen Covey: The 7 Habits of Highly Effective People. There were two very important lessons that I took from his book: start with a plan and do something about the plan.
Covey challenged the reader to construct a personal mission statement and to highlight the reader’s values and aspirations for life.
I wrote mine down. And I have held onto them for life -- almost 30 years now.
Here are a few of them:
I am an outstanding husband and father
I love my family and I build a close relationship with my wife and children by showing care, respect and kindness. I take sufficient time to help each realize his or her maximum potential and self-fulfillment. I help my wife and children in their spiritual, intellectual, social, professional and financial needs.
I foster intellectual growth
I develop myself with a depth and breadth of reading and thought. I read regularly each day. I select my reading from the best books and articles of the day.
I am honest in all things
I am honest with myself first recognizing that to be honest with other people requires that I first be honest with myself. I listen to my conscience on all decisions.
I maintain a strong and healthy body
I eat, sleep and exercise in such a manner as to maintain a high level of energy.
I value my time
I manage my time to gain control of the events in my life. I manage what I do according to my values.
I am financially independent
I have developed an income that will be present whether I am capable of working or not. My family’s needs are taken care of in such a way that they will never be without food, shelter, transportation or education.
Can’t help but catch that last one huh?
I Am Financially Independent
Of course, at the time I first wrote that statement, I was not financially independent. Nowhere near it. I was literally drowning in debt and struggling to make ends meet. I wanted desperately to be financially independent. That was my aspiration.
Aspirations are wonderful. They are, sadly, useless if not supported by specific, actionable goals and objectives.
And so, in December of 1990, I set up the following financial goals:
- Invest and manage money wisely;
- Pay off the mortgage and other debts;
- Provide for the children’s education;
- Maintain the family’s standard of living in the event of death or disability;
- Become financially independent;
- Maintain standard of living during retirement;
- Preserve the estate for heirs.
Job done? Not quite. The goals were still not very specific. A bit like having a goal about losing weight without stating how much weight you are wanting to lose.
Fear, Uncertainty, Doubt
A friend of mine passed me this story about financial freedom at 65. I have no idea whether this is accurate and I do not have any sources for the data but it did help me focus on my financial goals.
Financial Freedom at 65:
- 1 person will be financially independent;
- 8 will work to maintain a lifestyle;
- 14 will work to keep food on the table;
- 24 will be dead;
- 53 will rely on the government to survive.
CIBC released the findings of a study that they had conducted in February of 2018. They found that 32% of the Canadians surveyed between the ages of 55 and 64 had nothing saved for retirement. And, of those that had saved something, almost half had saved less than $250,000.
What number did these Canadians think they needed for retirement?
According to the survey, only 5% of Canadians had been able to save that amount or more for retirement.
Now perhaps all of these folks work for organizations with defined benefit pension plans. Or perhaps they have fully paid off homes in places like Vancouver and Toronto where they might be able to sell off their houses and downsize.
My suspicion is that the story my friend passed me about financial freedom at 65 is not too far from the truth.
And yet it really isn't that hard to achieve financial independence.
How I Achieved Financial Independence
By now, you can probably guess what I am going to tell you as being the first and most important step: set your goals.
Make sure that the goal that you are working for is something you really want. Your goal must be consistent with your values and you must be passionate about achieving your goal.
A goal cannot contradict any of your other goals. For example, you can’t buy a $750,000 house if your income goal is $50,000 per year. And you can’t save $10 million for retirement if your income goal is $50,000 per year. Not unless you get very, very lucky with a lottery ticket!
Write your goal in the positive instead of the negative and write the goal out in complete detail. Be specific! And make sure the goal is high enough.
-- Gene Donohue
I had to work through two key questions in developing my goal to achieve financial independence.
- How much money is enough?
- What is the purpose of my investment program?
The first question is personal and unique to my situation. What is enough for me might be too much for you or not enough. If Charles ever invites me back, I might post on how I reached my number. Regardless, it is really important to have a specific objective.
Very few people have an investment plan. They do not know how much they need for the future and they do not have any goals or objectives for their investment program.
I knew that I had to make a plan to support my specific goal.
The financial services industry has numerous experts: financial planners, investment brokers, lawyers, accountants, insurance brokers. This may sound a bit harsh but many of these experts are ultimately motivated to sell their services; they make money whether you do or do not.
I was determined to manage my own money and to keep my investment costs as low as possible.
Key Principles and My Overall Plan
I was able to distill all that was necessary to achieve financial independence into a few key principles. You may be surprised at how simple they are.
- Pay yourself first, always.
- Spend less than you make, always.
- Avoid the use of credit, almost always.
- Enjoy life and the peace of mind that comes from having financial independence.
Small actions done consistently will achieve remarkable results over time.
I had 15% of my after tax income automatically deposited into my investment account.
15%, every two weeks, for almost 30 years. Some years were even higher. If I had only started earlier! But, starting in my 30s meant that I had to set more aside to reach my financial goals.
Without any capital growth, those contributions alone would have been much higher than the average retirement savings held by Canadians today at retirement age. Not enough for me to achieve my goal of financial independence but an impressive enough result on its own right. Combined with capital growth and dividend reinvestments, financial independence was achieved seemingly without any significant effort. Automatically!
I built a plan to achieve financial independence supported by an investment policy. It describes why I invest and how I invest. I've taken an excerpt from my own investment policy although I have made a number of changes to make it a bit more generic. I found the investment policy very helpful in keeping me grounded with my investing approach over the years.
My Investment Policy covers how the portfolio will be managed, and includes acceptable and unacceptable asset classes, investment benchmarks, asset allocation strategy, investment strategy, funding strategy, and new investment strategy.
Acceptable and Unacceptable Asset Classes
- Acceptable Asset Classes
- Bonds and Cash. The portfolio will contain bond funds including corporate bonds, Treasury bonds, and municipal bonds. Cash will usually mean money market funds, short-term commercial paper, and other short-term debt instruments.
- Stocks. The portfolio will include stock funds including Canadian and U.S. stocks. These stock funds will be managed in a diversified manner, spread across countries, industries and companies.
- Other Assets. The portfolio may also include other assets, which would typically mean Real Estate Investment Trusts (REITS) that, in an asset class sense, are not viewed as "stocks" because of their unique nature.
- Total Assets.
- At no time will the portfolio invest more than 10% of its investable assets in any single company, stock, or individual investment except broadly based ETFs.
- Short Selling or Buying on Margin.
- The portfolio will not, at any time, invest in activities that require the borrowing of cash or securities, i.e., buying on margin or short-selling as these add significant risk to the portfolio. Leverage will not be used in the portfolio.
- Unacceptable Asset Classes.
- The portfolio will not invest in asset classes where there is no discernible specific advantage, i.e. derivatives, collectibles, foreign currencies, options, futures, etc. The only exception to this case would be the use of the options or futures as a means to increase incremental earnings on assets that the portfolio already owns.
- Stage 1. The weighted investment benchmark for Stage 1(pre-retirement) is:
- A portfolio model with roughly a 20/80 split between Bonds and Equities. The Bonds will be measured by the DEX Universe Bond Index. The Equities component will contain a weighting between Canadian Equities (30% of the portfolio) and U.S. Equities (50% of the portfolio). The Canadian Equities will be measured against the TSX and the U.S. Equities will be measured by the S&P 500.
- Stage 2. The weighted investment benchmark for Stage 2 (post-retirement) is:
- A portfolio model with roughly a 40/60 split between Bonds and Equities. The Bonds will be measured by the DEX Universe Bond Index. The Equities component will contain an equal weighting between Canadian Equities (30% of the portfolio) and U.S. Equities (30% of the portfolio). The Canadian Equities will be measured against the TSX and the U.S. Equities will be measured by the S&P 500.
Asset Allocation Strategy
- Stage 1.
- Until retirement, the assets are not expected to yield much income. They will be managed for growth with a limit on risk to capital in the form of realized losses and with a goal of maximizing after-tax returns. The portfolio will have the following asset class targets:
- Stage 2.
- After retirement, the asset allocation will be as follows:
- The portfolio investment strategy will favour passive management with a focus on value investing. Monies will be invested in assets that have a proven record of adding value over and above the stated benchmarks. Assets will be invested to minimize current taxes, realize long-term capital gains, and to defer, as much as possible, long-term capital gains until retirement.
- Individual assets that are actively traded will be accumulated through TFSA or tax-deferred, rather than taxable accounts. In this manner, the overall portfolio will not be impacted by taxes resulting from increased turnover.
- Funding of accounts will be consistent with the “priority of money” namely, first, free money; second, tax advantaged money; and third, tax efficient and wise investing.
- The portfolio will be funded through regular deposits to investment accounts and dividend reinvestment.
New Investments Strategy
The portfolio will at all times maintain a diversified set of assets that will aid in the achievement of personal goals.
- New Investments.
- The portfolio will not invest more than 7.5% of the total portfolio amount in any new or individual asset or investment. ETFs do not fall under this category unless they have portfolios with less than 50 assets.
- Investments in Company Stock.
- At no time will the investments in any single company stock in the portfolio account for more than 10% of their total retirement assets.
- Unlisted Investments.
- Allocation will be limited to 5% of the total portfolio amount.
Investment Monitoring and Evaluation
- The portfolio will be monitored monthly or more often as the need requires.
- The portfolio will be reported on monthly.
- The portfolio will be rebalanced on an annual basis. Rebalancing will attempt to minimize transactions costs and turnover through using new money to rebalance portfolios. The portfolio will be rebalanced using range-based rebalancing,
- Trade confirmations as they happen; monthly statements from the custodian; and an annual report on portfolio performance. Success will be measured by the achievement of the Goals and Objectives. (There it is again...Goals and Objectives).
This Investment Plan may be modified at any time based on changes in objectives or circumstances. The amount of the monthly deposit to the retirement and investment accounts will also be evaluated from time to time.
What Lessons Have I Learned Over The Years?
- Have a specific, measurable, attainable, realistic and tangible goal. “If a man knows not what harbor he seeks, any wind is the right wind.” -- Seneca
- Paying yourself first is the most fundamental and important cornerstone to achieving financial independence. Spending less than you make is just as important. Anyone can do those two things. So simple and yet so critical.
- Building wealth takes time and patience. Start early! I wish I had started much earlier. I waited until I was into my thirties before I started investing.
- Manage your own money. Many people I know fear the stock market. And yet they trust an advisor. There is only one person that should be concerned about your financial goals: you (and your partner of course).
- Invest in the stock market. It is not hard. Charles offers excellent insights on how to invest. Be consistent, be patient, keep your investing costs as low as possible and have a plan. Know what you want to achieve. Keep focused on your goal. And do not worry about market volatility. Markets move up and down due to factors that are beyond an investor's control. But over time, markets will reward the patient and disciplined investor with financial independence.
I hope this encourages you to pursue financial independence as a goal. Getting to retirement was never a goal for me. Being financially independent was the goal. Once achieved, I could call a retirement date whenever I was ready. Retirement can be the most wonderful time of life when you have the peace of mind that comes from being financially independent along with good health and good friends. At least, that is what all my financially independent retired friends tell me!
Note: I sincerely appreciate the time you took to read this article. Please send any feedback, corrections, or questions to email@example.com
Disclaimer: Richard and I have no knowledge of your individual circumstances and are not providing individualized advice or recommendations. We encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.