This is a guest post from The Rat at Ending The Rat Race. The Rat is a young Canadian investor and entrepreneur hailing from the east coast.
After earning a Bachelor of Commerce in the Maritime Provinces, he returned home at the age of 21 to work in various capacities, most of which were in the private sector. There, he had the opportunity to accumulate over ten years of business experience in a range of senior management levels, take advantage of real estate opportunities, and invest in equities and other types of investment vehicles. In January 2010, he was able to retire and hence “end the rat race” in his early 30’s.
Going by the pen name ‘The Rat’, the author has etched out and created a small place in cyberspace through his website “Ending The Rat Race” with the intent to provide value to readers both in terms of content and sharing of real-life experiences.
Officially launched in September 2008, Ending The Rat Race is a personal finance blog that has as one of its key purposes – the sharing of various personal finance topics with others having similar interests, and learning from one another.
When I approached Canadian Tax Resource Blog to see if there was any possibility in entertaining the idea of me writing a Guest Post, I was absolutely thrilled when I got my response, to say the least. And why would that be?
Firstly, I had been following Canadian Tax Resource Blog for quite sometime now and been subscribing to updates via e-mail. It’s definitely one of those well-informed, “go-to” sources for quality information as it relates to income taxes, investing, and personal finance topics.
Secondly, I was excited with the prospect of being able to share part of the story as to how I was able to retire and leave the workforce at such a young age and hence ‘end the rat race’. I could think of no avenue that would be more fitting to share some of this information. To put things quite simply, a retirement strategy with no tax considerations can be considered by many to be no strategy at all.
Why do I say this so boldly? Well, we live in a country where taxes play such a major role in the way we function, whether it’s through our day-to-day jobs, spending money on goods and services, or trying to accomplish our retirement objectives. Trying to effectively implement a plan without consideration for something that permeates all aspects of our lives would be difficult indeed.
Of course, it is literally impossible for me to paraphrase everything that I did that enabled me to retire in my early 30’s in one post; however, in the spirit and intent of this site, I will highlight three main areas to which I focused that enabled me to reap big benefits. Keep I mind, I am not a professional or expert, so get some advice before following anything I say!
1. Your Principal Residence Can Be A Gold Mine:
We may have all heard it before, “yeah yeah, I know, if I sell my principal residence, the money I make from the sale isn’t taxed.” On the surface, this petty little statement may seem like a ‘note-to-self’ type thing, but in reality, being able to enjoy a tax free capital gain on the sale of your home is one of the greatest tax havens we have in our country – at least in my view.
Canada’s Chartered Accountants’ 2009-2010 Personal Tax Planner Guide specifically states “if certain criteria are met, you will not have to report any capital gain when you sell your home.” Some of these criteria will likely include you moving into and living in your residence as soon as you bought it, and designating the property as your principal residence. It’s important to also note that “you can only designate one property as your principal residence in a year.”
If done properly, embracing the fact that any capital gain can be exempt from tax, can potentially allow one to reap major benefits. From a personal standpoint, I am currently living in my 3rd home and in the same community.
The successes I have been able to attain in selling my homes did not encompass any kind of ‘buy and flip’ strategy that we often see on television shows or some personal finance book focusing on real estate deals of this nature.
The first home I lived in required a lot of renovations. I estimated that in order to get the house ‘up to snuff’, I would have to invest at least $25,000 into the property. Because housing prices were fairly stagnate at the time (and remained for a period of ten years or so up until that time), my main objective instead was to sell my first home, and try to eventually get a better and refurbished home for roughly the same price. It was as simple as that.
Keep in mind here that even though I wasn’t necessarily looking for a gain on the sale of my home, money that can be saved that would have otherwise eventually been spent is food for thought. Fortunately, I was able to sell my first home at around $80,000 and live with a family member until the second home was lined-up and the deal signed.
Before I knew it, I was living in my 2nd home. Although there were some things missing from this one (such as not having new windows, no paved driveway, and no siding), I was happy because it had been well kept. There was a fireplace both upstairs and downstairs, wooden floor throughout the home, a nice backyard, and there was a shed to store things like my lawnmower and BBQ.
After a couple of years or so, I started to notice changes in the environment and community I was living in. The newspapers and media were constantly talking about new infrastructure and resource development projects starting up, as well as job creation, and I knew it was a matter of time before the real estate market followed suit and home prices would rise.
It happened, and it happened fast. Homes that were fetching $80,000 only a few years prior were not well into the $120,000 range, and increasing every few months. By the time they had surpassed the $160,000 mark, I told my future wife (we weren’t together that long by this point) that I was putting the house up for sale. I had absolutely no plan as to where I was going to live, but to me, housing prices were rising so high, I wanted to take advantage of the market conditions, even if that meant living in an apartment before I made my next move. For those who are curious, I ended up selling the home for $185,000 on a private sale. Yep, I put the ‘For Sale’ sign on my lawn and held a private auction for interested buyers to submit the price they were willing to pay by a certain date.
With the home sold, I was now on the hunt for an apartment or some type of living arrangement that would suit my needs for the time being.
And then, as if a gift fell from the sky, my employer informed me that they would offer me to live in a company home. I was ecstatic. With roughly ten years of being with the company, most of which were in senior management roles, I was being offered the chance to significantly reduce my living expenses.
My 3RD home, the one mentioned in the paragraph above, was the home that I eventually bought outright from the company I worked for when I left the workforce. By then, I was able to finally have all the amenities of a nice little home such as a paved driveway, garage, new windows and siding.
2. Don’t Focus Exclusively on RRSPs:
When I visit other great personal finance blogs, I often stop and comment on posts that ask questions such as “Should I Pay Down My Mortgage or Invest?” or “Should I Pay Down Some Of My Mortgage or Invest In RRSPs Instead?”
If there were one single piece of advice I can give to anybody that is receptive to listening, it would be to place the utmost importance on becoming ‘mortgage free’.
Once your home or principal residence is paid, you can plow most of your hard-earned dollars into investments for retirement purposes. Of course, even without a mortgage payment, you will still incur expenses such as utilities, food, insurance and so forth, so it’s important to keep that in mind.
The next question that often comes about is the following: Where then, should I park my money? How many articles have your read in some of the leading business magazines that highlight a family’s personal finance situation, and the following is what we often see:
Family Name: ‘The Jones’”
Where They Stand:Assets: Home: $300,000 RRSPs: $150,000 TFSA: $1,000 Vehicles: $20,000 Liabilities: Mortgage: $175,000 Net Worth: $296,000
What I’m about to enter is a very subjective part of this discussion, but what do you see missing? In my view, it’s the non-registered component of an investment strategy that’s missing.
Don’t get me wrong. I think RRSPs offer a great way to save for retirement purposes, and for tax season purposes, but it’s exactly that – one option. How many people do you know invest almost exclusively in RRSPs and plow them all into mutual funds that charge fairly high management fees just because a banking officer or ‘mutual fund representative’ told them to do so? I’m not trying to be cynical or say that one has to become an investment guru in order to be successful – it’s just that there are more options out there than just RRSPs.
If there’s one thing I would like stress in terms of importance, it is the cash flow stream that one can generate from having a non-registered account.
Of course, by earning investment income from sources such as interest earned on Guaranteed Investment Certificates and dividends from corporations, there will be tax consequences. However, by establishing a cash flow stream from a non-registered account, you are able to have access to cash that would otherwise not be as accessible as say, a registered account.
As my Tax Planning Guide states, “the tax benefit of an RRSP is that the RRSP does not pay tax on its income. Thus you can save for retirement tax-free.” I realize that this is an attractive component to investing for the future, and I’m not advocating against RRSPs. It’s just that there are also tax consequences to consider when withdrawing from them when the time comes.
3. Working In The Private Sector Can Pay Hefty Dividends:
If there is one thing that I can look back on and say that I’m pleased to have done (and pleased that it’s now over), is taking on roles in the private sector with a lot of responsibility and at a young age.
Personally, I think it’s easier to sleep only 4 hours a night when you’re in your 20s than say in your 30s or 40s. Sometimes, making big sacrifices early in your career can lead to earning hefty dividends in the years to come. I did this by taking on various senior management positions with my employer, and from that experience, I was able to ‘hang up the skates’ at a much earlier age. I recall getting bonuses over the years, and I can tell you, they really helped along the way.
You know the 3rd home I mentioned in #1? If I had not been with my employer for virtually my whole career, that opportunity would literally not have presented itself.
I’ve read numerous posts in the personal finance blogosphere about people wanting, for lack of better words, ‘easier’ or more ‘comfortable’ roles because they don’t particularly enjoy their job. That’s fine and there’s nothing wrong with wanting to live a happier life, both on and off the job. The only thing is that there are consequences to making big decisions in life.
Whether its taking that job in a more obscure or isolated location, away from a more urban life where amenities are more plentiful, or taking on a more stressful position for more pay, making difficult sacrifices at an earlier age can allow one to possibly reap heftier dividends over time.
In summary, if I had to choose one word to represent each of the three areas of focus mentioned above for the investor to reflect upon, it would be ‘timing’ (for Principal Residence), ‘patience’ (for Investing), and ‘perseverance’ (for Working).
By gauging the timing of opportunities that arise, having the proper patience and consistency in investing, and giving the energy and enthusiasm to one’s job and work environment, one can combine these things to achieve their respective personal finance objectives.
This post is far from informing others with a road map as to ‘how to get there’. Instead, my hope is that it motivates others to achieve their objectives because everyone utilizes different approaches as it relates to their path to retirement. People have varying levels of risk tolerance, investment style, and approach to working in general. You just have to dive in and find what works for you.
Hopefully, and with a bit of luck (because everyone needs it in my opinion), you are able to achieve your personal finance objectives in relative short order.
Best of luck!