I wrote The 7 Phases of Retirement in 2013 and encouraged readers to submit their plans. You need a road map to find your way to early retirement because you probably won’t get there by accident. Today’s post is from Tracy Ma, one of our readers. Check out Tracy’s plan and tell her what you think.
Tracy’s 7 Phases of Retirement
I have been enjoying all of the articles on Retire By 40 (especially Joe’s 7 phases of retirement) so much that it inspired me to write one myself. Early in life, my husband and I worked hard to discover ourselves and determine our values and goals. We wanted our decision making process to be driven by the bigger picture (our values, beliefs and goals) rather than the money directly in front of us. We wanted OPTIONS and the ability to accomplish our life plan.
We used real estate as an accelerator to plow through our plan. Eight years into it, with ups and downs, we are wiser, wealthier, and still holding onto these properties. The key is to protect yourself with rental income (the “dividend” of your investment) rather than just relying on the value of the real estate. During market corrections, this prevents you from needing to cash out the investments for a long time.
In my 7 Phase retirement plan, I am very happy to say we are our in Phase 5. I am very excited to share my plan and hopefully this will inspire and help you on your journey. So here it is!
Phase 1 –Build a Strong Platform: This is where you build financially healthy habits by slashing debt like a ninja and maintaining discipline. You decide to live under your means and monetize your skills as much as possible.
Right after I graduated from university, I had student debt and I was living in one of the most expensive cities in Canada. Rather than accepting that it would take many years to slash this debt, I decided to be creative and to build multiple streams of income. I found a cheap place to rent and I used my engineering salary to pay for my expenses. The surplus after expenses was invested in whole life insurance and stocks to start a small savings account. I also busted my butt for two years as a tutor and a model to pay off my student debt.
Phase 2 – Grow Your Financial Fortress: Earn more, spend less, and invest like a rock star. When you are young (especially if you don’t have children), this is the time to take the greatest risks because you have time on your hands to handle volatility and recover from bad periods. Invest in securities like stocks, or businesses, or real estate.
I focused on real estate. With a double income and no kids, my husband and I decided to repurpose our incomes. My husband paid for most of life and housing expenses. The majority of my salary went straight into savings, purchasing real estate properties, and renovations. We became landlords by buying a new home and renting out our current home: twice. We also rented out the apartment in our existing home, which paid for our vacations and property taxes.
Phase 3 – Have Your Fortress Start Paying you: Start enjoying the fruits of your labor by using your investment income to accomplish your goals like going back to school, going on a nice vacation, or achieving your dreams. My husband and I achieved a lot with our
investment income. We took part-time university courses, went on several vacations, and when we decided to start a family, we prioritized the rental income to pay for our nanny: a dream come true. We also continued to live below our means (as much as you can with twins) with a large proportion of my salary going straight into buying/renovating properties, and partnering up with family to continue this path.
Phase 4 – Pursue your Passions/Interests: You now have the courage and financial means to change directions in life because of your awesome discipline and habits, if you choose to do so. This phase is where you can make life decisions based solely on interests like deciding to take a sabbatical from work, investing in education, volunteering, embarking on a new direction, or starting a new business. When my kids started school, it freed up our rental income to pay for housing expenses. At the age of 35, I decided to take a year-long sabbatical that I enjoyed so much that I left my engineering job to pursue full-time entrepreneurship based on interests.
Phase 5 – Build Your Safe haven: Protect your investments so you can continue on your new journey forever! Life throws curve balls and if you have children, they can be expensive, so be prepared as best as possible with contingency plans. Continue to live under your means, earn extra side income and use that income to reduce risks to your wealth. For example, you might transfer your investments to safer vehicles, or aggressively pay down mortgages or consolidate your investments to reduce liability. All of my real estate properties have mortgages so we plan on paying them down aggressively, and zeroing out our mortgage. We also plan on diversifying our holdings to include dividend and blue chip stocks. This is where we are right now.
Phase 6 – Reach your Financial Nirvana: This is very, very close to reaching full retirement. This is where all of your life choices are on your own terms because you have enough investment income to live comfortably and cover all of your family needs. To do this, we plan on consolidating our real estate properties to have a few paid out mortgages, which would drive up the cashflow. When our kids are older, I plan on renting out the apartment in our home or move out to convert it to another rental home and downsize to a smaller space. My husband can start a new journey, if he wishes to do so, like starting a new business based on his passion or working as an independent consultant, or taking a long sabbatical. Or we can both not work for periods of time to go on vacation if we choose to do so.
Phase 7 – Reach your Financial Freedom: This is when you decide to stop working for good and enjoy full retirement whether it be volunteering, travelling and/or spending time with family. You can start drawing down from your retirement fund/pension when you choose to do so (or when you’re forced to by the government!)
Some of the steps are purely optional, like phases 4 and 6. It really depends on what your values and goals are in life. Although it is tempting to retire early by selling all of our properties, we have no need to draw on these funds because we want to continue to pursue interest-based work, and to learn and create new things until our bodies cave in and force us to ‘retire’ traditionally in Phase 7. This is not for everyone and it really depends on what you want out of retirement
Tracy Ma is a mother of twins and a real estate investor in Ottawa, Ontario. Connect with her at Financial Nirvana Mama where she shares free tools, videos and articles on managing your real estate portfolio. Her mission is to empower women on investing to reach their financial nirvana.
I would love to read about your 7 phases of retirement. Write them up and send it to me for publication. I promise it will be helpful to you and to other readers as well.
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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