Episode 118: Why Time Is Your Biggest Ally (or Enemy): The Math Behind Early Retirement Part 1

Listen here on our website:

Or jump to this episode on your favourite platform:

Watch Now!

The Math Behind Retirement and Specifically Early Retirement…

Could you be unknowingly sabotaging your financial future by not fully understanding how compound interest is affecting your investments?

If you’re in your 40s or beyond, you might feel financially secure and even start dreaming of early retirement. But the realities of compound interest could be working against you if you don’t understand how time and contributions impact your financial goals. Many people think they can simply “pause” or “shorten” their saving timeline and still retire comfortably—this episode reveals why that mindset could lead to financial pitfalls.

In this episode, Kyle Pearce and Jon Orr break down the numbers, showing how slight changes in time horizons, contribution levels, or portfolio balance can drastically alter your retirement income. Whether you’re targeting financial independence by age 50 or aiming for a secure retirement at 65, understanding the exponential power of compound interest is essential to avoid mistakes that could derail your plans.

• Discover how your time horizon impacts the effectiveness of compound interest in building long-term wealth.
• Learn how small adjustments to your investment strategy—like shifting equity-to-fixed-income ratios—affect retirement income.
• Uncover the hidden dangers of relying on average rates of return and why consistent contributions matter more than you think.

Ready to reverse-engineer your retirement goals and unlock the true potential of compound interest? Hit play on this episode to learn the strategies that could redefine your financial future.

Resources:

• Ready to take a deep dive and learn how to generate personal tax free cash flow from your corporation? Enroll in our FREE masterclass here. 
• Book a Discovery Call with Kyle to review your corporate (or personal) wealth strategy to help you overcome your current struggle and take the next step in your Canadian Wealth Building Journey!
• Dig into our Ultimate Investment Book List
• Follow/Connect with us on social media for daily posts and conversations about business, finance, and investment on LinkedIn, Instagram, Facebook [Kyle’s Profile, Our Business Page], TikTok and TwitterX. 
• Looking for a new mortgage, renewal, refinance, or HELOC? Reach out to Jon to share some options.

Calling All Canadian Incorporated Business Owners & Investors:

Consider reaching out to Kyle if you’ve been…

• …taking a salary with a goal of stuffing RRSPs;
• …investing inside your corporation without a passive income tax minimization strategy;
• …letting a large sum of liquid assets sit in low interest earning savings accounts;
• …investing corporate dollars into GICs, dividend stocks/funds, or other investments attracting cordporate passive income taxes at greater than 50%; or,
• …wondering whether your current corporate wealth management strategy is optimal for your specific situation.

 Achieving financial independence requires smart planning, especially when it comes to growing your net worth and generating passive income. For business owners, navigating the complexities of corporate structures, tax implications, and investment strategies can feel overwhelming. From understanding capital gains rules to leveraging life insurance for wealth optimization, the right approach can transform your financial future. By aligning your strategy with tax-efficient tools, you can unlock the full potential of your business and investments, ensuring sustainable growth and long-term independence.

Transcript:

Jon Orr: Okay, so many folks, think, this might be a wake up call. This might be the episode you need to hear right now. And really, we’re making this episode. We get a bunch of calls and we’ve talked with a bunch of people who are, I think, either our age, you’re in your 40s, you’re feeling pretty financially secure, you’re on your pathway to securing your wealth and you’re starting to think about retiring early.

You may be maybe your business owner and you’re starting to go like, hey, I’m seeing some returns here. I’ve got some retained earnings. I’m making money. I feel pretty confident in my financial stability and my future. Maybe I don’t have to work, you know, farther than I think I have to work. Maybe I can retire in 10 years. This episode, folks, what we want to do is shed some light on the realities of compound interest, the realities of investments and like the likelihood. of your retirement trajectories and your plans. That’s what we’re talking about here in this episode. Kyle, let’s dig in.

Kyle Pearce: Awesome, awesome. I’m super excited. Now, you know, this episode is going to be all about compound interest. I have a funny feeling that we’re not going to be able to get all of our ideas out in this one episode. So we’ll likely have a couple of episodes. Yeah, we’ll just go faster and make sure no one understands anything. But I do want to summarize though, first and foremost, that compound interest is and I think it was Einstein that was, you know, I don’t know if this is an official quote, but like he was like, this is like the eighth wonder of the world.

Jon Orr: Gotta talk fast. We’ll just speed it up. It’s the ninth. Ninth?

Kyle Pearce: ninth wonder other eight I don’t know I have no idea but whatever whatever the the number of the number of wonders that are in the world it’s like the extra one because of how powerful it is and can be which is great and is is referenced all the time when we’re talking about wealth wealth building investing and planning for your financial future the problem though is that it’s also extremely powerful in the opposite direction

Jon Orr: I don’t know.

Kyle Pearce: if we don’t understand what matters when it comes to compound interest and compound growth. So I think we all understand that, you know, there’s going to be this amount of money we might start with. Of course, the more money you start with, the better off you’re going to be. And then there’s this idea of continuing to add to this bucket. But the part that I think is like the sneaky part, and we’re going to explore in this episode here today, is how important

the time horizon really is when it comes to utilizing compound interest in your favor, right? And I think if you pause for a second, you think about all of the scenarios that have ever been shared with you about the power of compound interest. Typically, we are talking about longer time horizons, right? So for example, I used to do the penny a day activity with my students, right? The penny a day for one month.

If you were to double one penny every single day for one month and ask students, would you rather have $10,000 or would you rather have that penny doubled each day, every single day for an entire month, it was a great activity to really model that. But here’s the thing, there were 30 compounding events. So that’s a lot of compounding and it only started to matter after the first five, 10,

Jon Orr: Ooh, was 10 I think in that activity.

Kyle Pearce: 15 days, right? So this, if we now zoom in on our lives, right? We’re talking in years when we use compound interest. And if we do this over a really long span of time, like 30 years, like an entire career, we can actually contribute a fairly low amount. We can start with a fairly low amount and we can add in a fairly low amount each and every year for those 30 years.

and we’re gonna be in a fantastic spot. And we’ll look at that here today. But the problem is, as I think for many of us, is that we hit sort of the middle ages when we start to recognize that maybe income is, you know, maybe better for ourselves than it was when we first started or, you know, things were just, you know, we wanted to have fun or whatever it was.

Jon Orr: Well, no, it’s natural. It’s natural. Like you think about the timelines, right? Like it’s like when you’re in your 20s and 30s, you’re at the baseline of say your income level, you know? And you’re spending your money because you’re trying to either have a great time because you’re in your 20s or try to start towards, you know,

getting that house bought, know, and you’re all of a sudden your house poor and then all of a sudden you’re into the family years, you know, in your 30s or the years where you’re trying to like struggle to like, you know, keep the family going, build towards like, you know, getting people the right, you know, sporting events and all of those things. Like I feel like all this adds up in terms of your income and your spending. And I think it’s when you hit your 40s and they say, I think your 40s are supposed to be your happiest years of your life.

And that’s because you’re fine. You’re at the point where you’ve kind of you’ve got to some stability with your finances and in your family life. And I think I think there’s supposed to be that because you can you know, you’re not so like bogged down with like little ones running under your feet all the time. But you also have now of money in your pocket to kind of go do the things you want to do and start to plan. So I think it’s natural to get to this point in your 40s to go home. I’m I’m I’m

I’m ready, I’m ready, you know, I’ve got some discretionary funds now, what am I gonna do with it? And then when you start doing that, you’re like, well, how quick can I retire? And then that’s the part where it’s like, well, if you wanna, it depends on your time horizon, right? It depends on how long you now want to work for and that, because there’s only so many inputs into the compound interest formula, right? Like you’ve got time, you got interest rate and you got principal, that’s pretty much it. So it’s like, one of those three have to be fluctuated for you to get to a particular goal.

Kyle Pearce: Absolutely. And you I think you highlighted it appropriately. And I think it’s it’s when you get to this place, when you start thinking about, you know, the future. And this is where I think many of us start to think about this financially free number. Right. So like today, we’re not going to necessarily dig into like, what is your financial freedom number or anything like that. But we’re just going to try to pick some numbers that are easy to follow. And we’re actually going to look at the actual effect of compounding, but also we’re going to chat about some of the, I’m going to say like the hidden dangers of just blindly thinking about, yeah, like the secrets that are sort of there in plain sight, but really, really easy for us to miss because it’s, it’s not that straightforward. This is what makes this really, really challenging. So what we’re going to do today is we’re going to dig in and we’ve run some scenarios. And actually, ran a lot of scenarios, you know me in scenarios and my gosh, do I ever and I’m actually going to be sharing my screen.

Jon Orr: Kyle likes a good spreadsheet. Now Kyle, before you jump into the sharing your screen, like give everybody a snapshot of like, why did you go down this path?

Kyle Pearce: Yeah, yeah, absolutely. Well, I’ll tell you this much. One of them is it’s really most of these episodes, I’m sorry to tell everyone listening, but a lot of times it’s selfish. And what I mean by that is, you’ll notice a lot of times the ages I select tend to be conveniently around my age. And it’s because I’m actually looking to learn something in the process all the way through.

You know what I started to recognize John is like, you know, for guys like you and me and mad as well that you know, we have real estate and we have different aspects of our asset classes that are in our portfolios. We, you know, sometimes it’s like, you know, things will be quote unquote, okay, depending on what you have, but you don’t have sort of this, you almost need to this range of like, what’s your baseline?

We’ve talked about baselines before. We use a lot of permanent insurance as like our super, super solid concrete floor. But then as we look to take those funds and we put them into other asset classes, it’s sort of like, where’s that putting us? Like, where does that put us on the map? Like, have we hit our goal, right? So not only is it hard for you to define what that goal is, but if you have a cashflow goal that you’re after,

At what point can I feel like I’ve successfully made it there? And if I’m at a place where I feel like I’ve hit this number or I’ve hit this place, what does that really mean for me? am I like, is there like 30 % chance that I actually am not gonna hit that place? Like, is it actually more risky than maybe I recognize? And for a lot of people, I think that is actually the case, right? Because we’re using inputs.

that oftentimes aren’t reality. They’re like averages or they’re rounded numbers. And this is where things can really fall off the map. But before we get into those nuances, I think it’s important for us to see how impactful things like the actual time horizon can be on compounding. Because we have a lot of people that are going, listen, I want to hit fire, right? I want to get to financial independence.

Jon Orr: Hmm. Averages. their estimates.

Kyle Pearce: And they usually want it sooner than later. Like I’ve never been on a call where someone’s like, you know what? I want to do this in 30 years. You know, like no one ever says that it’s like they want to do it in like 10 or five, right? And that’s like not a lot of time. And today we’re going to really try to highlight the what matters in those cases.

Jon Orr: Well Yeah. Right, right.

So what you did is taking these wonders, It’s like these retirement goals, these retirement numbers is, and this is naturally what we do, but I think sometimes the numbers complicate things and we get a little bit bogged down is you want to reverse engineer. Like you want to go, what am I trying? Like what kind of income do I want to have? And a lot of times it’s like we overestimate, I think, what we are, like what we are.

or I guess in a way we underestimate what we’re needing. It’s like we think about like what we’re spending now and like what we’re gonna spend when we retire. And then we’re like, and you haven’t thought about what that number is for you to comfortably live on. And what you wanna do is, and what Kyle’s gonna share here is he’s done the work, he’s done the math, he’s done the spreadsheets to reverse engineer different targets to help basically say, hey, if you’re here and you wanna get here, here’s the likelihood of you getting there. And here’s what it’s gonna look like if you want to get there.

And here’s another scenario, know, like if you’ve got this kind of time horizon and you will look at this kind of target, here’s what you’re looking at. Because I think most of us kind of say like, I’m putting money away because that’s my discretionary money and I hope to retire by then or I hope to have some number. It’s like I have a bunch of assets, but I don’t know what those assets give me when I get there.

Kyle Pearce: Right. 100%. And, and the challenge is, is that there is volatility, right? Like, I mean, most of these assets, unless you’re in a very, very secure, fixed income type, you know, mindset, right, where you’re a GIC person, or you’re, you know, pumping everything into whole life policies and leaving it there, which again, we never advocate for people to do that. That’s not something that we believe is the best move. We want that money growing in markets, but

We also want some form of predictability at least within call it a range, right? And as you’re gonna see here today, we’re gonna use ranges. We’re gonna use like sort of like average rates of return today. And we’re gonna look at different timelines based on a simple funding schedule. So as I share the first scenario here, we’re gonna keep it super basic. Those on YouTube can follow along here with us.

For everyone else, we’re gonna do our best to try to make this still clear to you, whether you’re driving or walking or doing whatever it is you’re doing. We’re gonna start with something super simple, and we’re gonna start with a principal amount of $100,000 to start. Now, again, all of these ideas are scalable, of course. However, because it’s compound interest, that is not linearly scalable, right? So I mean, you’re gonna have to run some different numbers if you start adjusting things here, but you get an idea.

as to the impact that we wanna share. So we’re gonna start with $100,000 being invested right now. You’ve already got 100.

Jon Orr: So I have $100,000 already. So I look at my portfolio, it’s got 100,000 equity, value, cash value, whatever, my liquid value, that’s what it’s saying. Got it.

Kyle Pearce: Yep, exactly. And we’re gonna take that and every year until we choose to stop funding and start taking income, so typically like a retirement strategy, we’re gonna fund $10,000 each year, okay? So if we did this for 10 years, we’re funding 10 times $10,000 and so forth. So the first scenario we’re gonna look at is a 40-year-old funding to age 64. which would mean that they’re going to start pulling income at 65.

Jon Orr: Now, question about say this scenario we’re running is the hundred thousand is my net, in a way, my net assets right now. like, it almost, it’s like, this is what I like. This is like, it’s easier in my pension or it’s like, or it’s in my investments. It’s like, it’s not combined. Like I got this pension over here and I got assets. It’s like, if I just have the hundred, here’s what I get. Got it.

Kyle Pearce: Yep, exactly. you know what? In today’s discussion, too, we’re not going to say which buckets it’s in. We’re not going to say whether this is taxable or not taxable. We’re not going to say this is in a home, let’s say, and you’re going to downsize. We’re not going to get into any of that. We’re just going to talk about this money is in. In this case, we’re going to look in a typical market portfolio. We’re going to look at equities and fixed income.

And in today’s discussion, we’re actually gonna look at the impact of different variations of equities to fixed income, all the way from 100 % equities, because some folks out there are like, hey, I’m 100 % equities, awesome, to all the way to a 50-50, where someone’s like, I’m 50 % equities, I’m 50 % fixed income. And what you’re gonna notice that if we fund this thing to age 64, which is a full 24 years,

and we’ve done this extra contribution of $10,000 a year, that 100,000 and my contributions are gonna add up to a total of about 340, okay? So we’re gonna be essentially contributing 340 to this pension plan, so to speak, right? Your own income strategy later. Now, you might actually be shocked at this, okay? Because we’re gonna pick 10 % as the average rate of return for equities.

and 3 % for the average rate of return for fixed income. Now, as you’re gonna find out later in this exploration, all of this is fake because never will you ever get exactly 10 % in equities every single year. We’ll talk about that a little later, but let’s assume for now that this is happening, okay? Mr. Ramsey out there, Dave Ramsey is gonna say 12 % realistic, which again, it’s not, it really just isn’t. But let’s look at what happens here. You’d think,

I start with 100, I’m adding 10,000 per year for 24 years, and I basically have contributed $340,000. It doesn’t feel like a lot of money, and a lot of people are probably thinking like, that’s not gonna be enough to live on, but as you’ll see on the screen here, if you were in 100 % equities, and if those equities truly did earn 10 % each and every year, all the way till you were 100. So that’s 60 years. And this person started pulling income at age 65. They could pull $183,000 out each and every year from age 65 to age 100. And they would still have about $326,000 leftover at age 100. Like that to me is a bit shocking.

Jon Orr: Okay. Sounds pretty good. Right.

Kyle Pearce: Like it actually kind of blew my mind a little bit. All right. Now, as we scroll along here, you’ll notice as we go 90, 10, the average rate return will now go down to like, you 9.3 % on average.

Jon Orr: So when you say 90-10, you’re doing 90 % equities, 10 % fixed income. Like your portfolio’s just rebalanced a little bit.

Kyle Pearce: Yep. Exactly. So that individual and again, this is all fake news because again, we can’t guarantee these rates by any means. But now all of a sudden like that 183 of of income every year from age 65 to age 100 drops to 152. So you’re losing about $30,000 of potential income.

Jon Orr: Now. Where’d you get the 152?

Kyle Pearce: The 152 is how much you can start withdrawing without running out of money by age 100. Now that we’ve adjusted this portfolio from 100 % equities to a 90 % equity, 10 % fixed income portfolio, that shifted the rate of return down from 10 % to 9.3%.

Jon Orr: So 90%, yep. And Got it. So you’re waiting the balance there between 3 % fixed income on average, 10 % return on equities on average. Got it.

Kyle Pearce: Exactly, exactly. And now here’s the thing is the vast majority of the population are not 100 % equities. And I would argue that many are not 90 10 either, right? So, you know, I’m not advocating that you go 100%, but I am just showing like there is an impact here, assuming we live in this fictitious world where we can guarantee a certain rate of return every single year.

Jon Orr: Probably not, depending on age.

So, got it. just kind of rebalancing just to slightly to add a little bit more fixed income, you know, and people do this, like this is what target date funds are really trying to do, right? Is to rebalance as you get older to be, you know, a little bit more balanced between fixed income than equities. When you’re younger, you’re going more equities and fixed income. But what you’re saying here, Kyle, is that slight shift, if the same time horizon is there, no shift in time horizon,

No shift in contribution, no shift in principal, the amount of principal that originally in the pot. I just went from $183,000, I could pull every year, to 152. 152 is nothing to be snagged. But no, it’s pretty good, and you went down what? 0.7 % on average in terms of your rate of return. All right, all right, that’s not bad.

Kyle Pearce: Still good, like I’m still a little shocked, you know, when you look at it.

Yep, absolutely, absolutely. Now as we keep sliding, right, now we can look and go, okay, if we go to the 80-20 portfolio, all of a sudden now, everything else stayed consistent, like you said, we start pulling our income at age 65, the same amounts contributed, everything stays the same, except now your weighted return is now instead of 10 % or 9.3%, now we’re at 8.6%.

And now my income has dropped to 125 per year. Again, still nothing bad, too bad to, you know, sort of shake a stick at. Because again, the only amount you’ve contributed is 340 in total over these 24 years.

Jon Orr: All right.

It’s it. Right. Well, it sounds it sounds pretty good to say, like, look, I have some people right now are going like, I have one hundred thousand dollars in in my tax free savings account right now. And I could I could commit to putting ten thousand dollars a year into that pot for the next 24 years. And you’re saying I could then in what was the first how many years was I start pulling?

Kyle Pearce: So you’re gonna do this, this person’s 40 and they’re gonna start pulling at age 65. So 24 years of compounding and 24 years of contributing. Now with the tax-free savings account, we don’t quite have 10,000 each year we can put in, but it’s just under that, it’s not that far off. So it seems like, it seems like kind of a bit of a no-brainer, right? That you go.

Jon Orr: Okay, right 24 No. Yeah, yeah, it might get there. Okay, yep.

Kyle Pearce: All right, I’m gonna do that and I’m gonna commit to that. The problem we have though, the problem we have is sort of two things. One is we don’t actually get exactly that interest rate on this compounding growth, right? So we’ll talk more about that as we move along, but as a starting point, you go from its core, this makes sense. Yep, absolutely. Now, as we shift all the way along, okay, let’s say we go to 80-20.

Jon Orr: Wait, right, yep, Sure. Well, you’re reverse engineering. Yep.

Kyle Pearce: we’re now getting an income of about 125, right? Starting again at age 65. If we go to 70, 30, which is a little bit more common, I would say, and 60, 40 tends to be the most common, to be honest, but 70, 30 is gonna bring that income down to about 104 before running out of money at age 100. And as we shift all the way, if you were 50 % equity, 50 % fixed income,

you’ve now got all the way down to $70,000 of income as a 50-50 split with a weighted return of about 6.5%, not 10%, right? So I’ll be honest, I look at that and I go, regardless of where you are on that spectrum, I would be fairly happy, right? Regardless of what you feel comfortable with in…

picking something there to go, wow, like that is a a great place to be. Right. Now, the first thing we want to talk about though is what is important is obviously the rate of return is important. The consistency of that rate of return, but

Jon Orr: Okay. Well, that’s the only thing you’ve fluctuated here, right? Like the only change is the rate of return at this point.

Kyle Pearce: at this point in time. But here’s the big challenge. And this is the part that I think is a bit of the soul crusher, I think, for a lot of people. Because we sort of foreshadowed this at the beginning of the episode, where we said a lot of these compound interest scenarios typically have longer compound periods, 30 days in a month when you’re doubling that penny. It’s like, wow, that’s going to really do a lot. It’s going to grow quite a bit.

plus when you’re doubling something that’s 100 % return. That’s like a lot. Well, the same is true here at 10%. For example, that’s a large rate. That’s a high rate. But we also had 24 full years of compounding to take effect.

Jon Orr: Well, you’ve also had the compounding after, right? Like you have from 40 to 100. You have 60 years of compounding happening here, right? You’re just withdrawing at 65.

Kyle Pearce: Yes. And that’s another big piece here is that not only are you compounding and contributing for 24 years, you’re not withdrawing until the 25th year. Like that is really key when it comes to any type of financial freedom. Number is the fact that you’re actually now removing money from that compound machine. And if you don’t give that compound machine enough time to not only grow and compound without removing money,

Now you’ve kind of battling two things. You don’t have a lot of time on your hands and you’re starting to remove money out of that bucket. So you’re essentially limited to like whatever that return is, right? So like right away, if we started doing this earlier and we said there’s $340,000 in this bucket and I wanted to pull out money without affecting the principle and there hasn’t been enough time for this thing to compound.

I’m only going to be able to really take like that $34,000, that 10 % of 340 before I start eating away at that principle. So as we start to do less and less compounding and less and less time horizon to contribute, and then we start to withdraw from this bucket, we’re going to have something pretty, pretty impactful taking place. So what we’re going to do is we’re going to look now from

going all the way to age 64 and then essentially taking income in age 65, we’re gonna look at doing this to age 55 and then starting to take money at age 56. And when you look at it, we’re gonna start with the same 100,000, we’re gonna keep contributing the same 10,000 except because we’re doing this for less time, we’re actually not going to have the same 340 contributed. We’re actually gonna have about $90,000 less. 

And immediately what people will see on this spreadsheet here, you can see it summarized at the top, but you can also see me scrolling all the way to the bottom. If you start taking income at age 56, we’ve not only contributed less, we’ve not only given this thing less time to compound before we started to withdraw,

That means that instead of us taking out 183 like we could when we did this to age 64 and then started retirement in age 65, we can now only take 70,000 out of the full equity portfolio in order to not run out of money by age 100.

Jon Orr: but you’ll still have money until coming in for that length of time. But you’re right, that’s a huge, huge difference between having 183,000 to 70,000. When you think about it in terms of, this is where I think lots of people kind of, the secret here is lying is that people tend to naturally want to think linearly when you need to think exponentially. And that’s what’s happening here with compound interest. Compound interest is an exponential function.

you when you think about the initial contribution and go, look, look, it’s only $90,000 difference between my contributions, between the two different scenarios, it amounts for like more than $93,000 a year that I can’t access anymore. Like a year, for 40 years, 50 years. So it’s like, huge.

Kyle Pearce: Right, right. Right. It feels counterintuitive, like you said, because it’s like we want to think linearly. And it’s like even as former math teachers, knowing and understanding different functions and how they work, it’s incredibly difficult. So in this scenario, if we put this in another way, you are funding $90,000 less into this thing, which is only like, it’s like basically

three fourths the amount of the money right and in less than two thirds of the time. Yeah. Yeah. But well, hey, I’m gonna throw this out there but here’s the shocker. Okay, you I get it. You put in less money. You put in only 73 % of the money and you did it in about 62 % of the time but the shocker is that that leads to only getting about 38 % as much income. So,

Jon Orr: Now you’re talking fractions.

Kyle Pearce: like set another way. It’s like you’re putting in more than half the amount of the money and you did it in more than half the amount of the time, but you’re getting way less than half the amount of money on the outside. Like to me, because it’s not linear, like you’re not going well. If I, if I do it for, you know, if I put in half, I should get half on the way out. It’s like, no, doesn’t work like that. Unfortunately. It’s like you’re getting penalized hard by not giving it the time, not giving it as much fund.

Jon Orr: Right, right, no, just not like right, no.

Kyle Pearce: and now you are getting less out the back end, even though we kept the interest rate the exact same.

Jon Orr: Right? Yeah. And think about this. Why is this impactful? Why is this, like we’ve only looked at the 100 % equity as well, right? Like we’ve looked at that scenario. If you’re watching on YouTube, Kyle’s just scrolling through the scenarios, know, the 80-20, the 70-30. If we just go down to the 60-40, you know, because I think you’re right, like that’s the most portfolio. going from the normally like a 60-40 was in the funding to age 64, you were pulling 70,000 a year.

on our sorry in a 6040 you’re pulling 85,000 a year. And then if you fund only to what was it 55 like 54 and then pulling on the 55th on 56 so like all you’re only pulling 38,000 now so so in a way like why is this why are these stats important is to understand

Kyle Pearce: Yep, funding deal 55 and then taking at 56. Nine years earlier.

Jon Orr: that compound interest isn’t a linear function, right? Like you have to understand that. think we’ve made that clear. We’re also saying time matters most. And I think why those two things matter to you right now is when you think about when the likelihood is, like, how can I retire? Like, these are the thoughts that we go through our mind when we start to have some financial success. It’s like, well, maybe I can retire earlier than I thought. We do need to consider these factors of saying, I’ve got this kind of money. 

I stop contributing earlier than I normally would, I’m significantly reducing the amount of say, ongoing money that I can pull from that say, bucket. I think it’s like, it’s more than you think difference is what we’ve, Kyle’s pointed out here is that because it’s not a linear function, you know, you might think, so it’s not gonna be that much different if I pull 10 years earlier versus, you know, waiting that extra 10 years, but it’s huge. It’s a huge difference. And it makes it makes you say that you probably can’t retire the way you think you’re going to retire.

Kyle Pearce: Yeah. Right, or at least unless you really are analyzing this and paying exactly, you’ve gotta pay attention to it. Because I think you laid that out beautifully. It’s like, remember I said, I was actually pleasantly surprised when I thought, wow, doing this for 24 years with such what seems like a low amount of money that I was able to pull 183, assuming this perfect world of 10 % per year, which again, will

Jon Orr: you have to change another input, right?

Kyle Pearce: we’ll discuss in the next episode on compound interest. But it was shockingly high. But when you discount the amount of time and the amount of money you’re putting in at the same time, it ends up shockingly much lower than that number, right? It sort of shocks you in both directions. It shocks you when things are good, when the timeline is large. But it also shocks you how painful it is if we don’t go long enough.

and even going from 55 to 54, I’m gonna go back to 100 % equity for a second, okay? We’re at 70,000 if you pull in age 56, so you did this to 55 and then pulled in 56. If we go one year earlier, we look at just one simple year, that’s only one $10,000 contribution, but we’re taking our income a year earlier, what we…

Jon Orr: somebody’s I let me predict somebody right now is going like well maybe I’ll pull 60,000 instead.

Kyle Pearce: Yeah, exactly. Maybe I’ll pull. Hey, and guess what? Guess what you have. You get sixty three thousand, right? So you put but here’s the crazy part is you only took out one ten thousand dollar contribution. So it does make sense. You’re going to get to pull a little more than sixty, but it’s like that’s like a lot lower, like that’s seven thousand dollars lower for the rest of your life. Yeah, every single year for the rest of your life, assuming you get 10 percent. per year for the rest of your life, which again is also one of those variables that we can’t guarantee either.

Jon Orr: This is why all those teachers who have pensions and they’re thinking about retiring early, because you know, we’ve talked with a lot of teachers who think that that’s going to happen too. And they’re like, well, if I retire five years early, and I’m like, well, you better have a look at how that impacts your pension because five years early changes it significantly. It’s exactly this reason,

Kyle Pearce: Exactly, exactly. Yeah. And when we go down, there’s a lot of people that want to reach fire by age 50. So I did a scenario of contributing to 49 and then an age 50 starting to pull money. All of a sudden now it’s like, well, I had a hundred to start. I contributed 10,000 for nine years. That’s 190. That’s significantly less than what

I was going to pull or going to contribute originally all the way to age 64. But again, that timeline’s hurting me too. Now that annual income is 35,000 on this on 100 % equities. And of course that goes way down. If you go all the way to the 60 40, you’re looking at about 21,000 per year. So time is really important here. Of course, rate of returns always going to be important, but consistency with that rate of return.

Jon Orr: That’s at 100 % equities.

Kyle Pearce: So what we’re going to look at in the next compound interest episode is we’re going to build on this idea and we’re going to actually look at, what if I do want to try to get some of the same results as what that six, you know, funding to 64 looked like? Like what do I need to do instead? If I kept these rates of return the same for now, what do I need to fund? What should I start with? What do I need to fund? If I want to, you know,

get to financial freedom by age 50, right? Or age 55 or whatever the number is, you’ll at least get to see sort of the impact here. If we cut down the timeline, like what does that mean for what I’m gonna have to do instead to try to get somewhere close to what we just saw in that 65 year old sort of pension scenario?

Jon Orr: can’t wait. can’t wait. We will we will get into that episode in a future that topic in a future episode. But I’m, I’m excited to kind of go down that route, but also, in a way, shocked and also impressed, you know, at the numbers that we just kind of calculated here for you. So again, you know, thinking about our retirements, thinking about our futures and trying to think about how do I reverse engineer my retirement goals? You know,

Get your hands on a spreadsheet, get your hands on a calculator, do some of this kind of leg work. But also the big idea here is that time is your best friend on this journey and the longer you can keep that money in there, the better off you will be. That is the secret sauce here for your compound interest. Ninth wonder of the world? Or eighth, I don’t know. Google it, somebody will Google it, put it in the comments.

Kyle Pearce: Yes, or eighth or tenth or whatever Einstein said. Yes.

Jon Orr: Folks, we are glad you’re here with us in this particular episode. And if this is the first time you’ve listened to an episode, you found us because we were talking about compound interest, then welcome. Hit that follow button, hit that subscribe button. We put out episodes, two episodes every single week on secrets and investing ideas. Compound interest is at the root of all of this, but you won’t be disappointed if you tune in on a regular basis. So make sure you hit that follow or subscribe button.

Kyle Pearce: And for those incorporated business owners looking to unlock those retained earnings that are stuck in your corporate structure, you should sign up and enroll in our free masterclass, which you can find over at Canadian wealth secrets.com forward slash masterclass. Once again, it’s over on the website at Canadian wealth secrets.com forward slash masterclass. And hey, remember, this is not investment advice.

or then this is only for entertainment purposes. We are not your tax legal financial advisors and you should not construe any such information as legal tax investment, financial or other advice.

Canadian Wealth Secrets is an informative podcast that digs into the intricacies of building a robust portfolio, maximizing dividend returns, the nuances of real estate investment, and the complexities of business finance, while offering expert advice on wealth management, navigating capital gains tax, and understanding the role of financial institutions in personal finance.

OPTIMIZE YOUR FINANCIAL FUTURE