Retired at 31: An Early Retirement Story
I’m proud to introduce “Retired at 31″ (we’ll call him John), a regular contributor on Canadian Money Forum. As his handle indicates, he retired at the ripe age of 31 with $1.7 million in net worth. Like most millionaires, John created his wealth through investing in businesses. In his case, the businesses were his own. Here is his story.
Yes, I’m out (of the work force) at the age of 31 – about 10 months ago. My wife is about 80-90% removed – she should hopefully be out completely soon.
We married young at ages 19/20 and had our first child shortly after. Having the baby motivated us to get our priorities straight. I came from a frugal business minded family, my wife, not so much. It a little while to financially train her.
We saved into RRSP’s right from the time we were married along with buying a house. Houses were cheap then and we were fortunate that both sets of parents helped with a down payment. The bank pre-approved us for $120k or something like that but we bought one for $70k that had a basement suite in it.
I started a company when I was 23. Started small and part time. I staked it with $2,000 and largely grew it organically. It required some additional injections in the first couple years and later we used a HELOC to float some inventory. I applied the same frugality to the company as in the personal life. We left earnings in the corp and just took what we needed to live on. Over time RRSP contributions increased and we “caught up” in our mid to late 20’s. Since then we’ve maxed our RRSP’s each year.
We sold the first house when I was 25 for about $90k. Made a bit of profit at first glance, but had put money into it. Profit was negligible – maybe $5k or so. The next house was bigger but again, well within our means. We actually paid for a lot first and waited two years to accumulate more money for the house. Lot was $45k or so, house built for $200k or so. Over the next few years we developed the basement, landscaping, etc as funds permitted. The second child born around this time. A few years later we sold that house and changed cities. House sold for $300k, with probably $280k or so into it. Small profit. We become mortgage free in and around this time.
In the new city, the trend of buying below our means continues. It was just after the start of the boom in Alberta – the bank suggests a house of up to $800k. We laughed, but we actually had to take advantage of it for a period of almost half a year as house #2 took a while to sell. We end up buying a $470k house and we were once again with a small mortgage ($100k or so).
The housing boom accelerated and I was spooked because houses aren’t supposed to appreciate to that extent. While I wasn’t fearful about losing money on the purchase price, I knew how hard it was to make $100k taxes in. The boom town was also crowded, so we got out of there. We sold for $600k for a total profit of $120k. Great return for short ownership period.
At that time, we were looking to diversify our income stream. All of our household income came from the company. My wife was (and still is) a stay at home mother. She worked previously at various jobs, but never had a true career per se due to children. We looked high and low for another business opportunity. We looked in BC and Alberta, and eventually find one in a smaller city in Alberta.
The housing prices in the small town were cheaper than our previous boom town, but they were starting to take off. We downsized considerably for house #4 – smaller and significantly less “nice” than the previous two. We paid just over $300k which freed up a substantial amount of money for the purchase of companies 2 and 3. This coupled with retained earnings inside company 1 yielded a small loan required to purchase business 2 and 3. The house is currently worth about $400k.
Three companies are now producing income and per usual, being treated frugally. The first priority is to pay off the corporate loan asap, then worry about paying back myself and company 1.
A year passed and another opportunity fell into my lap. I took a loan for the whole purchase price, floated the inventory from the HELOC (we’re mortgage free again) and had 4 companies producing income with, again, the priority to repay loan.
This brings us up to last summer. Company 1 sells stuff to Americans. Exchange rate has been eating the growth, but thanks to sourcing goods in USD, the profitability remains great. I don’t like storm clouds on the horizon, so it was time for us to get out. We listed company 1 in March (08), a buyer comes along and we close Aug 1. Crap hits fan shortly thereafter. Timing was impeccable. We had significant retained earnings in company 1 which are now converted to a shareholder loan after paying dividends to shareholders.
The sold shares of company 1 were kept “onside” with the exemption rules (you have a once in a lifetime $750k exemption on qualifying shares of a small business). This means no tax on proceeds.
We were so happy with the outcome of selling company 1 that we decided to sell a minority portion of company 2 to the manager. This sale also qualifies for the exemption (shares in wife’s name), again no tax.
As it sits, we have 3 companies. Companies 2 and 4 are completely self sufficient thanks to new minority owners with a vested interest in running it well. I regularly look over the numbers and make sure things are on track.
Company 3 is without minority owner and run 80% or so by a “bonus for performance” manager. This system is not as good as an equity owner so my wife runs the 20% or so to ensure things are as they should be. The current manager is interested in being an equity owner, but capital deficient.
All 3 companies are debt free from external sources, save for company 4 which still floats it’s inventory via my HELOC. All 3 companies do owe us significant shareholder loans in the range of $500k (not including the HELOC which varies between $150k-$300k depending on the time of year).
At current repayment rate, we will be down to zero from $500k in 2 to 3 years, with one company being ready to produce income in a year or so.
There’s just under $200k left owing on an owner carry portion from us selling the shares of company 1 and 2. Both of these are uber secure as both have a clause which gives us the shares back if the buyers default.
The Retirement Income
As it sits, we have no (salary) income streams whatsoever. We’re deriving some income from non-reg investments and also from interest on the owner carry portions of the share sales. So we are currently eating some capital to live. I dislike debt (even to myself) and the sooner these companies throw income the better. The best way to do this is not to cripple the companies by taking income out of them.
Frugality persists, but we have loosened the purse strings a bit in the past 3 or 4 years. Combined household income didn’t pass through $100k until I was 28 and then never more than $120k until this past year when the shares were sold. Company 1 had around $200k or so per year that it could have been paid to us but we lived on far less.
In addition to RRSP’s of about $180k, we’ve stashed fairly significant funds for the children in an RESP and in trust accounts (approx $100k at the moment). Our oldest child is about 5 or 6 years away from being a high school grad.
The future is to be determined. A complication of retirement is children. Summer vacations excluded, we can’t venture far. We’re committed to this city until both kids are done school. I’ll be 43 then and actually free. At some point we’ll likely become minority shareholders and eventually non-owners of the 3 companies. Assuming no change in the profitability of the companies, both of us will have maxed out the exemptions ($750k each) when they are sold.
I’ve read quite about about retirement – early and otherwise – and it’s challenging. I took the winter off to pursue a hobby but now that winter is over, what do I do now? The traits that got me to where I am today is difficult to simply turn off. The wheels continue to spin – more so from a private business investment standpoint, but I am finding more ideas in the market.
I’ve considered returning to university as many years ago I left after a year of engineering. I’m not sure what I’d take, or if I’d even complete a degree, but learning stuff you’re actually interested in can be fun. I might take a job to fill the time, but only for the sake of doing something productive, not for the income. Perhaps a non-profit? I don’t know for certain, I’m still figuring things out.
How did we get to retirement at such a young age? Frugality, owning a business, having children young, setting goals, and delaying gratification are among the most important things. Splitting income and deferring tax via the companies has also been critical.
Stay tuned, I have an interview with “Retired at 31″ coming up that digs into a few more details.