Freedom 45: Frank Mancini then

Frank Mancini, Port Alberni, B.C.

Now: June 2014

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Then…

If you walk into Frank Mancini’s convenience store, you’ll probably find the young entrepreneur behind the cash register or on the phone lining up a pop delivery. Mancini, the 33-yearold owner of a Smart Mart store in Port Alberni, B.C., is a self-confessed micromanager who doesn’t mind getting his hands dirty. “I like the control selfemployment gives me,” he says. “But even though I make a six-figure income, I’m feeling pigeonholed.”

Mancini’s dream is to retire at 45 and travel the world, living where he chooses for months or even years at a time. While most people can only dream of retiring in their forties, Mancini (whose name and details we’ve changed to protect his privacy) figures he’ll be able to wave goodbye to work in early middle age because he’s single, has no dependents and plans to keep it that way. Given his current net worth of almost $600,000 and an annual income that exceeds $126,000, he figures he’ll have a seven-figure nest-egg built up by 45. But he’s still not sure exactly how he will finance his super-sized retirement.

His first question is how much money he’ll need to finance what could be 50 years or even more of permanent holiday. “I’m not an extravagant spender, but I really don’t know how much I will need to finance several years of living abroad,” he says. At the moment, nearly every penny of his wealth is tied up in his business, his home or a first mortgage on a convenience store he sold several years ago. He has a tiny RRSP, no stocks, no bonds. He knows he could sell his store and home once he retires and put the proceeds into a standard mix of conservative mutual funds. But he’s not sure if he would feel comfortable doing so. “Stocks and mutual funds seem very volatile to me. And once you’ve paid commissions and MERs on your funds, I’m not sure how much you make.” On top of everything else, there’s the issue of control. He’s never invested in anything he doesn’t run himself, so he’s not sure how he would feel about trusting an anonymous money manager to look after his wealth.

Rather than put his money into mutual funds, he’s thought about buying a small apartment building that could throw off a steady stream of rental income. Yet another possibility would be to hold on to his business and lease it out when he retires. But he’s not sure if either plan makes a lot of sense for someone who may be halfway around the world when a problem arises. “You could say I’m confused by all the freedom,” he says. “I’d really like to know the pros and cons of each plan before I have to start making decisions.”

Mancini has always liked being in total control. He may have inherited the trait from his parents, who were also self-employed and ran two convenience stores in Nanaimo, B.C. “My parents were entrepreneurial,” says Mancini. “But they were not willing to take on much risk. They never had personal debt and never really used the equity in their stores to its fullest advantage.”

Mancini attended university in Vancouver, but dropped out during his third year of a political science program when he realized the course was doing nothing to prepare him for the working world. At 21, he borrowed $50,000 from his parents to buy his own convenience store in Nanaimo. Two years later, Mancini sold that store for a $100,000 profit, paid back his parents, and bought his current convenience store, including the land it stands on, for $450,000. “I have a $378,000 mortgage on the business,” says Mancini. “But the whole investment is now worth $800,000 based on an assessment I had done last year. And it provides me with a very nice living.”

Mancini doesn’t share that living with anyone else. He spends time with a few close friends, but he has no plans for marriage or kids. “I know some people would call that selfish,” says Mancini, “but I’m just not the type of guy who settles down and has a family. I like the freedom that being single gives me.”

A typical day for Mancini starts at 6 a.m. He serves customers, orders supplies, builds displays and does the bookwork. He’s usually out of the store by 3 p.m. but stays later if something needs his attention. “Sundays I take off,” says Mancini. “The work is not backbreaking, but it is a lot of very early mornings and it’s never ending.”

What occupies his dreams is the thought of foreign places. Three years ago he made his first trip abroad, when an ailing aunt arranged a house swap in England and asked Mancini to accompany her. Mancini then traveled to Italy and France and later visited Australia and New Zealand as well. He’s enjoyed every minute of his foreign adventures. “I’d eventually like to be able to spend six months or a year living in one country and then moving on to a new place,” he says. “I’d especially like to try living in Italy for a year and then maybe Thailand.”

Given his globetrotting ambitions, Mancini doesn’t invest a lot of emotion in his current living arrangements. He bought a one-bedroom condominium 10 years ago for $150,000 and sold it two years ago for $239,000 when he “got tired of a 15-person condo board spending my money.” Early last year he bought a three-bedroom bungalow. It has a nice backyard, “but it’s just an investment,” says Mancini. “It’s handy, gives me some privacy and was a good buy at $360,000.”

Mancini’s store has also turned out to be a good purchase. Right now, because of the favorable tax treatment that he gets through a special shareholder loan repayment arrangement, Mancini pays only $1,000 a year in taxes on his six-figure income. “According to my accountant, over the years I have contributed money to the business and I am entitled to that money tax-free as I’ve paid income tax on it before. I don’t quite follow it myself—some kind of accounting voodoo—but the results are favorable so I don’t question it.”

His minuscule tax bill means that, after all expenses, he has $61,000 left at the end of the year to invest. He figures that he can have his business paid off in eight years. He will then turn his attention to paying off his home by the time he’s 45 and expects it to be worth $500,000 or moe at that point. “Land values are going up significantly here. An influx of Albertans is driving up prices. I’m confident that prices will continue to rise.”

If everything goes according to plan, Mancini will be debt free with $1 million or more in assets that he could liquidate to fund retirement at 45. But real estate is doing so well on Vancouver Island that Mancini is considering either expanding his business at a cost of $350,000 or buying an income property, such as a nine-plex. He figures both are tempting investments, but he knows they could complicate his life when the time comes to retire. If he bought the nine-plex, for instance, he would have to hire a property manager to look after it for him when he’s traveling. He would have to pay that manager 3% to 6% of the building’s revenue, which could considerably reduce his retirement income.

On the other hand, he could view the fees as the cost of freedom. Since the travel bug hit him, Mancini has hired two more people to look after the store when he’s not there. He’s also tried to put a little fun into his life. That means taking lessons in cooking the Indian food he craves. On Sundays, he hits the golf course with friends. “I just took up golf last year,” says Mancini. “I love it.”

He’s been preparing for retirement by immersing himself in books and magazines on investment. “I know that I micromanage too much,” says Mancini, “and sometimes I don’t see the big picture. But my way of investing has been very good to me. I’m just not sure it will work as well if I retire at 45.” What the experts say Mancini is in a fairly unique situation. “He has done many things right,” says Rick Spence, a Toronto-based expert on entrepreneurs and small business. “He has a job he loves, a thriving business and a real estate portfolio that has brought him solid growth over the years.”

But does he have enough money to retire at 45 and enjoy what could be a 50 year retirement? “A million sounds like a lot of money, and it is,” says Alexandra Macqueen, a fee-based planner with The MoneyPower Group at Raymond James in Mississauga, Ont. “But it has to last a lifetime. Luckily, he has a lot of options.” Here is what our experts suggest.

Diversify. Our experts believe Mancini may be taking on more risk than he thinks, because his entire investment portfolio is tied up in real estate on Vancouver Island, which leaves him vulnerable to any local downturn. “People have become de-sensitized to real estate’s volatility because we haven’t had a real down market lately,” says Macqueen. “But real estate is volatile—it’s just that the volatility is hidden. You don’t get a daily valuation of your portfolio like you do with stocks, so there’s no instant reminders that you’re losing money. But what happens if those Albertans, who rely on high oil and gas prices, suddenly stop buying up property?”

Even if Vancouver Island’s property market keeps going up, real estate is not very liquid nor very easy to manage from afar. What happens if a problem comes up when Mancini is in Thailand? And how will he raise cash if he suddenly needs to make a major purchase?

He could solve both issues by keeping a portion of his wealth in stocks and bonds to generate a stream of income. If he then needs money at any point, he could do so with a phone call. “He can sell some stock and have the money wired to him anywhere in the world in two or three days,” says Macqueen. “You can’t do that with real estate.”

Yes, he will have to pay some fees on his investment portfolio—but good investment management is a heckuva lot cheaper than paying a property manager 3% to 6% a year. “Things have changed a lot over the past few years,” Spence says. “In particular, there are a lot more low-cost options. Exchangetraded funds or index funds can provide a good return for 1% or less in fees.”

Get advice. Our experts think Mancini should find a good fee-for-service financial adviser. Such an adviser can charge him a flat hourly rate and can build him a well-diversified, long-term portfolio. “He’s in a special situation,” says Macqueen. “Even though 45 is young in investment terms, he will need a steady income stream at that point to meet his retirement goals. An expert can tailor a portfolio to those unique needs.”

Start now. Our experts suggest that Mancini start pouring his free cash into a diversified portfolio of stocks, bonds and mutual funds. “If he does so, and everything else goes to plan, he’ll be debtfree at 45. He’ll own all of his real estate outright [Mancini has already built those costs into his income statement], plus he’ll have a $700,000 portfolio invested in the capital markets that—even at a modest 6% annual rate of return—would provide him with $42,000 a year,” says Macqueen. “Add in any rent he can get for his store and his house, and he should be able to travel comfortably with no monetary worries.”

Mancini should feel free to adapt this plan as he sees fit, says Macqueen. If he wants to put $300,000 or so into stocks and bonds, then stop and invest in more real estate, that’s fine too. “The important thing is to give investing in the capital markets a try now that he has the time and money to experiment with it.”

Be flexible. “It’s great to be able to travel between the ages of 45 and 55, when you have a lot of energy and vigor,” says Spence. “But I find that most people long for some sort of roots.” Mancini may surprise himself at some point and decide to come back to Canada and go back to work for a few years—maybe at another small business, maybe at a salaried job. Doing that would allow him to bulk up his retirement income. “He’s single and will have only himself to rely on as he ages,” says Macqueen. “Working for a few more years in his late 50s or early 60s and adding to his investments should guarantee him a comfortable retirement as he heads into his golden years.”