Day to day life after FIRE

I got this question in response to the last post " If possible, can you talk a bit about what you do in your day to day life after FIRE? "

Of course it's possible, so here goes....

Well, it's been a little over 9 months since we moved back to Oz and I quit my job. I guess there are many different versions of FIRE, depending on your life situation, age, etc. In my case, FIRE involved moving countries and returning to the place I grew up, but hadn't lived here for 17 years. The bigger transition by far has been giving up a cushy Mon-Fri office job to be a Stay At Home Dad. I guess that would be the four letter answer to this question - SAHD.

I severely underestimated how time consuming and exhausting it is to look after kids. I took a lot of things for granted before when I used to walk out the door to head to work. But just to catch myself in case I start whinging, it is completely a labour of love ! I wouldn't change anything. And I know it will only be the blink of an eye before my eldest is in kindy (well, a little over a year actually but the time flies), so I want to make the most of this time while I have it.

I think it would've been helpful though to have a more realistic expectation of Stay at Home Parenting before I started. It would've saved me some frustration in the first months, as I gradually re-calibrated ... Maybe something for you to consider Rob_S (?)

So coming back to the question, usually 5-6 days of each week I'm looking after two toddlers together with my wife. We have 1-2 days where grandparents help out with childcare, and those are usually bursts of productivity to do shopping, gardening, maintenance, errands, etc. I visit my great grandmother who's in an aged care facility.

And now to share a recent development for me, I've started some part time contracting work in the past months. I'll put this forward as my excuse for the infrequent blogging of late ! It's only one day per week, but has been a nice change for me. I guess I wasn't that successful at the "RE" part of FIRE !!

What else can I share ? We see plenty of family and the kids are developing bonds with their grandparents, uncles/aunties and cousins, which is the main reason we wanted to be back, so that is fantastic. Asides from family our social life has been limited, which I guess is not uncommon for parents with toddlers, but it's something we're keen to change in 2016 to reconnect with old friends (and make new ones too hopefully !)

Well, that's all I can think of for now. Maybe quite different to expectations, sorry no fairytale holidays or golfing to report as yet, but hopefully more of those to come also :)

Wishing you all every happiness in 2016 ahead !!!

Financials Tracking

There was some discussion recently in the MMM forum. The context was tracking the cost base of share parcels for capital gains tax. I promised to share how I go about this and monitoring overall financials with my spreadsheet. Sorry, I’m not going to provide a template, just a description of how I do it. I believe in DIY and encourage people to take ownership by building their own tools. Furthermore, I’m not even sure if what I’m doing is a best practice worth sharing, it’s just what I’m doing.

My spreadsheet has evolved over time. Initially the purpose was Net Worth tracking. This extended to calculating the Asset Allocation. Then I added Transaction and Dividend’s history, as well as several other adhoc worksheets which I will not mention here, seeing as they are “adhoc”.

Net Worth worksheet

This is basically a balance sheet for those who have done any accounting. List out all your assets and liabilities. I use the following headings : Property, Shares, Cash/Term Deposit/Fixed Interest, Superannuation, Tax. Under each heading, include separate rows to list specific assets or sub categories. E.g. Under property you might have PPOR (Primary Place of residence), IP1 (Investment property 1), IP2, ..... Sub categories for shares might be – Australian Direct holdings, Australia ETF, Global ex US, US, Global hedged. Cash/TD/FI and Super are self explanatory. Under Tax I include known liabilities, e.g. Capital Gains Tax on IP’s that I intend to sell one day. You might also have Income Tax liabilities accruing. I don’t include potential CGT on shares since I intend to hold the shares “forever”.   Then the columns are Asset value, debt owing, Net income, Yield. Note - The last two are not “balance sheet” items, but I also use this to calculate my passive income so they are needed.

After completing the resultant table, you should be able to calculate Net Worth, which is the sum of all the asset values less the debt owing on those assets. For my purposes, I don’t include personal assets (e.g. contents, cars) in this.

As mentioned earlier, this was the original intent of the spreadsheet. To keep a track of NW as the basic goal post for our progress towards FI. However over time it evolved and I also wanted to add in Asset Allocation. To the right of the NW balance sheet, I added a table for Asset Allocation. This breaks down the assets into the various asset classes : Growth (Aus Shares, Global shares, Property) and Defensive (Cash, FI, TD). You will need to include your superannuation asset allocation, to translate the super balance into these asset class categories. I also subtract my “emergency fund” from the Cash, to keep this outside the Asset Allocation. I construct the table to show my AA inside and outside Super, as well as the overall/combined AA. Then I include my target AA and the delta between Actual and Target. I have some conditional formatting to highlight in green or red those positive and negative deltas (for those inclined to add such bells and whistles). This is how I manage my investments to try and keep in line with the plan. As we are still making regular contributions, I stay balanced by investing the next chunk in the asset class that is below target. This avoids making sales and incurring extra transaction costs and incurring capital gains/losses.

Trades Log worksheet

This is where I track of all my transactions. Everytime I transact any shares, ETF’s, managed funds or super contributions, I keep a log of it here. I also include and shares bought under DRP’s (Dividend Reinvestment Plans). This requires some discipline to update the spreadsheet everytime, but I think it’s a simple and quick task and helps me cross check to ensure nothing goes missing. The columns are date, name, category (e.g. Shares, ETF, Mgd Fund, Super), $, Units, Price, Brokerage, Other Costs, Tax deferred income (each year a new column), Cost Base.

The further functions of this sheet are :

CG cost base : Calculate the cost base for CGT for each parcel. For ETF’s with tax deferred income, this is updated at the end of each tax year to show the reduction in cost base due to tax deferred income in these funds.

Cross link to NW worksheet : Every time I add purchases to my core portfolio (which is basically four ETFs – VAS IOZ VTS and VEU) , this is automatically updated in the NW Worksheet using a sumif() formula that cross links to the Trades Log. That makes it very easy and effortless to see the latest impact on Asset Allocation as soon as new trades are entered and the current ETF prices are input. It can also be used to do “what if” analysis by adding in future purchases and see how much of each ETF is needed to achieve the desired AA.

Dividends worksheet

This worksheet is used to track dividends. Each line is a dividend or distribution. The columns record the details, i.e. Record date, Payment date, c/share, Franked Dividend, Unfranked Dividend, Franking credit, Withholding tax, FX rate (if applicable), etc. Again it requires a small effort. Everytime I receive an electronic dividend statement, at the same time as e-filing this away, I just enter the data as a new row in this worksheet. It comes in handy at tax time to cross check whatever is pre-filled in your eTax. It can also help monitor your expected dividend income, in case you want to take any actions to optimise your tax (e.g. making voluntary after tax super contributions which might be deductible if you are self-employed or unemployed).

Other useful features

One big bonus is the auto-filter function in Excel. I use it on both the Trades Log and Dividends worksheet. That way I can easily sort data to answer questions such as – How much have I invested in the past few months ? How many transactions did I make in the last financial year ? How much have I contributed to super (after tax) versus the concessional limit? What is my total purchase cost for VAS ? How much dividends have I received for VAS ? etc. There is much more you can do with structured data using pivot tables, but I haven’t found the need as yet.

How do I invest ? -- update --

Just a brief update on asset allocation. After the recent sharemarket dip, especially on the ASX relative to global shares, I decided to adjust my AA a little. No big changes. I have also been pouring some money into shares at these more attractive levels, so coming closer to target AA but still remain underinvested and have some way to go.

Updated target allocation is 65% growth / 35% defensive (instead of 70% growth / 30% defensive). I consider these +/- 5%, e.g. 60-70% growth and 30-40% defensive.  Current mix is 59% / 41%, so good progress on investing the lump sum and I can allow myself some small pleasure in the decision not to throw it all in the market back in April/May ! I plan to keep investing actively in the next month to get to the target 65% or very close at least.

The asset class split is as follows. The main change is the Aus/global share split now at 60/40%. I just see better value in the ASX, the yield is too enticing and with the AUD corrected down to a long-term fair value the upside for global shares is much less. Having tweaked a bit here and there, I intend to set this in stone now. The plan is to get portfolio in line with target allocations in the near term (next few months) and then stick to it as best as possible.

GROWTH

Australia shares (mainly ETF but also some direct blue chips) = 39%  [prev 38.5%]

Global shares = 26% (target around 3% of this AUD hedged)        [prev. 31.5%]

Commercial property = 0%

DEFENSIVE

Aus Fixed interest (including term deposits) = 8.7%     [prev 7.5%]

 Global FI = 0%

Cash (includes high interest saving accounts) =  26.3%   [prev 22.5%]

 

AA

I wanted to write a post about what I consider to be two of the most important attributes for FF (and life success/fulfillment in general, for that matter)... And just to keep you guessing, it doesn’t stand for Asset Alocation this time!

Attitude

You’ve probably heard the saying “Your attitude determines your altitude”. I’m a big believer in this, but it wasn’t always the case. In my school days and early career I was quite the opposite actually. I thought it was all about brains, IQ over EQ. You need a qualification to be able to practice, etc. Over time and with experience, I’ve slowly learnt that this is not the case. Pretty well anyone can do anything in this world, if they set their mind to it and persist through thick and thin. I honestly believe this and it’s a very positive and empowering approach to take towards life. When I reflect back on friends from school and how people have progressed in life, I don’t see much correlation at all between grades and “success”.

So what kind of attitude should one take ? First and foremost, it’s important to be Positive. For some people this comes naturally. For others, it really requires effort. But there is definitely value in seeing the glass half full. Lean forward. If in doubt, say “yes” and give it a go. Remember those reflections from people in the final days of their life. People rarely regret the things they’ve done, but they do regret the things left unsaid and untried.

In addition to positivity, let’s add Activity. As Nike put it so well, Just do it! Your attitude should be biased towards taking action. Obviously sometimes a bit of planning and pre-thought is useful, but don’t overdo it and get into motion as soon as possible. Be flexible, experiment and use trial and error.

The final piece of attitude I would add is Curiousity. Try to remember what it was like when you were a kid, and learning everything. Ask lots of questions, inquire, open your eyes and explore. If you have young kids, try to be more like them. And tell them not to be in such a hurry to be more like you !

Since acronyms are useful to remember, let’s call it a PACitude !

Now for the second of the A’s....

Accountability

During my working life I recall being taught the difference between responsibility and accountability. Response – able, literally, means you are able to respond. If someone asks you to make your bed in the morning, then it’s reasonable to assume this is within your power to respond. However, if someone asks you to fix the country’s budget deficit and return it to a surplus, then unless you happen to be Joe Hockey, you would not really have the power to meet such a request. Accountability is a similar concept, the ability to be held to account. Responsibility is a prerequisite to accountability. You can’t be held accountable for something you are not responsible for. So don’t try and blame me for the country’s budget problems.

Anyway, enough of semantics, the point i’m making here is you need to have an attitude of accountability. It doesn’t matter too much if you prefer the word responsibility, or “ownership” is a good word to use also. You are the captain of your ship. Don’t blame the wind or the weather, you have to steer the course you want to travel, no matter what else is going on around you.

Here’s a bit of a confession coming up, one of the best self-help books I’ve read is called Life Strategies and it’s by Dr Phil. Yes that’s right Dr Phil..... His afternoon tv show can make me cringe at times, but I found this book really useful. One of his key things is responsibility and he won’t tolerate a victim mentality. No matter what kind of setback or trauma you have faced, he holds you accountable for how you respond to it. Victor Frankl is another excellent reference for this. It was a huge learning for me. You can adjust the way you feel. Start to become more aware of the dialogue inside your head. If you can influence your thoughts, it affects the way you feel and the actions you take. Think positive thoughts about the life you dream for, and you will feel better and orientate your behaviour towards achieving these goals. If you think negative thoughts about things that have gone wrong, or people who annoy you, then you just end up feeling worse and behaving accordingly.

A final aspect of accountability is living a life of intent. I’m reminded of Good Will Hunting. The scene where Robin Williams holds Matt Damon up and shouts at him “What do you wanna do ?”. It’s a very primal and basic yet confronting question, what do you really want to do with your life ? Sadly, most people don’t even give it any thought. Many of us are just drifting along. Living the life we feel we are supposed to lead. Following what our parents or friends are doing. Accumulating stuff to try and make ourselves happy.

In the world of FF, we talk about active vs passive in a few different contexts. There’s active vs passive income, in which case passive is better (you are FF when your passive income finally gets big enough to cover your living costs). There’s active vs passive investing, again I would say passive is better, but that’s a matter for debate. To add a third context, there is accountability for all the decisions, big and small, that you make in the course of your life. Do you actively decide for yourself, using your own brain, or do you passive go along with what is suggested or the way things always were ? In this third arena, it’s very important to be active, not passive. Even if you decide to do nothing, decide it actively, not because you were too lazy or too scared to decide. Live your life with intent, don’t just drift along like seaweed.

Summary

This is a philosophical post about life in general and my suggestion that Attitude and Accountability are two key things to focus on. Adopt a Positive, Active and Curious - PACitude - and be accountable for all aspects of your life, no matter what circumstances you find yourself in. These two things are interlinked of course. You are accountable for your attitude, and you should adopt an attitude of accountability.

All this is very theoretical. You might be wondering, in the real world, is FFA some kind of zen Buddha who practices what he preaches ? Most of the time, honestly, nope. I’m only human and a very fallible one at that. But in my better moments and when I have the rare chance to pause and reflect, this is what I try and focus on. And I feel it helps me to be a better person when I do so... Why not give it a try and see if it works for you ?

How do I invest ?

The aim of this post is to share how I’m approaching our investments as an early retiree. Please do not consider any of this as financial advice or recommendation. It’s really just a description of what we’re doing, which may or may not be good for us, let alone for your circumstances which I have no idea about!

Basically I view our portfolio in two parts : A ) residential property and B ) the rest (includes super).

At the point of retiring early, the split was 57% / 43% (of which 10% super). This split excludes the value of our own home in Australia and a cash emergency fund.

We immediately sold the overseas property we were staying in. This shifted the ratio to 42% / 58% and left us with a large lump sum to invest. I would like to reduce our property exposure A) further and firmly intend to sell at least one more property in the next 5 years. As for the lump sum, we invested about a third of it in index ETF’s and the rest is in high interest accounts. I intend to dollar cost average it over the next year or two. More on this later.

I probably better say a bit more about the investment strategy for B)...

I view the asset allocation on an overall basis with super included. My target allocation is 70% growth / 30% defensive. The asset classes I invest in and target allocations are as follows :

GROWTH

Australia shares (mainly ETF but also some direct blue chips) = 38.5%

Global shares = 31.5% (target around 3% of this AUD hedged)

Commercial property = 0%

DEFENSIVE

Aus Fixed interest (including term deposits) = 7.5%

 Global FI = 0%

Cash (includes high interest saving accounts) = 22.5%

 

A bit of explanation, starting with the portfolio exclusions...

I’m not keen on commodities, hedge funds, private equity, etc. Commods : I just don’t buy the arguments about diversification / inflation hedging, and I don’t see them as being assets worth holding for any other reason. HF/PE : very high in fees and again I’m not convinced they bring the diversification benefits many others hope for.

Commercial property, I feel there’s already enough in the ASX, not to mention my own overweight residential portfolio.

Global FI. I don’t want to touch it in this world of zero interest rates and QE. Even Aus FI I have set quite low for the same reason. I believe interest rates are at an extreme setting and they will eventually normalise. Once that happens I will be willing to invest a bit more of my defensive into FI, perhaps half or even a bit more of the defensive part.

For the shares I have split it 55% Aus / 45% global. I have been keen on 50/50 (as I’ve discussed quite a bit in the MMM forums), but eventually tilted a bit to the local as the franking credits and yield are ever so alluring. It’s also a pragmatic issue, as my international is held in VTS/VEU which do not allow dividend reinvestment. Whereas my Aus shares have a large portion of dividends reinvesting. Furthermore VEU has 5% Australia embedded. Due to these effects, it basically means if I add new contributions in a 50/50 ratio, it will roughly work out being allocated 55% Aus / 45% global. So I plan to alternate fresh fund investments every four months VAS/VTS/VAS/VEU in the same clip size.

To reiterate my position as per MMM forums, you need global shares for diversification as the ASX is highly concentrated in banks, property, mining, etc ; and gives limited exposure to Tech, pharmaceutical, heathcare etc. However there are big advantages to investing locally with the ASX high yield and franking credits. I don’t think there’s any scientific optimum, but personally I feel anywhere in the range 70/30 to 40/60 is acceptable, depending on which factors you weight the most. As it happens, my 55/45 split is at the midpoint of this...

So, after explaining the plan/strategy for B), I will backtrack to our lump sum from the overseas property sale. The actual asset allocation is currently quite divergent from target. I’m around 51% growth / 49% defensive right now. I’ll be investing decent amounts on a monthly basis until I reach the target. I’m not aiming to time the market, so I will adopt a regular pattern. On the 1st of the month I will invest 2.5k in Mrs FFA’s super. On the 10th day I will invest 20k in VAS/VTS/VEU (alternating as explained earlier). On the 20th day I will invest 2.5k in my super. This will put $30k in each of our super which is the concessional limit. And it means we’re investing 80% outside super and 20% inside. I’m not keen to add any further into super if there is no additional tax benefit (up to $30k we can tax deduct as self/unemployed). Our marginal tax rates are likely to be 19%, so super only gives a small tax benefit at 15%, which I don’t think is adequate to compensate the lengthy restrictions and regulatory risk. Of course if you are salary sacrificing and getting other tax benefits it’s a different story (hence we are maximising concessional contributions).

A caveat on market timing, if there’s a substantial correction in share prices, I will accelerate the investment plan with some additional bargain hunting purchases. I don’t intend to monitor the markets closely. But if it’s the kind of thing you hear about regardless, e.g. you see newspapers on the table with “MARKET MELTDOWN” on the front page, I will be tempted to make an extra online trade and scoop up additional cheap units. If the ASX ever heads back to 5,000 or thereabouts I will be doing this surely.

Once the asset allocation eventually reaches target, I will drop the large regular investments and maintain/rebalance periodically. There might be another big lump sum to invest when we sell the next property (we might wait a few years as it’s in perth and the market is weak there now), after which I will probably repeat this process, i.e. invest a third/half straight away and trickle the rest in over a year or two. So far the decision has paid off, as the share markets were higher back in April/May, but who knows how it will turn out. In any case, I have made this plan and I intend to stick to it.

I hope this gives you some insight into how I’m approaching our investment portfolio. It is far from perfect and there are quite a few legacy aspects that I would not repeat if I was starting over. Where possible I will try and simplify the approach and portfolio. I look forward to playing this out and see how well we can comply with the plan! Please feel free to leave any comments, suggestions or questions....

The great active vs passive investing debate

This is a huge topic, potentially a bottomless pit. There are deep theoretical arguments one can wade through about the relative merits of each approach. Then there is the more practical approach of picking out examples, or reflecting on your own experience of trying to pick stocks or time the market. It’s hard to know where to begin, but let’s try to lay down some thoughts on this.

Efficient Market Hypothesis

Starting with the theory, most economic doctrine is underpinned by this EMH premise, which makes a lot of assumptions about rational behaviour, perfect information, etc. Basically everything is already in the price thanks to the efficient market. If you believe this, then it leads towards a passive index approach, because there is no value arbitrage to be monetised via active investing.

I don’t believe markets are efficient in this sense. You just have to look at the bubbles and crashes to see that the level of price variation goes far beyond the movement in fundamental asset value. Largely this is because of human behavioural aspects, e.g. fear and greed, which defy the assumption of rational behaviour. So then, does that make me an active investor ? Well not really nowadays, but I have certainly tried over the years. Basically I evolved to the view that it is possible, but not easy, to beat the market. A safer and more reliable approach is to simply accept market returns, focus on asset allocation and minimise costs whereever possible.

Follow the smart money

It’s funny to hear phrases like this. I thought all those $20 notes were the same, but apparently some are smarter than others. And then there’s the “dumb” money going into passive index funds. Diworsification, as some traders/investors/fund managers might mock. You hear comments like “why would you want to buy the index when it means you’re going to own BHP / WOW” (or in the past it would’ve been TLS, or whatever company/sector is out of vogue). I don’t really buy into these arguments. Call me cynical, but if someone really had an investing edge to sustainably beat the market, then they should be smart enough to use it to their own advantage and bet their own money (with leverage of course). I guess most of them must hope for healthy overall market performance in which case many investors will gloss over the issue of performance vs benchmark and fees.

There is one glaring case that deserves a special mention. This of course is Warren Buffett and Berkshire Hathaway. Surely this must be the poster child for active investment. But is he the exception rather than the rule? Statistically you would have to say so.

Stock picking and market timing is foolish

At the other end of the spectrum, you will hear index advocates pan active investing as foolish and pull out any number of statistics to support their view. You will read a lot of this especially if you hang around bogleheads, MMM, etc forums. While I have gravitated towards this end of the spectrum, I am certainly not in this camp either. As I said already, I believe it is certainly possible to beat the index, just not easy. However for those who have the interest, desire and mindset, I think it certainly is a valid approach to pick stocks and/or time the market. Some of the biggest investment opportunities I have seen in my lifetime have been during market crashes (2002/3 Iraq war, 2008 GFC). If you had the temperament and conviction to buy when everyone else was running for cover, then these opportunities (that will come up a handful of times in your life) are huge shortcuts to FF. Of course, the opposite is also true. If you don’t have the temperament and discipline, then you will end up buying the bubble and selling the crash, which is a great way to extend your working career. I will say it again, it’s not easy to beat the market. One might think bottoms and tops are easily spotted on a chart, after the fact. They are much harder to see at the right end side though. And further to this, even if you can pick the top/bottom, will you have the conviction to trade it.... Or will you lose your neutral, unemotional view and get caught up in the fear/greed like most others ? I’m convinced the mindset factors are critical to success. Unfortunately human beings seem to be hard wired to fail at speculative investing. As I read somewhere, you need to reverse your natural instincts. Learn to be fearful with your losing trades (cut loss) and greedy with your winners (let profits run). Most people are fearful with their winners (worry about giving up gains / being “wrong”, take profit early) and greedy/stubborn with their losers (hold on and hope, usually as losses get magnified).

So far I’ve been talking market timing but how about stock picking - can one even hope to compete with the army of market analysts out there ? At risk of sounding like a broken record, I think it will be tough. Even to find the time to read all the annual reports and company disclosures nowadays is a challenge. Also one of the key drivers is the quality of management. Is it possible to really judge this as an amateur investor who will never be granted a private audience with the CEO and management team of a listed company ? It really takes skill and effort to succeed here, but again, I’m sure it’s possible. Personally if I had to pick one or the other, I would choose market timing as a better chance of success, purely because of the market cycles of fear and greed that you can try and gauge (provided of course that you can remain adequately detached yourself!).

Willingness, capability and need to take risk

I think that’s a quote from the bogleheads, and something I’ve found quite instructive. For me, nowadays, there is not much need to take risk. Therefore I’ve kind of ended up ditching any thoughts of active investing. Even though I believe it’s possible and I have an interest in the area, why bother if there is 1) no need and 2) bearing in mind my view that it’s not easy to achieve a positive result. If I was starting out again, or still on the journey to FF (i.e. 1) does not apply and there is a need), I guess I would be tempted to give active investing a try. It is yet another “shortcut to riches” that I have written about before. But I hope ultimately I’d have the sense to follow my own advice and stick with the boglehead approach, which I have now broadly adopted (although not in a religious way). Nearly all of it resonates with me, especially the part about minimising costs (why pay for your fund manager’s Ferrari). I think investors are spoilt nowadays to have index ETF’s with such negligible fees. Really when you think about it, having the opportunity to invest in 100’s or 1000’s of companies with a relatively small amount of capital and paying <0.2% p.a. Most people would be best served to be thankful for such facilities. Just take this easy option and find a less costly hobby. Old habits die hard though, and on the market timing front, I haven’t entirely given up : I am holding a decent cash allocation and hoping I will have the courage to “fill my boots” should another serious market panic arise in the coming years. I do slightly regret missing the previous few opportunities I’ve had in my investing lifespan.

Active investing

I’ll just finish with a few thoughts on what it might take to succeed as an active investor. As already stated, I’m not an active investor myself so take it for what it’s worth...

Firstly, should you DIY or delegate to a fund manager ? I think it depends on your capability, interest and approach. In most cases, it will be better to use a fund manager. And if you DIY, you should mentally consider it as though you are employing yourself as a fund manager. Sounds a bit silly/contrived, but basically you need to have two hats, one as the investor and another as the fund manager who works for the investor. This fund manager should prepare an investment plan, quarterly reports to review results and actions taken. The investor could even pay the fund manager (a notional payment of course, it’s all your money afterall) a fee of say 1% of funds under management, and see if this fee is recovered or even outperformed. Basically the point is you have to treat it like a pro. If you are going to be an amateur / hobbyist, then either don’t do it (use an active fund manager or go back to indexing), or keep the percentage of assets low, e.g. 20% max, to minimise the risk to your hard earned stash.

Secondly, if you decide to use an active fund manager, the question will arise of how to pick one. As many researchers have shown, past performance is not a reliable indicator. So I wouldn’t just pick the fund with the best returns last year. Really you are betting on the fund manager’s skill and capability so it makes sense to get to know the fund manager. As a minimum, read their prospectus and market reports. Do they have an active website/blog which gives good insights into their investment approach. Do you understand what they are doing and their strategy to beat the average market return ? Are their fees reasonable ? These are the questions I’d be asking myself. If all else fails, there are some Listed Investment Co’s in Australia and a very notable one in the US that have a long track record of solid performance and reasonable fees. They might be a good starting point for your research!

Where did our wealth come from ? Part three

The aim of this third post is to draw deeper insights into how we achieved FIRE. So far we have established that the majority (approx two thirds) was derived from retained earnings, and one third from investment returns. This seems to tell you what we did but not really how we did it, i.e. what did we do differently than the average person/family to enable us to retire so much earlier. When I first conceived this post I intended to perform some kind of benchmarking analysis. For example, the average person earning X, spending Y, .... and compare this against our earning A, spending B, .... ; to try and build a bridge spanning the 27 year gap between our early retirement versus conventional (let’s say 65 years). Maybe I will still do this one day, but I can’t be bothered right now – sorry! Instead I am just going to try and list out the key things we did differently from most other people, and then try to judge which of these differences really made a difference. I hope this will be more useful and insightful than just stopping at the usual message: save more / spend less (although that actually is the crux of it!)

What did we do differently ?

Flying start (new car, no debt, no HECS)

Double Income No Kids until 30’s

Property Investment and accelerated loan repayment

Overseas “Expat” for 12 years

Carless decade

Frugal spending

High salary / career progression

Which differences really made a difference ?

To varying extents, all of the above strategies helped us reach FF in fast time. Some of them probably saved a year or two of work, others maybe cut a decade or even more. Some of them are also inter-related. Let’s go through them one by one...

·        Flying start (new car, no debt, no HECS) : This certainly was a boost, partly down to part-time work and saving while studying at Uni, and partly generous parents who wanted to pay off my Uni fees. I guess it’s not a silver bullet, but probably a year or two of head start versus the average person with a car loan / HECS debt.

·        Double Income No Kids until 30’s : I used to think this was a huge factor, but so far after 3 years of parenthood, I’m starting to wonder if the kid factor is not such a massive financial drain as what I had feared (perhaps its still too early to say). Also, I personally wouldn’t advocate making this life decision based on economics. For us, it took quite some years before we felt ready and excited to have kids, and there were periods when we questioned whether we would have them at all. The biological clock certainly played a role as a forcing mechanism and we are both extremely glad to have two wonderful children. Having said all of that, I think financially it is far more optimal to be DINKs and save/invest the surplus in your 20’s. I guesstimate this can be worth 5-10 years versus a couple who have kids in their early 20’s, and resultant impact on earnings (career break / slowdown) and expenses (childcare, kids costs, etc). Again, to reiterate I wouldn’t advocate deferring kids for financial reasons. If you know you want kids and are ready and eager to have them, then go ahead and do it !

·        Property Investment and accelerated loan repayment : I think the key factor is the last part. Our serial property investment was an effective forced saving mechanism. We didn’t overleverage. I feel our investment performance was neutral. We didn’t pick great properties but we didn’t pick lemons either. We had a good run overall with tenants over the years. It probably helped us get there a bit faster but I honestly don’t feel it made a huge difference versus if we had stuck it in index ETF’s and not used any leverage over all the years.

·        Overseas “Expat” for 12 years : The first seven of those years were on a traditional multinational company expatriate package, with lots of generous allowances and equalisations. This was a big income boost and enabled us to increase savings substantially. Not all expats capture the benefit, many spend or travel it away. In our case, I think we enjoyed ourselves but also tried to make the most of the financial opportunity. Aside from the salary aspects, there are factors like being a tax non resident of Australia. I think we didn’t capture this opportunity nearly as much as we might have in hindsight. In particular, with investment more in shares than property to capture greater benefit. As per the kids factor, I think key life decisions such as this, i.e. where do I choose to live, should be made holistically and not just based on economics. The opportunity to live abroad for us brought many positives to travel and experience different cultures, and the fact we could get ahead financially was the icing on the cake. I guess this helped us quite a bit, perhaps a 3 years short cut, off the top of my head.

·        Carless decade : We were lucky to live in big cities with excellent public transport systems (i.e. not places like Oz, US, where it’s hard to live without a car). Car’s are a financial drain and living without one for 10 years must’ve saved us a fair amount. Again it’s not a silver bullet, but would’ve contributed perhaps a year or two of avoided work.

Just a process check, adding up the above I get roughly 12 years worth of avoided work. We reached FF approx 27 years earlier than conventional retirement age, so that leaves another 15 years to account for. And that brings us to the two generic early retirement “must dos” – earn more / spend less.

·        Frugal spending : I’m unsure whether we are really frugal people, but let’s go with the description nonetheless. As I’ve mentioned, we have never been in the habit of budgeting or tracking expenses. But definitely I would consider myself tight with money and someone who likes to bargain hunt, I’m sure I inherited that from my folks. Some of this has inevitably rubbed off on Mrs FFA too after hanging around with me for so long! We are not materialistic people and spend little on clothes or brands. The purse strings have certainly loosened a lot over the years, and definitely we have accumulated our fair share of useless “stuff” and made some stupid impulse purchases just like nearly everyone else does. That was a bit of a ramble but to cut to the chase I would estimate from a NW accumulation perspective, these “frugal” tendencies carved at least some 2-5 years of work versus the average. But don’t forget a lower spending level has the double whammy effect of faster NW growth AND lower NW required for FF. The latter is a much more substantial effect in our case. Our typical annual spend of $30-40k (including two kids) is far below the numbers I see for “comfortable retirement” which are of the order of $55k (and that’s for a couple without kids). If one’s spending is 40% lower than the average, then one can also accumulate 40% less in retirement funds. That is a huge shortcut; decade(s).

·        High salary / career progression : Without going into details, my salary has been above average and career progression relatively good/fast. I had a good run for 18 years. Benchmarking against an average income, I expect this is a big factor driving our early FF. It’s also the reason we managed to achieve such a high savings rate of approx 80%, which was more about high earning than extreme saving. I guess this was worth at least 10 years, probably more.

Summary

This post identified seven things we did differently from the average person and attempted to guesstimate how many years each of these factors contributed towards earlier FF. In our case, a successful career, an extended period as DINKs, and frugal spending are the key factors. As I have stated in earlier posts, increased earning and reduced spending are both very important but if I had to pick one I would target sustainable spending reduction as the most critical driver of FF (due to the double whammy and controllability). I hope this gives you some insight and ideas on how to plan your own path to FF.

Where did our wealth come from ? Part two

I sat down recently and tried as best as possible to figure out where we accumulated our wealth over the years. I won’t be posting any absolute numbers here but will talk in percentages, which still tell the basic story. This post will aim to estimate where the wealth was made based on the various buckets of Earning (net of Spending), Saving, Investing. This will be a good start, but I’m also interested to try and draw deeper insights on what really enabled us to achieve FF in accelerated time. That will be the focus of the next post, i.e. to identify what strategies we used to accumulate wealth faster than the average person, and which of these were the most effective.

Now for the hard work of backcasting the past 17 years and analysing where the money came from.

Let’s start at the beginning : As a 20 year old bright-eyed, Uni graduate. I must admit, I was lucky to be able to start from scratch (and not negative). Two things helped me get off to a flying start: 1) I had saved money from part-time work while in Uni to buy my first car with cash and 2) my parents had paid my Uni fees so I had no HECS debt.

So, from this starting point, the task is to make a bridge from – age 20 / 0% to age 38 / 100% net worth.

Despite being a relatively detailed person, I haven’t kept budgets and financial statements that will enable me to forensically calculate this, so we will have to make some simplifying assumptions. Fortunately, I have tended to buy and hold investments, and the majority of investment has been in a handful of residential properties, so I will start by back calculating the capital gain and approx. income derived from these over the years as a percentage of current net worth:

·        Property Capital Gains (after provision for CGT) : +20%

·        Property Net Income (after interest on mortgages) : +6%

I have also been a long-term regular investor in shares, but it has always been a small allocation versus property. Regrettably I don’t have good records of all the capital gains and income from these over the years, but my best estimate of the contribution is :

·        Share/Cash Investment returns (including Superannuation returns)  : +9%

Please note, the above are contributions to net worth from these investments, they are not asset allocations. My actual asset allocations are currently something like 55% Property (too much, I know!), 15% Shares, 10% Super, 20% Cash. The point of this exercise is to identify where the money came from, not where it has been invested.

To recap so far, we have accounted for a third of my net worth being generated from Investing, with 26% from returns on residential property and 9% from returns on shares/cash. Referring back to the FF waterfall (and ignoring the Savings bucket which is included in cash), so the balance two thirds must have come from the surplus of Earnings over Spending. It’s going to be difficult for me to break it down in any more detail except to say :

·        Earning (Salary/wages) less Spending : +65%                ( = 100 – 20 – 6 – 9 %)

I guess this reinforces my position regarding the preferred pathway to FF being to focus on the “Earning less Spending” part of the equation, moreso than the Investing.

The final piece of backcasting is to reconcile our historical after tax Earnings (based on employment contracts, bonuses, tax returns etc) versus the “Earning less Spending” contribution calculated above. Again I don’t have the full records of the past 18 years at my fingertips, so this involves some degree of estimation, but here is the figure I came up with…

·        Earning (Salary/wages) : +80%

·        Implied Spending : -15%                  ( = 65 – 80 %)

I must say that before doing the sums, I was expecting the Earnings to be a much larger multiple of net worth, leaving behind a huge amount of Spending that I would have no idea where all the money went. But this result is a pleasant surprise. So much so in fact that I am questioning the accuracy of my calculations and wondering if I’ve missed a chunk of income somewhere. The inferred “savings rate” is 80% ( = 65 / 80 * 100), which is at the high end based on this poll in the MMM forums:

 

source: http://forum.mrmoneymustache.com/welcome-to-the-forum/what-is-your-savings-rate/?viewresults

In conclusion, having gone through the analysis, it seems the vast majority of net worth came from our Earning (80%), i.e. active income from salary and wages accumulated over the years. Out of this, a relatively small portion was required for Spending (15%) on our basic needs and wants, leaving behind roughly two thirds of the net worth being contributed by “Earning less Spending”. The residual third has been generated from Investing, i.e. passive income and capital gains from property (26%) and shares/cash (9%).

This has been a useful exercise and only deepens my opinion that the key to achieving FF is at the top of the waterfall. Efforts to minimize Spending and maximise Earning will have the biggest impact for most people. Of course it is always beneficial to invest wisely and put your money to work effectively, but the impact is second order in comparison. If you are serious about FF, you need to focus your mind and effort where it will make the most impact. In part three (whenever I eventually get around to writing it !), I will dig deeper into this and try to benchmark the various strategies we used to reach FF.

Where did our wealth come from ? Part one

I was reading this recent MMM blog http://www.mrmoneymustache.com/2015/01/26/calculating-net-worth/ and it got me thinking... Where did our stash actually come from?

Of course, I have a fair idea that a large chunk came from salaries, out of which some was spent. And then we have had lots of investment primarily in property, which has made money over the years. While I have a good handle on our balance sheet, net worth and asset allocation today, I couldn’t definitively tell you where it came from, or answer questions raised in this post e.g. what was our savings rate?

In some ways it’s an academic question, but I’m kind of curious and I guess some readers will be too. Also I’m wondering to what extent I have practiced what I preach, about controlling spending and maximizing earning as being the two most important pillars to focus on. So this is the background to the following series, which will be in three parts.

1.      Our financial story

2.      Backcasting Net Worth into FF buckets

3.      Accelerated wealth strategies

Financial chronology

Here’s a brief summary of our main financial milestones over the past 17-18 years. Sorry I’m not including all the gory details of salaries, property prices, etc – they are private and I don’t think they’re required details for the basic questions I’m trying to answer here.

Year(s)	Milestone / Activity
0	Graduated Uni debt free. Used savings to buy new car. Moved cities to start work.
1	First year of work. Mrs FFA still studying. Company pays rent. Saving for house deposit
2	Bought property 1 (20% deposit) and moved in. Mrs FFA now working
4 to 10	Bought investment properties 2, 3 and 4. Roughly paid off each mortgage before buying next
4 to 6	Started some small share trading/investment, without huge success (or failure)
6	Expatriated overseas. Rent out property 1.
6-16	Regular monthly investment in retail actively managed funds (CFS, MLC, Perpetual etc)
10	Relocated to different country, still overseas
12	Paid off all mortgages properties 1-4. Switched from expat to local terms, paying rent again!
14	Bought property 5(overseas) and moved in
15	Parenthood ! Demolished property 4 and built new house (our intended post FIRE home). Mrs FFA becomes a SAHM.
17	Belatedly discovered ETF’s. Switched all mgd funds (2% fees) into low cost ETF’s and direct ASX blue chips
18	Quit job to return “home” to Australia!

 

Hopefully the above time-line gives you a good enough impression of our trajectory towards FF. A few key points to highlight :

·        We invested heavily in properties, but with moderate gearing and aggressive loan repayments. We did not cascade mortgages on top of each other. (Note : Just to make sure you have the right idea, these properties are villas or small houses, not McMansions !)

·        We enjoyed a lengthy period of expatriate living with company allowances for housing, etc

·        We invested consistently in shares over the long-term but at small scale and using high cost actively managed funds. At the end, our share portfolio was roughly equivalent in size to having another Australian property.

Data keeping

It has been an eye opener for me since reading FIRE blogs to see the extent to which people track living expenses. We have never really budgeted, let alone track how much we spend. Fortunately we are not big consumers or materialists, so I doubt the lack of these habits has dented our wealth too badly, but it is hard to say how much more effective we might have been over the years. One thing is for sure, the lack of such data makes it difficult to approach a task like this and figure out where the money came from. I will have to do my best to estimate and fill in the gaps.

Back in the early days, I did use to track Net Worth in a book. Initially I did it every month, but then after some years I regret I also fell out of this habit. I am trying to track down that book now, but it will take some more searching through boxes. Certainly it would be very handy for this exercise to have a timeline of our NW progress.

Coming up next

So that set’s the scene. In the next post I will analyse from our current NW all the way back to the beginning. While I don’t have records of how much we’ve spent over the past 17 years, I can estimate how much we’ve earned in salaries and the returns on our investments. From this data, I will infer spending and savings rate, as well as shed some light on what proportion of the NW was generated from active versus passive income.

Landing in Oz

We've been back for 6 or 7 weeks now and the time has flown!

This won't be a long reflection on having transitioned to FIRE, I'll save that for later. To be honest it has still barely sunk in yet.

Our FIRE is a jumble of several things - 1) quiting my "career", 2) relocating home after 17 years, 3) being a Stay At Home Dad.

[ Note : Points 1) and 3) only apply to me; Mrs FFA has already been for some years and I now empathise much better with all the things she has been telling me! ]

So far, I've felt the impact most of point 3). Being a SAHM or SAHD is a tough gig and must be one of the most under-appreciated and undervalued roles you could imagine. I guess you have to do it yourself to realise, that's how my eyes were opened.

From a practical perspective, the move has gone relatively smoothly, all things considered. We have had a lot of help and generosity from family which has made a huge difference. There's still many relocation issues to attend to, but I am hopeful some spare time will emerge to write some new posts here. The next plan is to put up a high-level analysis of how we generated our wealth, so stay tuned!

Taking a break, FIRE in progress.....

Please bear with me, there will be infrequent posts in the next month or two as we relocate back to Australia. Many thanks to all of you who have been reading and commenting - I promise to write more once the dust settles !

To RE or not to RE ?

First things first, sorry about the corny title. I just couldn’t help myself.

While I’m apologizing, sorry too for the heavy use of acronyms in this blog. I’m learning them too actually, I never knew about FIRE until a google search led me to the MMM website (oops another one) a few months ago. I hope you can figure them out. If not, please comment and I will happily explain.

 

Source of image: aidyreviews.net

Financially Independent Retire Early… it makes sense right ? The natural thing to do if you are financially independent is to retire… Or is it ?

Responsibility

We already covered some philosophical money issues in “How much is enough ? (part two)”, including my views against accumulating excessive wealth and the reasons for drawing a line in the sand called “enough”. But does it necessarily follow that you should retire immediately upon becoming FF ?

The answer of course is no. Being FF gives you more choices than the average person, but if you genuinely love your work and want to continue, there is no reason to stop immediately, or even ever. The important thing is to choose it consciously and intentionally, rather than just drift along because you don’t know what else to do, or maybe you feel uncomfortable explaining it to your colleagues, or other such questionable reasons that you will likely regret later on.

Here’s how another blogger describes it :

“While piling up net worth is a safe strategy, it is not necessarily an optimal strategy, given the fact that life is finite.  Once you have reached Financial Independence, you are now responsible for how you spend the rest of your life.  If continuing to work brings you joy, by all means continue, but remember to take more vacations and explore your alternatives. Bonnie Ware, a hospice nurse, listed the top 5 regrets people expressed on their deathbed:  working more or harder than they felt they needed to, not living a life true to oneself, not having the courage to express one’s feelings, losing touch with friends, and not allowing oneself to be happier.” - http://escapevelocity2020.com/about-me/

The bolded part was added by me. This is something I’ve been grappling with in the latter part of my career, as reflected in the “Evolving perspectives of FF” post. This might sound ridiculous, but in some ways it’s actually easier when you’re not FF, as you don’t really need to think too much about your life purpose and goals. For me anyway, I spent many years on auto pilot, toiling away purely in a quest for that “one day” when it would no longer be necessary. There was always a clear motivating force (money) and a clear goal (FF), even though these did not arise from much intentional thought on my part.

However, once you reach FF, or start getting close to reaching it, you need to find new source of motivation and fresh goals. As EV2020 says, the responsibility is now squarely on you. Auto pilot will no longer suffice. I believe the avoidance of this responsibility may well be one of the real reasons why FF people often choose not to RE, or at least delay it for extended periods.

Our decision / indecision

It’s difficult to say exactly when we became FF, depending on the criteria. I’d estimate based on a 3% SWR assumption and excluding any home equity in net worth, we crossed the line several years ago. So why keep going? In our case, I can deduce five factors that lead us to postpone RE :

·         Inertia : It’s natural to resist change and we are no different.

·         Geography : Having fun overseas…. “We’re going to spend the rest of our lives in Oz so why not one more year abroad, especially as we’re here and all setup now”

·         Re-employability (if needed): Being in a highly paid niche job makes you think long and hard before you quit. Especially in my case no such job exists in my home town. It is a completely irreversible decision. Perhaps this would not be such a big factor if you are in a more common field (e.g. accounting, teaching, etc).

·         Procreation : We had two babies in the past three years and it’s difficult to contemplate three major life changes at once (parenthood, retirement, relocating countries).

·         Greed / Fear : Let me expand a bit more on this one

Greed and fear are primal emotions that influence basically all money matters, so naturally they play a role in this too. Greed can somehow overrule the views you might have about excessive accumulation. Especially as your passive income starts to multiply and all of this flows back into more investments, the wealth starts to multiply quickly. This might become addictive in its own right. You begin to lose sight of the original plan and fall in love with your bank balance. Greed often works in tandem with his buddy Fear, who might also start whispering in your ear: “What if you run out of money, can you really cope without a monthly paycheck, markets might collapse soon after you quit work, etc.” I think you can imagine with the combination of these two goblins incessantly chattering away in the back of your head, it can invariably lead to…

OMY syndrome

One More Year. I confess we gave into this, but only once! We seriously considered pulling the trigger in early 2014. But we had a very good (and I would say valid) excuse in the joyful arrival of our second child in late 2013. Once the timing became apparent, we reassessed our plans. I was still keen initially to stick with the timeline. But as usually happens, Mrs FFA talked some sense into me. As already described above, it would be difficult for anyone to juggle three major life changes at once (newborn baby, retirement, relocating countries). In hindsight, even without this valid excuse, I am glad we took the extra year. We made the most of the bonus time overseas, and it has allowed us to mentally prepare for the big changes ahead. On the financial front it has enabled us to accumulate an extra buffer so our retirement economics are not delicately balanced.  

Therefore, while we did take OMY, fortunately we did not get trapped in OMY syndrome. In our case it was a conscious decision and not one that became ongoing, as some people seem to get stuck in.

Other considerations

I’ve been lucky to spend the latter part of my career in a good industry that pays well. A lot of people I work with have salaries and bonuses that are substantially above average. However, it also tends to be highly materialistic and for most of these people lifestyle inflation more than keeps up with earnings. Therefore sadly the majority get no closer to FIRE than the average person, despite having many times the earnings.

I’ve also seen a few others like myself who capitalize on the opportunity and exit at a young age to start a new life... Hooray!

But there’s another minority I observe who genuinely love what they do and will keep doing it long after they no longer need the paycheck. Other possible reasons for these folks not to RE include:

·         Not ready to take responsibility for what to do next (as explained earlier)

·         The power/status of their working persona

·         The social benefits of work

The power/status factor can be a big one. You might enjoy a high level of authority (official and/or unofficial power) in your workplace, where everyone looks up to you and respects you. Will you be prepared to give that up to be a stay at home parent and get bossed around by toddlers all day ? It’s hard for a “somebody” to accept being a nobody. Although this depends a lot on your ego of course.

Conclusion

FF doesn’t necessarily mean RE, although it is a prerequisite. The RE decision extends well beyond financial readiness into many other factors, not least of which the question “what do you REALLY want to do with your life, now that you fully own your time and don’t need more money?” Surprisingly, this question is not as straightforward as one might think, and if you don’t have the answer it might be tempting to roll on with the status quo. But frankly speaking, such avoidance is a cop out… FF is an amazing privilege that so many others would love to have, please don’t waste it! Tackle the challenges of RE head on, face up to any fears and accept full responsibility for your life ahead.