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.

More about this blog

This is to elaborate on my welcome post, after making progress in the past five weeks to get some content up here. I hope this will make it easier for you to search for posts in particular subject areas, as well as further clarifying the intention of the blog.

Structure

As you probably noticed I am a beginner at blogging so the structure and layout of this page is very basic. I have decided to use the following labels to categorise each post :

·         Financial Freedom

·         Earning

·         Spending

·         Saving

·         Investing

·         Mindset

·         About me

·         Start here

The first five labels should be self explanatory. So far I posted a lot about FF and there will be some further posts to cover my basic thinking on this. After the overall FF framework has been covered, I intend to dive deeper into the four buckets of the FF waterfall and share some of my experience and tips on how best to handle each one : Earning, Spending, Saving, Investing. The Mindset label will capture posts about the psychology of FF. About me is also obvious and will capture self reflections and other posts that give some personal background (albeit vague/non-descript as I already explained this is an anonymous blog). Finally the Start here label is for these introductory posts and any other key articles which are the foundation of what this blog is about.

Content

All of these blog posts are original content that I’m writing myself. When I quote or take inspiration from another source I will always try my best to reference it accordingly. As I start to read other blogs, I noticed a few times very similar content as what I have already put up, e.g. FF water buckets on Living My Rich Life’s blog, and the Shawshank redemption analogy in livingafi.com’s Fear of Freedom post. I guess this can easily happen as most FIRE bloggers are like-minded people and have similar influences. Where possible, I will edit my post and make a cross-reference especially if there is a close similarity. Please accept that these are purely coincidental and unintended occurrences. Meanwhile I intend to stop reading other blogs for a few weeks, at least until I type out the next 3 or 4 posts to complete my basic thoughts on the topic of FF (there will be more to come after that, don’t worry!). Hopefully this way I can avoid contaminating my own ideas and/or subconsciously copying content from others.

Not for profit

I mentioned in the first post my intention is to be honest and transparent. I’m sure readers might wonder if I plan to “monetize” this blog, and if you might soon be seeing google ads, amazon links, etc. I know it’s one of the criteria I sometimes use to screen if I want to follow a blog or not, especially as (with most things these days) readers are overloaded with choice and need to prioritise.

To answer the question: This is a Not for profit blog. I have no intention to monetize it in any way. If that ever changes I will inform you beforehand, but I really can’t foresee why that would occur. By the way, no disrespect to those who have profitable blogs, I think that’s fantastic and an excellent achievement too! But it’s not my purpose here, which is really about the objectives I already stated - to have a space for some self reflection on the transition to FF, and to give back to others by sharing the benefit of my experience, in the hope it might help those at early stages of the same journey. Of course this could be presumptuous on my part to assume this blog will ever be widely read, but I wanted to make it clear nonetheless.

How much is enough ? (part two, going beyond the numbers)

Long post warning: grab a nice warm cup of coffee now, this might take a while to read!

Part one already covered the mechanics of calculating your retirement number, and how important this first step is to get on the path to FF. But there are some deeper, philosophical and mindset factors, which I feel warrant this “part two”.

Philosophical ponderings

On the first level, there’s the issue of money itself and what’s the point? At the end of the day these are pieces of paper or a bank account balance flashing on your phone. It has no intrinsic value by itself, but of course the value comes from your ability to pay for goods, services and experiences using these pieces of paper. So we accumulate money to enable us to spend for our immediate survival needs, plus some wants/luxuries on top, plus to provide for the future via savings and investment. In this case, what’s the harm in infinite accumulation, you can never have too much of a good thing, right ? Even if you go to the grave wealthy, you can always pass it on to your family, so it won’t be wasted.

It’s a valid view held by some, but not one that I subscribe to. For me, there is value to drawing a line in the sand called “enough”. The main reason is the opportunity cost of over accumulation, which is a fancy way of saying I didn’t need to spend so much time focusing on money and could have been doing other more worthwhile things instead. A further point is my skepticism on passing on too much wealth to the next generation. Like any parent I want the best for my kids, but I would rather them be motivated and self reliant, rather than spoilt and entitled. Finally, when I look at the ultra accumulators (Gates, Buffett, Carnegie), they seem to reach a point where they stop and reverse direction, trying to give back at least half (or even all) their wealth before they die. It just makes me think, was it really necessary to accumulate so much in the first place?

It’s also worthwhile to revisit the concept of FF itself. In one of the first posts, I have defined this in terms of the FF waterfall diagram. There comes a point where your passive investment income is generating enough water to fill up your spending bucket and the waterfall becomes self sustaining. It can flow all by itself without any contribution from your active income. In addition to this, it’s helpful to also consider FF from the simple perspective of being free from any money worries. You reach a point where you can make nearly all life decisions without money being a consideration. Of course that’s not to imply you should be wasteful or careless with your wealth, but surely you will have a wider set of options than most. A useful blog post I found that describes FF from this angle is here, written by a very inspiring young man: http://www.scotthyoung.com/blog/2009/04/02/financial-freedom/

Making the right assumptions for you

I think the “free from money worries” aspect is very important to bear in mind when calculating your retirement number. In particular, it might make a big difference in the assumptions you are willing to make regarding both annual spending and Safe Withdrawal Rate (SWR). There are plenty of things one can be concerned about in retirement forecasting. The level of uncertainty is so huge that it probably causes many people not to bother at all, which is a shame. Of course, the value is more in the planning process than the financial plan itself. The critical thing is to be self aware and develop a plan that you feel comfortable with, believe in, and have ownership over.

I do get concerned when I read forum comments about SWR such as : While 4% is a good assumption, you will probably not have enough if you encounter a bear market in the first decade after retiring, in which case you either need to return to the workforce or seriously cut your spending habits until the markets recover. For me, this is not something I’m personally comfortable with, so I will be more conservative in my plan and use a lower SWR.

Please note carefully I’m not saying it’s right or wrong, just that it doesn’t work for me. For other people, they might be fully confident in the 4% assumption and equally okay with the scenario of using a plan B in case of insufficient funds. They might also validly point out that my conservative approach likely leads to over accumulation and a loss of post FIRE time. Again, there is no right or wrong, but the key is to be self aware, ensure the plan fits your situation/needs and leaves you genuinely feeling comfortable and confident. Don’t quit your job based on the generic assumptions in a retirement calculator and a piece of paper saying you’re financially free. Only to spend your retirement years fretting over every share market wobble or RBA cash rate announcement. This does not sound like “free from money worries” to me.

Pop Quiz

·         Person A has Net Worth (NW) $1,000,000, Annual Spending (AS) $30k and is FF, she has quit her high flying job and is excited to be embarking on the next phase of her life.

·         Person B has net worth $1,000,000, annual spending $30k and is not FF but well on the way. He hopes to be able to retire sometime in the next decade.

Who is right, A or B ? Surely based on the maths, NW * SWR > AS = FF, shouldn’t they both be in the same boat. i.e. If A is free then B should be too, or on the other hand if B is not free then how can A be? Hopefully based on this post you can see that it’s important to go beyond the numbers. And FF is not one size fits all (or one SWR fits all in this case).

Let me fill in some further details not provided in the earlier synopsis :

Person A is a devout mustachian. She has done her own research on the trinity study and fully believes the 4% SWR can be applied to her situation. Therefore her $1,000,000 net worth will generate $40k per annum of passive income, which is adequate to cover her spending needs. She still has a reassuring 33% margin of safety ($10k / year); a handy buffer for inflation and other unexpected costs.

Person B is highly risk averse, being influenced by his father’s gambling habits which squandered large percentages of the family wealth in the past. He was also traumatized by the 2008 financial crisis when he supported several close friends who lost their homes as mortgages were called in by the banks. Person B is only comfortable assuming a SWR of 2% in line with long term government bond yields in the US. Based on this, his $1,000,000 net worth will generate $20k per annum of passive income which covers two thirds of his spending needs, but there is still a gap that will require 5 to 10 more years in the workforce to fill.

What to make of this now? Has person A acted recklessly only to later regret her decision to quit the highly salaried job that she might never be able to get back again? Is person B playing it too safe and will rue the lost years spent working when he could have been free to follow his other passions?

In my mind, both are doing the right thing and planning for early retirement in a financially sound way – they are self aware and following a plan they feel comfortable with, believe in, and have ownership over. This is not to say it will be smooth sailing and without regret, but they have done their best in the areas they can control to minimize the risk. The really interesting thing I find in this example, is that two people with identical net worth / annual spending and both having solid financial plans, can somehow be many years (or even decades) apart in retirement timing. How can this be?

Think and grow rich

Source : www.huffingtonpost.com

 



So then, should we all rush to the local library to borrow self-help books, and maybe even take a few sessions with a life coach or motivational speaker? It seems compelling if such a small investment of time and money might enable you to retire a decade earlier in this example of person A versus B. But is it really “between the ears” to such a huge extent?

Actually, I’m a big fan of psychology, self help, positive thinking, or whatever you want to call it. I’ve created a blog label called “mindset” and will tag all posts relating to this so they can be easily found. I am sure many will be skeptical that you can think yourself to FF and it’s true this industry does not really have the best reputation (i.e. hyped up motivational seminars). However I do believe it can work and make a substantial difference, not only for FF, but for life and general wellbeing too! Like anything worthwhile this takes ongoing effort and needs to be done authentically and sustainably.

What do I mean by this? For starters, leave the gimmicks aside, e.g. staring at a Ferrari poster above your desk for 10 minutes twice per day to magically “attract” this car into your possession; or repeating positive affirmations in your mind “I will be a millionaire by 30” “I will be a millionaire by 30” “I will be a millionaire by 30”..... I consider myself an open minded person, but even I wouldn’t bother with these shortcuts to nowhere.

I would recommend the following strategies to build a strong FF mindset :

·         Read a good self help book, and re-read it annually. Preferably around end of year / new years resolution time. Stephen Covey’s Seven Habits is one of the best IMHO, but you should research and find that one that works for you.

·         Become financially educated. Confidence can’t be entirely fabricated. No matter how good your mindset techniques, if you really don’t understand what you’re doing, they will come unstuck eventually. Build authentic confidence and comfort based on financial competence.

·         Avoid comparing yourself against others. Instead compare versus plan or versus last year.

·         Focus on the controllables. Covey is big on this. I like to remember the Serenity prayer. It’s an excellent summary of this principle. And it reminds me of a favourite Seinfeld episode as en extra bonus! A practical takeaway from this – avoid watching live share market prices !

·         Above all, try to lead a balance life and keep things in perspective. Practice gratitude. Be thankful for your health and all the other positives in your life.

I don’t know if I managed to convince any skeptics with this post. If you ask me to prove these mindset techniques work, then I have to openly admit that I can’t give you scientific evidence or explanations. If you want me to quantify how much wealth I have created from my mindset, I couldn’t really do that either. All I can say is I’ve tried these approaches and feel they have a positive effect for me. Maybe they can work for you too. And even if they don’t, I really can’t see much harm. You might spend $30 on a few books (or maybe not even that if you use the library). Rarely do you see such a cost-benefit equation where the cost/risk is negligible and the payoff is potentially immense.

Conclusion

The point of this post is to dig deeper into the retirement calculation and go beyond the numbers. You can make page after page of FIREcalc graphs, but I hope I convinced you to also focus on being self aware and developing a plan that you feel comfortable with, believe in, and have ownership over.

Don’t dismiss mindset factors and the subtle role they can play in accelerating or sabotaging your FF. Remember the other definition of FF as being free from money worries. Therefore another way to achieve FF faster is to learn how to worry less, or better manage the worries when they arise. This is not some kind of magic, you saw how person A’s mindset can tolerate a higher SWR, which enables her to FIRE much sooner than person B, all other things being equal. I am a believer in self help, which might well be the best investment you can make in terms of the cost incurred versus the potential payoff. It would be great to hear your experiences, and if mindset factors have helped or hindered your journey to FF?



 

 

The final month

It’s hard not to be quietly happy as I embark on my final month of a 17 year career. Adding to this inner glow is the fact it’s a short month being February, and even further multiplying the joy is the presence of two holidays. Since today is nearly done as I write this, that makes it only 17 working days left…. Sweet !

So how did it come to this, 17 years boiled down to the next 17 days ? I don’t really know myself and will take further time post FIRE to digest and understand it all. Anyway the point of this post is not to gloat, but to reflect a little on where my head is at right now… There are plenty of things to do since in our case, FIRE also involves an international relocation with two young kids. We are lucky to have family helping on the destination side and we already bought some bits and pieces (fridge, washing machine, car) so we can hit the ground running there. We are fortunate to have an empty house ready and waiting for us too! On the departure side it will be somewhat more chaotic, the main thing yet to be booked is the moving company, which is the key job for this week. There’s a long list of other admin tasks (closing bank accounts, credit cards, change of address, etc), but still plenty of time for these.

From a career perspective, I’m keen to end it well. It’s been a happy and successful path over the years so why not end on a good note too... How to do this ? I’m trying to close out loose ends, let go for all other issues to be handed over (doesn’t come naturally for me) and giving a good exit story so that people can understand my decision. This last part is one of the more difficult things. I’ve been reading the MMM forums about how to explain FIRE, whether to tell or not, etc. In our case, I really don’t see the need to go into FIRE voluntarily, but if someone asks me directly I also wouldn’t lie about it. Making things a little easier is the merging of FIRE with geographical relocation, so it’s easier to steer the conversation to the latter. The crux of our decision to move home is down to personal reasons - the desire to live near our extended family, and raise our kids as Australians. This is an easy story for most people to grasp, and it’s also the honest truth. Therefore I tend to leave it at that and not bother about the FIRE part. Sometimes people probe into it, e.g. what will you do there ? can you continue to work in the same field ? etc. I usually answer these honestly and move the conversation into other areas. Am I being evasive or trying to hide my wealth ? Maybe, I don’t know really. But in my experience talking about money matters / relative wealth with the majority of family and friends usually ends badly. I do worry it might leave the other person feeling jealous, that we are “different “ or somehow out of touch with real people. I don’t want to drive a wedge between us and others who might not have much prospect of FIRE, or even any concept that such a thing can be achieved without a winning lottery ticket.

Anyway, in the interest of keeping this briefer than recent posts, it’s a very exciting time and I’m really looking forward to the coming months. I thought I’d be quite stressed by now about the move but it’s not the case and seems to be offset by the eager anticipation of FIRE and finally heading “home”. The end of “work” is not such a big issue. As explained in the Evolving Perspectives of FF post, for some years now I have been coming to the idea that I will continue to work after RE and phase my exit from the conventional career. It’s nice to be able to think about all the different possibilities, projects, hobbies etc on the horizon. And often I have to catch myself and remember to take it slow for the first 6 to 12 months. I got some good advice in the MMM forum along these lines, and to be open to things that come my way rather than trying to initiate/plan everything. I will try my best to follow this.