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.

How much is enough ? (part one)

This is THE critical question for FF. Unless you can answer it, you will never know if you are there or not, and you will never have a concrete goal to aim for. Anyone seriously seeking FF should have a specific answer to this question, i.e. a net worth figure and a target date.

Source of image: theintentionallife.com

Initial research

I’ve spent a lot of time on this recently. Obviously before quitting the career and packing up everything to head home after nearly two decades, it’s important to be sure of what you’re doing. The 2008 Global Financial Crisis is still fresh enough in mind to factor in a safety margin.

While I was reasonably confident I had enough, I started doing some research to try and “make sure”. What I managed to find was various numbers on what it costs for a couple to retire, e.g. “The Association of Superannuation Funds of Australia releases a guide to how much retirees need for retirement. They reckon a “modest retirement” is $23,489 for singles and $33,784 for couples. Yet who wants to be modest in retirement? To have a comfortable retirement (holidays, nice wine, trips to the flicks), you’ll need $42,597, and $58,326 (couples). “ – Barefoot investor, 13 Jan 15

Here is another version with four lifestyle categories :

No.	Lifestyle	Single $ p.a.	Couple $ p.a.
1	Doing OK	22,500	32,500
2	Comfortable	32,000	44,500
3	Doing Well	41,000	56,000
4	Premium	54,000	71,500

(Source: Sunsuper, Suntracker brochure)

Of course, most of these guidelines are for the average single or average couple in Australia. You will be hard pressed to find general guidance for a couple in their late 30’s and with young kids, aiming to retire 25+ years before the typical age. And furthermore, it was only answering part of the question (i.e. how much you will spend, rather than the bigger question of how big a nest egg is needed to fund this spending!)

I also found some very extreme guidelines, e.g. “when you can live on the interest on your interest” –mentioned in “ The Rules of Wealth”, Richard Templar. And I thought I was being conservative! That’s an extremely stringent target especially in this recent environment of ultra low interest rates. Even assuming Australian interest rates of say 3% (which are very high versus other developed countries), that works out to 0.03 x 3% = 0.09%. Taking the modest couple requiring $33.8k p.a., they would need $38 million according to this ! And I didn’t even allow for taxes in the calculation!

Still searching for peace of mind before taking the plunge, I decided to take advantage of the free financial advice offered by my industry super fund. This was a worthwhile experience to get myself organized, but the complimentary financial check-up in no way answered my specific questions on early retirement, and I was not keen to shell out extra money for the personal financial advice offered.

Finally some answers

So I continued my search online, and it was a very rewarding and enlightening bonus to discover the world of FIRE (Financially Independent Retire Early). I never knew there was a community of bloggers out there writing about this, the very same thing I had set out to do all those years ago! And in particular it was very valuable to find Mr Money Moustache (MMM), which I have found to be an excellent resource and have been going through it in some detail these past few months. It was only on this website that I managed to find quality information that I felt was applicable to my circumstances, albeit with geographical translation needed from US/Canada to Australia.

So what does MMM have to say on this question :

“The 4% Rule: The Easy Answer to “How Much Do I Need for Retirement?

The answers you get to this question vary widely. Financial beginners (about 95% of the population) tend to randomly just throw out a number between 5-100 million dollars. Financial advisers who aren’t Mustachians will tell you that it depends on your pre-retirement income, (with the implicit assumption that you are spending most of what you earn) and the end answer will be somewhere between 2-10 million.

Financial Independence enthusiasts will have the closest-to-correct answer: take your annual spending, and multiply it by somewhere between 20 and 50. That’s your retirement number. If you use the number 25, you’re implicitly using a 4% Safe Withdrawal Rate, which is my own personal favorite number. “

(Source : MMM The 4% Rule )

It was a relief and gave me a lot of reassurance to find someone who spoke logically and specifically to my questions on early retirement. As I said before, nearly all the general information out there simply doesn’t apply to people still in their 30’s and with young kids.

Example

So how does one apply this? Let’s go through an example of how I would approach it…

1) Take current annual spending e.g. $44,500 (Based on a “Comfortable Couple” as per Sunsuper).

2) Assume a multiplier, let’s chose 40 (A safety margin over MMM’s preferred 25, but still within his suggested 20-50 range).

3) Do the multiplication: $44,500 x 40 = $1,780,000

[ Note: I didn’t consider income tax, but with an income of $44,500 split between a couple of two, the tax rate should be relatively low. Also considering I have been conservative in the multiplier assumption, any taxes should be covered by this safety margin ]

Just to be clear, what exactly does this “retirement number” mean? In my case as a home owner, it is the amount of net worth needed over and above owning my own home outright (mortgage fully paid off). Some might include their own home in net worth and that can be appropriate in some cases. But from a retirement perspective, your home is not an asset providing passive income, and so it does not contribute to this retirement number.

Potential Pitfalls

Please note that home ownership is not mandatory for FF. If you choose to rent, then the above process still works, you just need to ensure rent payments are included in your current annual spending.

The above is an illustrative example only. Obviously you will need to consider different assumptions fitting your individual goals, circumstances and risk tolerance. And accept that it will never be perfect. Of course you could use much more complicated discounted cash flow and statistical models. Please accept these will be imperfect too and I wouldn’t have much more confidence in them based on the track record of most economic forecasters who use such models. In the absence of a crystal ball, a simple and understandable approach suits me fine.

As with any model, it’s only as good as the assumptions and thinking which underpin it, and it can be open to both use and abuse. Try to approach it with an open mind and no pre-conceived outcomes. You will only be deluding yourself if you fudge the numbers. For example, say you are desperate to retire early, so decide on a 30% reduction versus current annual spending (e.g. $20,000 instead of $28,000) and assume the minimum multiplier of 20 to give a retirement number of $400,000. This might serve as a data point for reference, but it’s not prudent to go and quit your job and retire early based on this calculation alone. Before taking such a major life decision, it would be strongly recommend to test the robustness of the assumptions, i.e. 1) try living for at least 6 months on the 30% reduced budget and see if it is really do-able and sustainable, 2) check the average after tax returns achieved on your investments and see if it is in line with the 5% (plus inflation) implied by a multiplier of 20, 3) seek professional financial advice.

Another potential pitfall is the opposite scenario, where the retirement number calculated is so huge that people are de-motivated and possibly give up at the outset. If you experience this, I can only suggest breaking it down into smaller chunks. Every journey begins with a single step. It may seem impossible to reach $1,780,000 when you are starting from scratch. But if you look over 25 years on a straight line basis, that’s $71,000 per annum, which is already much less intimidating, although still a very large number. In reality, most net worth trajectories are far from straight line. Wealth tends to accumulate more rapidly in the later years due to compounding. Try to take a leap of faith and give it a shot. There is not much to lose – even if you don’t quite reach your goals, I’m certain you will still be far in front versus not having bothered about any of this.

Conclusion

The key takeaway message from this post is to spend the time and effort to calculate your specific “retirement number”. Once you have this, FF will no longer be a vague pipedream, but gets transformed into a concrete personal goal with a clearly defined finish line. And now the choice is yours, if you are ready and willing to commit or not ?

Buying a car

After writing on heavy topics like the definition, theory and psychology of FF, it’s high time for some light relief and this post will be about the more practical issue of buying a car, which is very topical for me right now

 

 

(Source of image: http://conversation.which.co.uk/transport-travel/are-car-clubs-cost-effective/ )

The car is often described as the second biggest purchase you’ll ever make. And for many people it’s much more than a transport device, but a source of pride and pleasure. However in my case let me tell you up front that I’m not a car enthusiast. For me, it’s really just to get from A to B. So based on a clinical, economic approach, then how does one go about buying a car ?

As with most purchase decisions nowadays, one is immediately confronted with many choices :

·         Buy or lease?

·         Borrow or pay with cash?

·         What type of vehicle?

·         New or used?

·         Dealer or private seller?

Let’s go through these one by one, but firstly we should start with the basics. Sticking with the economic viewpoint and ignoring any personal sympathies or biases towards cars : It’s important to realize that a car is a liability, not an asset.

[Aside : If I recall correctly, I first learnt this concept from Robert Kiyosaki’s well known classic Rich Dad Poor Dad. I gather this book might be a bit taboo nowadays, but I also read on Early Retirement Extreme’s blog that he had listed this as one of his top two books. So this gives me comfort to come out of the closet as a fan of this book. ]

The reason to view a car as a liability is because it does not generate income, depreciates in value, and incurs ongoing costs. Now, there is an argument that one might “need” a car to get to work and earn salary. I acknowledge this might be the case, although one should also consider public transport, cycling, etc. Others might also argue that some vintage cars could appreciate in value. Anyway let’s not get stuck in these ratholes, if I can ask you to indulge me in this general notion of a car as a liability. Following directly from this, most financially educated and disciplined people will never borrow to fund a liability. Please note this does not imply you should always borrow to acquire assets! But at least it is an option to consider in the case of assets, provided the alternatives and risks are clearly understood.

So these basics enable us to answer the first two questions… Buy or lease? Borrow or pay with cash? Since a car is a liability and we should avoid borrowing for liabilities, therefore you should save up and delay the car purchase until such time as you can afford to buy with your own cash. It might not be the answer most teenagers itching for their first wheels will want to read, but I’m afraid it’s the only logical way if you have any serious ambition of FF. Delayed gratification is a very important habit to develop.

Next on the question list: What type of vehicle? Well, this is a personal question. As I declared at the beginning I’m not a car guy. If it’s a personal passion or hobby, you may have many other criteria to add into your decision making. And anyway in this case it probably won’t be a purely economic decision. But as for me, the type of vehicle is purely determined by our needs. The internet is a powerful tool and car sales websites are very useful. I recently went through the process and was hugely impressed by the search functions available. You can enter your location, maximum price budget, minimum number of seats, auto/manual, vehicle type (sedan, wagon, SUV, etc) and any other requirements you might have. Just keep tightening the search until you get a small enough number of cars to conveniently look through, e.g. 30 or 40. I also added things like maximum mileage. You get the idea. Basically sit down and think about your needs from the vehicle. Use a car sales website to search for vehicles that meet your needs. And then keep recycling back to finetune your search, as sometimes looking at vehicle ads leads to other ideas or re-consideration of needs/preferences. Hopefully after a few loops you will narrow down to the type of vehicle you want. This process takes a bit of time and effort but is well worthwhile. It means you will have ownership over the decision after exploring the various options available, which is much better than just asking your best buddy’s opinion, or buying the same car as your folks have without thinking.

We are making good progress. Now we know what type of car we will buy and we have committed to save up and fund the purchase with cash. The final step is the buying part… New or used? Dealer or private seller?

Firstly, a bit of my personal background and baggage. My parents are strongly of the “new car” philosophy. When I bought my first car as a 20 year old, I just followed in their footsteps and bought new. This car lasted me about 5 years after which I sold it second hand for roughly half the purchase price, due to overseas relocation. Overall it was a happy first car experience, but equally I could not help but notice the rapid depreciation in value. After this time, I was “lucky” to live in big cities with very handy public transport systems, and we decided to live without a car for the next decade! This is lucky in the financial sense of avoiding a liability for ten years, but I will admit there were certainly times that I missed the joy and convenience of driving. Anyway, the days of being carless are now over for us, and with much more experience and opinions of my own, I am no longer a new car buyer. The reason is simple. Most of you will have heard people say that new cars lose 10/20/30% of their value as soon as you drive out the showroom. I don’t know the exact percentage and it might depend on the make/model, but even if it’s 10% at the low end, this seems a serious waste to me.

If you’re still with me up to here, we are now ready to secure our desired used car, but should we buy it from a dealer or private seller. I would be open to either, but based on the limited sample of two used car purchases that I have made, both were from private sellers. The first one has turned out well (for a year at least!), and the second one just happened so I can’t tell you yet, but let’s keep our fingers crossed. Clearly there can be more comfort buying from a used car dealer, as you should get a small warranty period up to one year. However, the better value is often from private sellers, since dealers will include additional margins in the price to cover costs and achieve profit targets. Most private sellers do not have such business constraints and merely want to dispose their vehicle to the best paying buyer.

There you have it, all questions have been answered (Buy or lease? Borrow or pay with cash? What type of vehicle? New or used? Dealer or private seller?)…..

Well, actually there is probably one more important question to address at the higher level : How many cars to buy for your household ? Again this is obviously a personal question and heavily dependent on your situation and needs. But my simple answer would be as few as possible and to err on the side of having less cars than needed instead of more. The reason again is straightforward, a car is a liability, one should minimize their liabilities. As mentioned earlier, we lived without a car for over ten years and I believe this considerably helped our progress towards FF. Sorry for stating the obvious but while this is common sense, my observation of what many families do is quite the opposite. They seem to accumulate cars and have a bias to have more cars than needed, just in case someone comes to visit, conflicting appointments at the same time, etc. In my view these are not good reasons to have an extra car (and all the costs and time drains that accompany it). Your guests can always hire, and you can always re-schedule appointments, make arrangements to car pool etc. The money you will save can pay for quite a few taxi fares if needed.

This is turning into a lengthy post, but moving into the final part I would like to summarise my recent car purchase. We started with very vague ideas of possibly a light SUV or station wagon, and while we would prefer one car only, we might opt for a second car for convenience and since many families with two kids have two cars. After some searching, discussion and iteration, we gradually converged to the view of a single, bigger car with 7+ seats to allow us to take day trips with extra flexibility. Avoiding the second car is a huge saving in time and annual costs (rego, insurance, servicing, etc). Having narrowed our criteria, it left us with two basic options, either a medium SUV (7 seats) or people mover. SUV’s seem to be all the rage nowadays, but for us we definitely won’t be heading offroad and 4WD seems over the top to me for city driving. SUV’s also tend to be heavier and less fuel efficient than equivalent people movers. Finally, people movers tend to be a bit more spacious, especially comfort levels in the rear row of seats for any extended journey. Therefore, we finally knew our target, a 7-8 seat people mover. Up until now I haven’t mentioned budget as it isn’t really a huge constraint for us these days, but we had discussed $25,000 as maximum and $20,000 as the desired target. After a week or two of searching, we found a car that fit our needs perfectly. Admittedly this 10 year old vehicle with just over 100,000 km was a bit older than we initially had in mind. However since it was a single owner with full service history and excellent visual condition, we were willing to give it a shot. Best of all, the price was less than $10,000, not that it was a primary consideration but obviously a very handy bonus.

Please note there is a significant multiplier effect of buying a lower cost, used vehicle. It reduces the stamp duty, the annual insurance cost, etc. Furthermore and more important to me, it helps me to relax. If I spent $50,000 on a new car I would naturally be more stressed about everything, e.g. where I park, any small scratches, young kids spilling drinks, etc. I probably also might be tempted by the car salesman to top-up on optional extras (“Since you’ve spent this much already, what’s another $2,000 it’s less than 5%). When you pay less for your vehicle, you will have less knock-on costs and you also worry less, which for me is a big plus.

Well, I think I’ve exhausted this topic. Fingers crossed this latest car purchase works out for us ! I hope this gives you some food for thought and please feel free to comment with any feedback and/or alternative views on how to go about buying a car.

Evolving perspectives of FF

So far I’ve written about my general framework and preferred pathway to FF. One of the objectives for this blog is also to reflect on my personal life transition. This post will make a start on this by considering how my personal/internal perspective of FF has changed over the years, which has been quite substantial. Apologies if it’s rambling but that can be the nature of self-reflection.

As mentioned in the very first post, when I started out my career it was all about accumulating wealth as soon as possible. Work was a means to end. And the “end” clearly in my mind was being permanently parked on a picturesque beach, golf course, or other similar pleasurable location. I guess it’s a common aspiration for many young, ambitious graduates (and even the older, less ambitious variety too!). I used to track my net worth each month in a book, and drew satisfaction in the slow but gradual accumulation of this wealth pile. I was inching towards my goal and it was an excellent way to keep focused and driven in my career, budgeting, saving and investing habits.

My mindset stayed like this for around 8-10 years. I can’t recall the exact point, but somewhere in this timeframe and approaching the 30 milestone, I noticed my perspective starting to change. In retrospect, I reckon there were a few factors involved in this. When you are starting out, the FF goal is a long way off and rather abstract. It is easy to keep your head down and focused, safe in the knowledge that you are heading in the right direction and will one day reach the hallowed land. However, once you start making tangible progress towards FF and it is no longer a dim flicker of light at the end of the tunnel, but really coming into sight, then it starts to take away from everyday focus and becomes a substantial distraction in its own right.

This can manifest in different ways, a few of the key issues I encountered were : 1) lower tolerance for work / boss ”issues” that in the past would be easily accommodated as a necessary evil, 2) questioning the end game and if I would really be able to while away 40+ years on the beach and golf course. In some ways these are good problems to have. It’s like an enlightment to finally take more conscious control of one’s life and re-discover your intent and purpose. That is of course, provided that you really know what you want to do with your life ! This can also be a disorientating and destabilizing phase. After spending the better part of a decade on autopilot and happily tolerating the daily grind for the pursuit of later rewards, it can require a huge adjustment in mind set to revisit these basic questions, especially without any strong financial motivational force. I guess it could even be like the Shawshank Redemption movie, where the freed prisoner has been in jail so long that he/she no longer knows what to do when finally being granted freedom, and might even prefer to stay in prison, as crazy as it might sound.

I struggled for a long while on this, some years in fact. Mainly it was a challenge career-wise as I lost motivation and direction. Previously my career goals were always clearly aimed to progress and grow my salary and bonuses in order to accumulate enough wealth for early retirement. I knew what to do and didn’t question it, so things just chugged along. However when I began to deliberate these issues - the need to continue, more “meaningful” pursuits, etc – the answers didn’t come so easily. There was a sense of limbo or “no man’s land”. In some ways I wish I had been braver and declared FF at an earlier point, like Mr Money Moustache and others. But I was always a bit conservative and wanting a bigger buffer or margin of safety. Also I became quite attached to my job and resident country and it was quite easy to keep postponing the decision another year. Finally as already explained, I didn’t really know what to do with myself next and wasn’t quite mentally ready for FF, even though the balance sheet had probably passed that threshold some years earlier.

I’m pleased to say that as the time of FF now approaches, the uncertainty and instability is melting away and replaced by excitement and newfound enthusiasm. Perhaps the hard part for me was deciding, as one can agonise especially over timing. It’s always tempting to defer and accumulate a bigger reserve in case of the unexpected. However, after booking the one way flight home and giving notice to the boss, the decision is now made and we are past  the point of no return. I’m looking forward to the final weeks of “salaried life”, finishing off this chapter well, and eagerly await the opening of a new life chapter in the coming months!

So in reflection, there has been a massive change in what FF means to me. The initial dream of hedonistic life was useful to put me on the path and stay motivated. But as I started to make serious progress, the reality also came to me that it would not be satisfying to park on the beach for decades. This was disorientating because 1) it meant I had to find a new end goal, and 2) substantially brought forward the timeframe for FF. The second point is due to the huge difference between assuming no further employment income and an opulent lifestyle, versus some continuing employment income and a moderate lifestyle. Gradually I have recalibrated my idea of FF and the key point is being Free to choose if, what and how one might work. Not necessarily that you will never work again. I am really excited about the possibilities of working in areas where I have a deep passion, genuine interest and the chance to directly help people in need. Of course these possibilities always existed but before now my priority was Earning, which led me to other pursuits instead…….

This has been a longwinded post but if I were to draw one key conclusion it would be that there is a lot of psychology that supports (or can derail) ones progress to FF. It’s important to be aware of your own internal dialogue, assumptions and motivation, as well as how these will change over time and as you get closer to FF.