There is a widely held misconception regarding the amount of money you need to have in order to be retired.
Listen to this podcast.
Save. Invest. Let your invested money create your income.
There is a widely held misconception regarding the amount of money you need to have in order to be retired.
Listen to this podcast.
Save. Invest. Let your invested money create your income.
The Light at the End of the Tunnel!
Yah, it’s kind of a long road, but it’s doable and it’s worth the trek. The Road to Financial Independence. The Road Less Travelled.
Let’s visit the Millennial Revolutionaries for the last instalment of their story on their journey to early retirement.
Excerpted from Millennial Revolution
It’s been two hours since I resigned, and I’m still shaking.
Part of me is relieved, but part of me is also terrified. And since I never told anyone at work about what I’m actually doing, this matches the reactions I get.
“You’re QUITTING with no job lined up? Are you nuts?”
“Travel the world? How the hell are you going to pay for it?”
“Why would you quit? Don’t you like working here? ” (I couldn’t answer the question. I was too busy rolling on the floor laughing.)
The next two weeks are a blur. Goodbye lunches, concerned friends (mostly asking if I’ve lost my damned mind), and endless knowledge transfer sessions for my replacement fill my days.
And after work, Wanderer and I are busy packing, selling as much stuff as possible, and consolidating the next year of our lives into 2 backpacks. It’s actually surprisingly easy, making me wonder why the hell we EVER needed suitcases just for 2 weeks of vacation.
On my last day, I have a great time shredding anything and everything I can get my hands on. But as I pack all my tchotchkes and hug my friends good-bye, I start to wonder.
What if they’re right? What if this is a mistake?
But then, I flash back to our last meeting with Garth. Together, we had carefully dissected our plan with surgeon-like precision; making sure all our T’s are crossed and I’s are dotted. We are engineers, after all.
We go over the following scenarios:
Black Swan Events? We delay our end date to June and set aside 3 years of living expenses in cash.
Inflation? We hold Real Return Bonds and Equities.
Childcare costs? $6000 childcare credit, and NOT keeping up with the Jones’s.
Check, check, and check.
It’s all going to work out. We’re going to be fine.
As Wanderer and I board the plane, and wave goodbye to the city that’s been home for the past decade, I can’t help but wonder what’s in store for us. As excited as I am, in the back of my head, fear still churned like big, angry, tornado.
But as it turns out, I had nothing to worry about.
15 countries, 42 cities, crossing 3 continents. We travelled across North America, Europe, and Southeast Asia, all on our…*raises eyebrows dramatically*…trip around the world!
The last team to arrive…sorry I’ve been watching too much “Amazing Race”.
Anyhoo, I’m not going to bore you with every single place we visited, but I will provide you some of the most memorable, in order of most expensive (blegh) to least expensive (yay!)
You know that scene in “The Sound of Music”, where Julie Andrews is standing on a mountain, twirling and singing “The Hills Are Alive…”?
Well, that’s pretty much what I did the ENTIRE time we were there. And because I have the leakiest brain ever, that was the only line I know from the entire movie. So of course, I spend all my time singing that line, and ONLY that line, at the top of my lungs, over and over.
I CANNOT understate how both exhilarating and annoying this is.
I can’t, but Wanderer can, based on him finally getting fed up and grabbing me by the shoulders saying, “BABE, if you DON’T stop singing that song, I SWEAR TO GOD I’m going to jump off this mountain.”
I’m…not allowed to watch The Sound of Music anymore.
One thing that isn’t beautiful though, is the prices, as Switzerland ends up being the MOST expensive place we visit:
The city that taught me the true meaning of the lyrics: “I can’t feel my face when I’m with you.”
PROTIP: If you’ve never dabbled with weed before, DO NOT, I repeat DO NOT, eat an entire space cake by yourself, jump on a ferry, and then attempt to pedal two miles to get home.
Trust me. Just don’t. I’m still not sure how we managed to get home, but by the time we did I thought the squirrels were trying to eat me and Wanderer was declaring, “We’re never going to get back. Hope is lost. All is lost.” Every 5 minutes.
We ended up hopping a bunch of islands in Greece, but Santorini is by far our favourite. Hiking up and down white-stoned streets with the Aegean Sea on one side and rolling white clouds on the other, eating a lunch of fresh locally caught fish drizzled in olive oil, and then getting on an ATV and motoring out to a beach of black volcanic sand. This is why our host in Amsterdam kept insisting, “Go to Santorini! Just go!” Right before bellowing “LET’S DO A JOINT!”
We almost skipped Thailand because of the Bangkok bombing in August, but we are SO glad we didn’t. Out of all the places we visited, Thailand somehow felt most like home. The food in Thailand is like nowhere else. It completely changes your palate. (I thought Asian food in Toronto was good, but now I can’t even look at it) And it’s cheap. For a measly $3, you can have a full meal—main, dessert, and a smoothie. What can you get for $3 in North America? Half a coffee from Starbucks? Blegh.
And Chiang Mai in particular had all the modern comforts of home. Fast Internet. Good cell coverage. Even those douchey Work-Sharing places with those beanbag chairs were all over the place.
That’s why there are so many entrepreneurs and digital nomads there. I couldn’t even get a haircut without being thrown two job offers.
No matter where we are in the world, we’ll always consider Thailand our second home.
And to all those wondering how we managed to fly to these exotic locales without breaking the bank, I have three words: Frequent Flyer Miles. Actually, four words: Frequent Flyer Miles & Ryanair.
So, how much did it all cost?
Are you ready for this?
Just $40,000 for the TWO of us for the WHOLE year.
That’s $55 per day per person .
Yup, you read that right. The ENTIRE trip costs less than what we spent in Toronto every year from 2006-2011 (before The Plan turned me into a Budget Nazi)
Turns out traveling isn’t really expensive at all. It was only expensive when we were working because we had to package everything into a hectic 2-week vacation package. And when you’re not limited to weekends, fighting for flights and trains with the rest of the corporate drones, the cost plummets. Heck, we even got a bus ticket from Amsterdam to Brussels for $4 each. I’m pretty sure they LOST money just driving us there!
Meanwhile, what happened with our portfolio?
It continued paying us a solid 4% dividend throughout the year. But while we were overseas, oil plummeted all the way from $110 a barrel to a low of $30. Taking the stock market and especially the TSX along with it.
Our portfolio swung from +5% to -3%. But we had seen this crap before, and we knew exactly what to do. So together, Garth and us agreed to take the extra cash generated by the dividends and rebalance into the storm. And lo and behold, by the end of the year, we were sitting back at our original position.
A yearly gain of 0% doesn’t seem that impressive, but for comparison, the return from the TSX in 2015 was -12%. We had now survived not one, but two catastrophic financial collapses with no money lost.
And now, knowing that the real cost of travelling the world is actually the same as simply living in Toronto, we realized 3 things:
And why wouldn’t we? My last year of work showed me the damage that outsourcing could do. When a worker in India can do the job of a worker in North America while being paid half as much, we all collectively freak out. Nobody seems to win except the company. But what if we could turn outsourcing on its head? What if we could outsource ourselves? What if we could do our jobs, earn our North American income while living in a country where the cost of living is a fraction?
Right now, the press is starting to notice what we’re doing on millennial-revolution.com, and friends and family members are starting to ask us “Are you serious? Is this real?”
Yes. This is serious, and this is real. I have travelled around the world, and as of June 2016, a combination of dividends, portfolio gains, and a small income from coding and writing has resulted in a net worth that’s somehow HIGHER than when I left.
That’s right, I just travelled the world. For free.
Why was I so scared to quit again?
As with all worthwhile endeavours, although one needs to take the initiative and make the effort on their own, it never hurts to get a little help along the way.
Help can come in the way of books, friends, blogs, magazines, and various other media sources, however, nothing really beats personal, hands-on advice.
We re–join the Millennial Revolution couple to see how they discovered an advisor that helped them grow their savings exponentially by altering their financial philosophy and investment style.
From Millennial Revolution, How We Got Here, Part 4: The Bearded One
Financial advisors are weird. One second they think you’re a two-year-old, the next second you’re the goddamn Queen of England.
The transition usually happens when they find out you have half a million dollars.
Then all of a sudden, instead of slowly explaining what “compound interest” and “money” are, they’re going on about Covered Call hedge funds that get you 15-20 % returns and calling you a genius even though you’re the same person you were five minutes ago.
Garth was different.
Garth knew we weren’t geniuses.
In fact, he basically called us idiots…straight to our stupid idiotic faces. I knew instantly we’d be BFF’s.
I knew that Indexing worked, since it helped us survive 2008 without losing money. But if we weren’t sure that the same strategy for building our stash would work for early retirement, so we were trying to get help building a dividend-producing portfolio that would pay us 6%.
“Terrible idea!” Garth says. Huh. That’s weird. Everyone else called us geniuses!
Turns out that yield-chasing in the Canadian market simply results in a portfolio loaded up with oil and bank stocks, opening yourself up to a potentially nasty surprise if oil prices crash. If oil prices crashed, energy companies would crash and cut their dividends, leading to a nasty double-shock as both the yield and share prices plummet. This advice would turn out to be prescient, as exactly this scenario happened in early 2016. If I had listened to those other guys, I’d be screwed right now.
“Soooo…Indexing?” I asked, confused.
“With a twist,” he explains. The core strategy is still Indexing using low-cost ETFs, which I was already a huge fan of, but with a twist of adding higher-yielding bonds than the Government of Canada ETF’s I was using. By carefully layering in Corporate bonds, Preferred Shares, and Real Return bonds (which we will write about in a future article), we find that we could goose our yield from 2% to close to 4% without taking on much additional volatility. Solid.
So on that snowy afternoon, the three of us crafted a plan to retire in our 30’s, and we haven’t regretted it since.
Around this time, Wanderer and I also start doubling down on our writing. After 2 failed novels and 75 rejections, we are FINALLY getting somewhere with our new novel about super-villains.
PROTIP: If you’ve ever wanted to write a book thinking it was an easy way to make a quick buck, BWAHAHAHAHAHAHAHA. *falls down gasping for air*
Write because you love writing, not because it pays well, because it doesn’t. But with our portfolio now growing and generating passive income, I finally plan for the day I get do what I love instead of having panic attacks every Monday morning.
And so we wrote, night after night.
And at work, the beatings continued, day after day.
MadDog patrols our cubicles hourly, barking at anyone who dares to eat lunch while NOT typing with their other hand. At least 50% of your appendages must be working at all times!
One of my co-workers can’t take it anymore and disappears on short-term disability leave. We’re annoyed, because at the time, none of us had any idea he was on anxiety meds and anti-depressants.
And since work is as much fun as sliding down a banister made of razor blades, I can’t help but daydream about going back to Europe. So we decide to take a breather and go to London for 2 weeks.
Even though it seems far away, the Plan to reach a 7-figure portfolio and retire early has been hatched. And with work going down the crapper, I turn into an obsessive-compulsive Budget Nazi, which is why everything is now broken down into more specific buckets.
|Groceries/Eating out||$1100||We cook more, but still have weekly outings with our friends.|
|Entertainment||$45||Since we are writing like fiends we spend an ungodly amount of time at the library, reading every writing and publishing book I can find. This also has the side effect of lowering our entertainment costs down to almost nothing.|
|Bills/Transportation||$200||We start walking to work in the summer so we didn’t need a pass for the whole year.|
|Clothing||$30||Absolutely loathed shopping at this point. Not only did it feel like a chore because I wasn’t writing, I start to see mindless consumerism as ball and chain keeping me from early retirement.|
|Vacation||$583||Trip to London, trip to San Francisco for a friend’s wedding (7000 in total for the year)|
At the end of the year…
|Combined income (after tax)||$168,680|
|ROI (After Fees)||3.4%||Irritatingly, the tornado of paperwork needed to transfer all our money into Garth’s practice takes so long we miss most of the year’s returns. So we did crappily, but the rest of his clients made around 7-8%.|
|Total Net Worth||$655,830|
2013 is pretty hazy…because we spent half the year writing like crazy, and the other half drinking ourselves into a stupor.
Because we finally got a literary agent. And that literary agent sold our book!
We are now officially published authors.
When the dream you’ve had since you were eight years old finally comes true, all you want to do is laugh manically, cry, and laugh some more, before chugging an entire box of wine and passing out in a puddle of your own drool.
Work is still bad, but I don’t care. My dream came true and everything else can go fuck itself.
Now I’m REALLY motivated to budget. Because if our Plan actually works and we get to a million, I can do this FULL time for the rest of my life! And with that motivation, we take a hatchet to our spending. It’s not about sacrificing, but cutting waste. We never clipped coupons, but we changed where we shopped and what we bought.
|Rent||$850||Our landlord suddenly realizes he had forgotten to raise our rent this entire time, and bumps it up to $850|
|Groceries/Eating Out||$800||We find this awesome Chinese grocery store, which somehow sells everything at 33% less than all the other places. We eat out even less.|
|Bills/Transportation||$250||We don’t walk to work as much because we have to go home to write.|
|Gym||$75||Turns out my company had a program where we could buy discounted gym passes this entire time. *facepalm*|
|Clothing||$3||I buy 1 shirt and a few socks for the whole year.|
|Household/Gadgets||$150||We buy a new laptop after wearing out the old one from writing. Worth it!|
|Vacation||$467||A trip to visit friends in DC + Cruise from Boston to Tampa, Florida|
At the end of the year…
|Combined after tax earnings||$155,000||Earnings actually go down, as my entire department gets their bonuses cut for ‘not working hard enough.’ Whatever. Fuck ’em.|
|ROI (After Fees)||8.39%|
|Total Net Worth||$832,414|
With our Net Worth cresting above $800 grand, we now have enough to buy that slanty semi with cash, but the allure of houses is so gone by now. Buy an overpriced prison and keep working hateful job for another 10 years, or retire in 1? Hmmm…tough call…
Work sucks. Everyone is busting their ass, and rumours of layoffs and re-orgs are flying all over the place.
My boss, Scott, goes on short-term disability leave. There’s a blood clot in his leg and doctors say he has to be on blood-thinners or he might die. A month later, he comes back, acting like nothing’s happened. The blood clot is still there and he limps around with a cane, but he just works even longer hours and screams at us to do the same.
A few months later, my mentor, Andy, collapses at his desk and almost dies. His doctor says working 14-hour days is as bad as second hand smoke.
And then finally the axe falls.
But not on me.
On my best friend, Amanda, after losing half her family.
Taking her place is a foreign worker, working twice as hard for half the pay. As more and more foreign workers move in, hostility permeates the air like acrid smoke.
One day Lenny corners me in the cafeteria, fuming. “Do these fucking Indians think they can just take our jobs? We have families, kids, homes. Do they not give a shit about any of that?”
“Hey, don’t blame them. They have families too,” I point out.
“What? Why are you defending them?” He said, glaring at me. “Whose side on you on?”
“I’m not trying to take sides, but they’re miserable too. Do you know how many hours they work a day? And how little they get paid? One guy even missed the BIRTH of his own child for a meeting! How fucked up is that?”
“Great,” he throws up his hands. “So they get paid peanuts, we lose our jobs. Everybody loses!”
“Except the company.”
Lenny takes a deep breath. “So what can we do? My house is 900K, I’m in debt up to my eyeballs, and so is everyone else. We can’t risk losing our jobs. None of us can afford to stand up for ourselves.”
As I watch Lenny walk away, defeated, the feeling in my chest goe1s from a dull ache, to anger, to full-fledged rage.
At this point, I realize my journey isn’t just about retirement. It isn’t just about fulfilling my writing dreams, and ditching my hateful job.
It’s about breaking free from the corporate prison we’ve all been tricked into. Because of overpriced houses and expensive lifestyles, we’ve been conditioned to believe is this is the ONLY way to live. And corporations know this, so they saddle us with more debt, forcing us to work at our jobs until we die.
This reminds me of an episode of Mad Men I saw the other day, when this song started playing at the end credits.
You load sixteen tons,
what do you get?
Another day older and deeper in debt.
This was a song from the 1950’s about how much it sucked being a coal miner, yet somehow it feels just as relevant today as it did back then. How is it possible that 60 years later we can relate to a coal miner from 1950?!?
Because we’ve been tricked into thinking that saddling ourselves to massive debt, and being prisoners to our jobs is normal.3
Since writing this blog, friends and co-workers have been asking me “Hey! I’ve been working just as long (or longer) than you, and I don’t even have $10,000 in my bank account? Where did my money go?”
That is an excellent question. Where did it all go? Because the only difference between us is that I just kept track of where my money went, and didn’t buy into the whole “buy now or be priced out forever” crap the real estate industry sprouted at us.
Sometime around November while I was still 31 I logged into our investment accounts and, after adding up the money we had saved that year, the total staring back at me was $1,000,000. We had done it. We were millionaires.
On New Year’s, we watched the fireworks from the waterfront, knowing that this would be the last year we would ever have to work. And when we got home that night, we both flipped open our laptops and penned our resignation letters.
|Groceries/Eating Out||$750||At this point I can see the home stretch, so I’m cooking pretty much every day.|
|Entertainment||$100||Go out for movies a bit more.|
|Clothing||$20||Slightly more stuff than last year, but still bare minimum. Seriously, I hate clothes shopping. It bores me to tears.|
|Vacation||$168||We pretty much skipped out on vacation this year, since, you know, the rest of our lives would be one giant vacation.|
At the end of the year…
|Combined after tax earnings||$164,000||Wanderer gets his third and final promotion.|
|ROI (After Fees)||8.1%||Eagle-eyed readers will notice that this ROI seems too high, as 53,000 / 832,000 = 6.4%, not 8.1%. This is because the savings I made in 2014 I decided not to move into the portfolio, instead building an emergency fund due to a growing chance of job loss. Therefore, the returns of 53,000 were made on the 656,000 that was sitting with Garth from the end of 2013. 53,000 / 656,000 = 8.1%|
|Total Net Worth||$1,018,414|
There is something special about reaching a goal you’ve been running towards for 9 years. You’re sweaty, dizzy, and exhausted, but it doesn’t matter. When you see the finish line in the distance, you get a second wind. You pump your legs harder and push yourself just a bit farther.
And then all of a sudden you’re done! You reached it.
Victory is FINALLY yours. And you regret nothing, because it was all worth it. You’ve made it and no one can take that away from you. What you suspected all along was true: Failure doesn’t faze you, and now you can do anything.
Hopefully, I’ve managed to convey the fact that we are not that special, we didn’t do anything magical to get here, and we didn’t sit in our basement clipping coupons and eating cans of beans like hobos. All we did was:
Got that? Becoming a millionaire is not about hitting a home run picking stocks. It’s about not shooting yourself in the foot. If you’re reading this thinking “Hey, that doesn’t sound so hard! Can I do it too?”
The answer is: Yup.
If I haven’t already mentioned it, one of the best sources of information about how to retire early is the website: http://www.mrmoneymustache.com.
I read it regularly, and in fact, it was my inspiration for getting my financial act together and realizing that there is more to life than being a wage slave.
Anyway, that blog has just turned six years old. It has been a monumental success. So, here’s to you Mr. Money Mustache – Happy Birthday!
Check out the link below!
Taking down the old sign at the future MMM HQ building last month. Much more has changed since then! In early April of 2011, I started a blog. Although I secretly hoped that lots of people would end up reading it, it was partly just a form of personal therapy – a place where I…
Navigating along this winding road leading to financial freedom, we check back in with the savvy millennials who have laid out the path for their cohorts to follow. Keep saving your pennies kids.
Excerpted from: Millennial Revolution – How We Got Here, After The Crash
After the happy-go-lucky-fun-times of 2008/2009, I’m finally feeling relaxed and getting back into the rhythm of things.
Work is going so well, I decide to acquire a comb! Because unlike when I worked for “The Gulag”, I actually have time to shower, brush my teeth, and comb my hair. Finally, I’m starting to look and smell like me, instead of a pile of garbage disguised to look like a human being.
My new boss, Scott, is great. He leaves Lindor chocolates for us on his desk, takes us out for team lunches, even invites us to his house for summer BBQ’s. And unlike my old boss, he actually calls me by my real name, instead of “What’sHerFace”.
One day, I come home to find that Wanderer has scattered rose petals on the floor, placed vanilla-scented candles on every surface, and even set up a massage table in the middle of our living room.
After giving me a nice, long, aromatherapy massage, he gets down on one knee, and says: ‘this is what your life will be like from now on. Marry me?”
I blink. Once, twice. Three times. I’m having trouble seeing. What is this strange, unfamiliar wet stuff in my eyes?
But just as I’m about to answer “Yes! Yes! A thousand times yes!” our 70-year-old half-naked landlord bursts into the room in his tighty-whities yelling “HEY! NO CANDLES IN THE HOUSE!”
And that’s the story of how we got engaged…
The next week, we start planning for a big, elaborate wedding. But while we’re struggling to choose between Chiavari or Bentwood chairs for the reception (on the form, I write in “who gives a shit” but that just makes the wedding planner mad), I throw my hands up, and decide fuck it, we’re eloping. So instead we go to Aruba and choose a simple beachside wedding package, consisting of Wanderer, me, and the giant pile of money we’re NOT going to blow on a pointlessly extravagant wedding. To keep my in-laws from disowning us, we agree to let my mother-in-law invite whomever she wants to the reception back home.
On our big day, our perpetually frazzled wedding planner gets all the details wrong…from the flowers (we asked for lilies, we got hydrangeas), to the color scheme (we asked for red, we get gray), to even the cake (carrot cake?!? What kind of monster are you?).
But as I stare into Wanderer’s big doe-like eyes and fuzzy caterpillar brows, I think “Who cares”? I’m marrying my best friend, and we are going build one kickass empire.
We are married. On a beach, at sunset, overlooking the Caribbean. I’ve married the boy who’s been my lab partner and BFF since 2nd year university. This turns out to be my best life decision ever.
And now that we’re married and saving up for a house, I actually start to dig into our expenses.
“Hey, do you know we’re spending $500 a month JUST on beer?” I ask Wanderer.
“But beer is delicious! We can’t just NOT drink beer. That would be insane.”
“Yeah, but you know they have beer in STORES right? Why can’t we buy beer and drink it at home?”
Wanderer looks at me, confused for a second. “I…don’t…know.”
Around here we also just woke up and realized that the ritual of paying a cover charge to get groped by random strangers who are 80% Axe body spray, also known as “clubbing” is incredibly stupid. So our food budget drops effortlessly by $500/month ($300 saved by buying beer at the supermarket rather than bars, $200 saved by no longer going clubbing) . YEEHA!
|Category||Cost / Month||Comments|
|Wedding/Honeymoon||$833.33||$10,000 total for that year which includes: Aruba wedding package: $1000, Aruba honeymoon vacation package: $7000, Wedding dresses: $100+$300 (bought from an outlet),Wanderer’s suit: $400,Hair and makeup, photographer, misc: $1200,Reception: $0 (Actual cost $10,000 but it was covered by cash gifts from guests)|
Miraculously, I managed to somehow not fuck up at work, and get another promotion. At the end of the year, this is what our balance sheet looked like.
|Combined income (after tax)||$145,400|
|Total Net Worth||$380,250|
Now that we’re married, it’s time to act like real adults and start shopping for a house.
We look around the neighbourhood and find one that’s decent. It’s a semi with no parking, low ceilings, and an unfinished basement, but I do like the kickass backyard and balcony.
We ask for the price and the listing agent tells us “$750,000”.
“WHAT? But it doesn’t even have parking!”
“If you don’t want it, I have eight other buyers lined up.”1
And it’s not just this house. Let me tell you a story about “Devil House”.
You see, Devil House, is this dilapidated, two story house we see every day on our way to work. To say that it’s a fixer upper would be the biggest understatement ever. Why? Because DH wasn’t just falling over, it was inhabited by a man who would have made Charles Manson look normal. One time we walked by and saw the word UFO smeared over all his windows with what we could only hope was red paint. Another time he put up signs all over his yard ranting about the government trying to steal his eyes. And one time we walked by and saw him digging a bunch of six foot-deep holes all over his front and back yard. (This is NOT a joke. This actually happened.)
So you can imagine our shock, when, one day, we see a sign on the door that says “FOR SALE”.
“Who in their right mind would buy this house?” I ask Wanderer, incredulous.
“I bet some idiot’s going to buy it for $500k”
I burst out laughing. “No one’s THAT dumb.”
One week later, SOLD. $500k.
And to prove my point, a flipper moves in, slaps some dry wall and hardwood floors on it, and sells it for $800K two months later.
The floors were uneven. There was no parking. And a cursory home inspection would’ve revealed that the basement was a portal to Hell. But of course, no one bothered with an inspection because they had to drop all conditions to participate in the ensuing bidding war.
To this day, we have no idea how many bodies the new owners found under the floorboards.
Oh, and speaking of dead bodies I see every day, my team narrowly escapes the guillotine during a massive re-org, and we move to a new department.
Things are eerily quiet when we walk into the new office. No one is laughing. No one is smiling.
People find it strange that we joke during meetings. They find it strange our boss talks to us in human language, instead with barks and growls. They start whispering amongst each other whenever we are around. I suspect this is NOT a good sign.
Right around now we decide to take a break from all the fruitless, idiotic house shopping, and go on a vacation to Las Vegas. I have a blast. Literally.
When I come back from our trip, I learn that I have a new Director. She’s constantly mad, and with her long shaggy hair and sizeable canines, she kind of looks like a dog. So I call her MadDog. And my boss Scott has, somehow in the course of 2 weeks, gained a whole bunch of gray streaks in his hair. The reason why is obvious, as he is being constantly barked at by MadDog.
One day, he announces our work is quadrupling. Orders are coming from the top that our performance, which had racked up awards in our old department, was now somehow “unacceptable”, and we now needed to submit weekly reports detailing why we shouldn’t be immediately fired and replaced.
And just when I was starting to like this place…
|Category||Cost / Month||Comments|
|Vacation||$583.33||Vegas, Cruise, Orlando for $7000|
And at the end of the year…
|Combined income (after tax)||$167,500||Wanderer gets a second promotion. Work is getting hellish for me, with lots of overtime, but at least our salary goes up.|
|Total Net Worth||$507,150|
At this point, our cash in the bank has peaked above half a million bucks, and we start saying, “Holy crap, this is kind of a lot of money.” The plan was always to buy a house, considering it’s the “grownup” thing to do, but… considering how my work is quickly morphing into “Gulag 2.0” and the housing market is just getting more and more idiotic, we start searching for better options.
And one fateful morning while browsing finance blogs, we idly scroll by one that catches our eye.
“Hmm…” Wanderer says. “The Greater Fool…”
As I noted in the previous post, the road to retirement is one of financial self discipline.
The earlier you get on it, the earlier you’ll get to financial freedom nirvana!
Let’s continue with more excerpts from:
In the depths of the 2008 Financial Crisis, the Dow would regularly dive 500+ points, and I vividly remembered the TSX dropping over 1000 points in multiple trading sessions.
Here’s the tricky thing about investing: When stock markets are going up, it’s really easy to convince yourself you’re a genius. “Oh, I came up with this system and I picked these stocks and I’ve already made $10000!” people say. Well, that’s because everything’s going up and you just got pulled along for the ride. You have no idea if a particular investing strategy is any good until you’re see how it performs when everything’s on fire.
And in 2008, everything was on FIRE.
We had invested nearly all our assets on the eve of the worst financial crisis in modern history. Within a single trading session, we had given back all the gains we had made investing. And in the trading session after that, we were in the red. And in the trading session after that, we were DEEP in the red.
“So, how was your day?” Wanderer would say after returning home from work.
“ShitshitshitshitSHIT!” Was my reply as I hunched over our laptop watching our portfolio get pounded.
I understood, intellectually, the strategy of Index Investing, and how it was impossible for your portfolio to go to zero. But there was always the caveat that it was impossible for your portfolio to go to zero unless the world ended.
And on September 15, 2008, when Lehman Brothers filed for Chapter 11, the single biggest Chapter 11 filing in US history, causing the Dow Jones Industrial average to drop a cataclysmic 1000 points, it kinda sorta seemed like the world might actually end.
People were losing their homes left and right with entire neighbourhoods getting flooded with foreclosure signs. Newspapers were running stories about the impending collapse of the global financial system (with black-and-white pictures of 1929-style bread lines, just in case we weren’t already scared enough). People were hoarding gold and canned goods. Even Derek Foster, Investment guru and self professed “Youngest Retiree in Canada” (a title that I think belongs to me now) famously panicked and sold every stock he owned.
Losses to our portfolio kept building, and it just wouldn’t seem to stop.
By the time the end of the year rolled around, the stock markets had dropped almost 50%. Our personal losses were at 30%. The difference here is because we had 40% of our holdings in bonds, which didn’t drop (in fact, they went up), but that’s cold comfort when we logged into our brokerage account at the end of the year and the screen basically said “Hey, you know all that work you did, and all that money you saved? Well, almost a third of it is gone now. Oh, and it’s probably going to get worse. Merry Fucking Christmas.”
|Category||Cost / month||Comments|
|Rent||$800||We move in together because of the “frying pan” incident documented in Part 1 and our rent halved.”|
|Vacation||$583.33||$7000 in total for Cruise documented in Part 1|
At the end of the year, this is what our balance sheet looked like.
|Combined income (after tax)||$131,000|
|Total Net Worth||$134,900|
Our first foray into stock market investing was not going well. Within a few months, we were swimming in losses with no end in sight.
Now here’s the thing. A critical part of Index Investing is to create a portfolio that balances your holdings between stocks and bonds, and then to rebalance your holdings periodically back to your target allocation. If your target allocation is 50/50 stocks/bonds, and stocks do well to the point that it’s 60/40, you’re supposed to sell enough stocks and put that amount into bonds to restore your 50/50 target. If stocks do poorly and you’re now 40/60, you’re supposed to sell bonds and buy stocks. This causes you to buy low and sell high.
We knew that rebalancing was what we were supposed to do, intellectually. And in normal markets, selling off your winners to pick up more of your losers feels counter-intuitive. But in an end-of-the-world stock market crash, it feels downright insane.
In this situation, “rebalancing” meant not only selling off our bonds, also known as the only part of our portfolio that wasn’t currently on fire, it also meant taking every last dime of our paychecks that we could spare, and throw it into a stock market that was in free-fall, all while the media screamed “the sky is falling!” at us.
This was not fun, and I remember viscerally the feeling of putting $1000 into the stock market, only to have the stock market immediately plunge and my portfolio to go down $1000.
“Where the fuck did my money just go?!?” I would scream at the screen.
But we continued doing it, because we had faith in the underlying strategy. Buy the Index, and rebalance. No matter what.
Around mid-March 2009, the S & P 500 had found its bottom. From a pre-crisis high of 1550, it had crashed and burned all the way down to 683. But then it started climbing back up. And throughout it all, we continued to buy.
Here’s an interesting thing about this strategy. By buying into a storm, with the faith that the index would never collapse completely, as the price per unit dropped we were naturally picking up more units for the same amount of money. As a result, when the recovery happened we were able to participate in the upside more strongly than the downside. The actual value of the S & P 500 didn’t recover to its original number until 2013, but because we had picked up so many units when everyone was running the other way, we hit our break-even point, taking into account interest and dividends received along the way, by December of 2009.
So in December of 2009, we made the single biggest mistake of our investing career: we exited the stock market completely.
It wasn’t because we lost faith in the stock market, or in Index Investing as a strategy. Quite the opposite, actually. That year had given me a rock-solid faith in Index Investing that we carry to this day. While everyone was losing their shit and jumping off buildings, we, lowly unsophisticated retail investors, had managed to do something most Wall Street traders and even financial behemoths like Lehman Brothers couldn’t pull off.
We didn’t lose any money in the Great Financial Crisis of 2008.
So why did we sell? It’s actually quite simple. Talk of marriage and settling down had been happening more and more, and we figured we would probably need that money in cash for the inevitable house purchase (Spoiler: HA!). So in December 2009, we exited our positions and moved completely into cash. History would prove our move a mistake, as the index would rampage higher over the next 2 years, but as far as financial blunders go, I very much consider myself lucky that this was the biggest one.
|Category||Cost / month||Comments|
|Vacation||$750||$9000 for the year. Yes, we love our vacations.|
At the end of the year, this is what our balance sheet looked like.
|Combined income (after tax)||$136,000|
|Investment Gains/Loss||+$58,000||Holy Shit, Money. Welcome back. I took you for granted. Let’s never fight again.|
|Total Net Worth||$280,300|
The point of this blog is how to enjoy your life. That necessitates freeing up your time to be able to do the things you enjoy. Duh.
In my case, that means working less, or not at all. How can one do this?
Answer: Achieve Financial Independence. FI for short.
So, this blog is actually about several things: Retirement, Financial Independence, and Doing Enjoyable Things such as Travelling, Photography, Zen, Hiking, Skiing, Riding Motorcycles, Puttering Around, Beachbumming, and Drinking Wine.
But you’ve got to get yourself in a position, financially, to be able to NOT WORK, and do these fun and worthwhile things instead!
Here’s an excerpt from a blog directed at young people (Millennials), on how to start saving, investing, and stop wasting money. The first step on the journey to FI.
From Millennial Revolution:
It was June 2006. I’d just graduated (and by graduated I mean quietly slipped through the cracks when the Dean wasn’t looking) from Computer Engineering. We had planned a 10-day Caribbean cruise—a breather, before diving back into the working world. Since Waterloo had a co-op program, I had an offer to return to my last placement on a 6-month contract, a place I’d like to call the “The Gulag”. The last time I worked there, I spent my days running around like my hair was on fire, and threw up multiple times from stress. I think I was forming my very own stomach ulcer. So, to put it mildly, the thought of going back was met with…mixed feelings.
“Stop thinking about work! Just enjoy yourself.” TheWanderer said, popping a fat, pink shrimp into his mouth. “Ohh, these are good.”
But I couldn’t. People were laughing, canon-balling into the pool, stuffing their faces with steak and lobster, and all I could think about was how to swan dive off the ship so I wouldn’t have to go back to work.
Back on land, “The Gulag” was exactly as bad as I remembered. I was regularly working 14-hour days and weekends, with my hair smelling like soot.
The stress meant I didn’t really have the time to cook very often, so we spent a lot of meals at restaurants. Specifically bars, getting wasted to forget the fact that tomorrow I was going to have to do this all again.
|Category||Cost / month||Comments|
|Rent||$1500||Stupidly, we were renting two places and living in only one. We weren’t married yet, so to keep TheWanderer’s parents from condemning us to the 9th circle of Hell, we each had our own apartment, but as soon as their back was turned we would scamper off to his place. So half the rent was a complete waste.|
|Food/entertainment||$2700||That’s shameful $90/day! We ate out a LOT. And went clubbing, and got fancy $12 martinis. One time we went to some fancy lounge for a friend’s birthday party and dropped $200 on NOTHING. When the night was over we were still hungry and had to go get a pizza.|
|Vacation||$833.33||This I don’t regret. Even though I was dreading going back to work the entire time, even though it cost $5000 for the year, this was my FIRST vacation ever. Worth every penny.|
At the end of the year, this is what our balance sheet looked like.1
|Combined income (after tax)||$66,500|
|Total Spend||$32,000||Keep in mind that in 2006 we only started working halfway through the year. We left school with basically no money.|
|Total Net Worth||$34,500|
So somehow even after all this excess and debauchery, we still managed to save 52% of our combined after tax salary. I know people who regularly spend DOUBLE that! I just don’t get it.
I finally got sick of puking all the time and smelling like a forest fire, so I looked for another job. And within 6 months I found one. A full-time job! With benefits and shit! When I got the call from HR, I squealed loud enough to shatter all eardrums within a 10-mile radius and actually peed a little (Yup. I’m 2 parts FIRE, 1 part puppy).
The second I walked into my new office, I knew I’d hit the jackpot. No one was screaming. No one was panicking. No one was rocking themselves in the corner, crying softly. People were actually SMILING! Holy shit. I was going to love it here. (Spoiler Alert: This would not last)
Wanderer and I were working and finally getting settled, feeling like adults. Time to spend some mad money.
So in March of that year, we took a two-week vacation to Cuba. As soon as we set our bags down, we headed to the pool bar and drank like two greedy, wasteful, alcoholic fish.
|Category||Cost / month||Comments|
|Rent||$1500||Still stupidly wasteful.|
|Food/entertainment||$2200||All that eating out was starting to turn my belly button from an innie to an outie. And, since my stress level was no longer in “screaming hair-on-fire” territory, I actually had time to learn to cook. I discovered a thing called the Paleo Diet, which is less of a diet and more of an excuse to stuff more delicious delicious meat into our pie-holes. I lost 15 pounds and our food expenses dropped by about $500 / month. Win-freaking-win.|
|Vacation||$250||$3000 for the whole year|
At the end of the year…
|Combined income (after tax)||$125,000|
|Total Spend||$51,000||Was I really spending THAT much?!? :hidesheadinshame:.|
|Total Net Worth||$108,500|
We were getting comfortable at this whole “being real adults” thing and totally crushing it.
Work is great! We both get promoted for not sucking, and a nice bonus. So we decided to celebrate with a Mediterranean cruise, because why the hell not?
It’s my first time in Europe…and I am IN LOVE. We hit up Rome, Pompei, Florence, Pisa, and Venice.
I probably drove all the locals nuts with my obligatory pictures of us in gondolas, kissing under the Bridge of Sighs (did you guys know that it’s actually not a love bridge, but a bridge to death row? More about this in a future post), and yelling “THIS. IS. SPARTAAAAA!!!” at the top of my lungs in the Colosseum.
So now we’ve caught the travel bug, a disease that continues to plague us to this day!
And then something unexpected happened. The apartment I was pretend-living-in was basically a rooming house with a bunch of other students in it. And one of my housemates was constantly fighting with her boyfriend. Like, yelling, screaming, throwing-pots-and-pans at each other fighting. I never noticed because I was never there.
So one day my parents are visiting my pretend-home, and that housemate got into it once again. Anyway long story short, after a frying pan nearly nailed my mom in the face, our parents all of a sudden became totally okay with the two of us living together.
So I moved in with TheWanderer and our rent halves.
Our cash is now growing to a point that we figured we should probably start learning about investing. And like the naïve silly Millennials we were, we figured, who better to tell us what to do with our money than the people who are holding it for us? So we made an appointment with the investment advisors at our bank, and what we found was…less than impressive.
First of all, most of the bank mutual funds were a joke once you actually read past the first page of their prospectus1. Hmmm, the fund’s called “US Equity Fund,” it’s got a fee of 2%, and yet somehow when I pull up a graph of its price history overlaid on top of the S&P 500, you’re trailing on average by 3%. What in the Hell are you people doing back there?!?
And the bank “Advisors” are even worse. They won’t stop pushing me into these Managed funds. Managed? What does that mean? So I peel back the layer and I find that they’re just buying their own shitty high-fee mutual funds, and then charging me a 1% fee on top of that for the privilege! Ohhhhh, “Managed” means you Managed to find a way to get paid to do a shitty job. Sounds like a great deal, for you. Not so much for me.
My favourite moment was sitting in the office of one these “Advisors” who was trying to sell me on what would happen if I were to buy their shitty fund.
“So let’s say you invest $10,000. And the markets go up 8%. That means in one year you’ll make…uh…hold on…”
I sit there, incredulous. After what seems like way to long, I offer “$800?”
“Right!” he says, obviously surprised by my little-girl-brain’s ability to do simple math. “You’re good with numbers!”
He then offered to sign me up for an investment seminar, and then, I kid you not, asked if he could tag along as well, since he “really should learn about this stuff too.”
Thus beginning my long-standing love-hate relationship with banks. Only, you know, without the love.
It’s around here that, searching for an alternative, I learned about index investing. Index investing, meaning the strategy of simply trying to match the index rather than beat it, appealed to me immediately. It’s simple and easy to understand, most active stock pickers can’t beat the index anyway, and by buying the entire index it’s impossible for our portfolio to go down to zero.
So armed with that knowledge, I took our wad of cash and invested it in a dead-simple portfolio using the lowest cost vehicles4 I could find at the time, the TD e-Series Index Funds. My portfolio was 60% equity, 40% bonds, with the equity portion split evenly between Canada, US, and International.
Immediately once I did this, my portfolio started making money. Every week it just went up and up and up, like magic.
I stared out over the horizon, smugly confident in my absolute knowledge that I had figured it all out. I had officially won at life. It’ll be nothing but smoooooth sailing from here on out.
The journey continues. Tune in for more. Coming soon!
Yoho, named for a Cree word expressing awe and wonder, is a park of rock walls, waterfalls and glacial lakes. Yoho lies on the western slopes of the Canadian Rocky Mountains. It’ s a stunning Canadian national park with dizzying snow-topped mountain peaks, roaring rivers, silent forests, vertical rock walls, and cascading waterfalls. One more perfect setting for a retired dharma bum to tramp around in!
Yoho’s craggy peaks and steep rock faces posed an enormous challenge for Canada’s early explorers. The mountains that were the curse of railway builders are responsible for the park’s many waterfalls including Laughing Falls, Twin Falls, Wapta Falls and one of Canada’s highest at 254 m (833 ft.), Takakkaw Falls. Silt carried by streams from melting glaciers high on the mountains is responsible for the deep, rich turquoise colour of Emerald Lake and Lake O’Hara.
Many of British Columbia’s plants and animals reach their eastern extension in Yoho. The high peaks of the Continental Divide wring out the precipitation remaining in clouds moving eastward from the Pacific Ocean. This creates pockets of wet belt forest where coastal species such as devil’s club, western red cedar and western hemlock thrive.
Takakkaw Falls can be seen from kilometres away, but its loud roar is the first thing you notice as you approach. It is 384 metres from its base, making it the second highest officially measured waterfall in Western Canada after Della Falls on Vancouver Island. However, its true “free fall” is only 254 metres.
“Takakkaw” translates from Cree as “it is magnificent.”
Emerald Lake is the largest of Yoho’s 61 lakes and ponds. The lake is enclosed by mountains of the President Range, as well as Mount Burgess and Wapta Mountain. This basin traps storms, causing frequent rain in summer and heavy snowfalls in winter.
Due to its high altitude, the lake is frozen from November until June. The vivid turquoise color of the water, caused by the powdered limestone silt, is most spectacular in July as the snow melts from the surrounding mountains.
There was no better way than to end the day at the exquisite Tschurtschenthaler Lodge! What a great B&B to relax and unwind at. (Located near Golden, BC). We lucked out and got a mountainside view room for our brief stay.
This article is excerpted from http://www.mrmoneymustache.com, my favourite blog about all things related to financial independence and early retirement.
In the Financial Independence Club, we’ve got a little shortcut that goes by names like “The 4% rule”, or “The 4% Safe Withdrawal Rate”.. or simply “The SWR”.
As with all things financial, it’s the subject of plenty of controversy, and we’ll get to that (and then punch it flat) later. But for now, for those new to the concept, let’s define the Safe Withdrawal Rate:
The Safe Withdrawal Rate is the maximum rate at which you can spend your retirement savings, such that you don’t run out in your lifetime.
That sounds nice and simple, but unfortunately it’s an unpredictable thing to nail down. After all, you don’t know what sort of rollercoaster rides the economy will take your retirement savings on, and you also don’t know what rate of inflation will persist through your lifetime. Will a box of eggs cost $6.00 a dozen when you’re 65, or will it be closer to $60? How can we possibly know how much money we will need to live on in 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.
So where does this magic number come from? At the most basic level, you can think of it like this: imagine you have your ‘stash of retirement savings invested in stocks or other assets. They pay dividends and appreciate in price at a total rate of 7% per year, before inflation. Inflation eats 3% on average, leaving you with 4% to spend reliably, forever.
I can already hear a chorus of whines and rattling keyboards starting up, so let’s qualify that statement. That’s the idealized version. In reality, stocks go up and down every year, and so does inflation. Over a long multi-decade period like the gigantic retirement you and I will be enjoying, enormous things have happened in the past. The Great Depression. The World Wars, Vietnam, and the Cold War. The abandonment of the gold standard for US currency and years of 10%+ inflation and 20%+ interest rates. More recently, the great financial crash and a slicing in half of of real estate and stock values.
If you happened to retire in 1921 on a mostly-stock nest egg, you would have experienced an enormous stock run-up for the first eight years of your retirement. You’d be so rich by the time the 1929 crash and the Great Depression hit, that you’d barely notice the trouble in the streets from your rosewood-paneled tea room. On the other hand, if you retired in early 2000 while holding stocks, you saw an immediate and huge drop in your savings along with low dividend yields – and your ‘stash may be looking pretty sparse today, 12 years into retirement.
In other words – the sequencing of booms and crashes matters. Ideally, you want to retire in a time of low stock prices, just before a long boom. But you can’t predict these things in advance. So again, how do we find the right answer?
Luckily, various Early Retirement Ninjas have done the work for us. They analyzed what would have happened for a hypothetical person who spent 30 years in retirement between the years 1925-1955. then 1926-1956, 1927-1957, and so on. They gave this imaginary retiree a mixture of 50% stocks and 50% 5-year US government bonds, a fairly sensible asset allocation. Then they forced the retiree to spend an ever-increasing amount of his portfolio each year, starting with an initial percentage, then indexed automatically to inflation as defined by the Consumer Price Index (CPI).
This gigantic series of calculations was called the Trinity Study, and since then it has been updated, tweaked, and reported on, recently by a guy named Wade Pfau. He created the following very useful chart showing what the maximum safe withdrawal rate would have been for various retirement years:
As you can see, the 4% value is actually somewhat of a worst-case scenario in the 65 year period covered in the study. In many years, retirees could have spent 5% or more of their savings each year, and still ended up with a growing surplus.
This brings me to a critical point: this study defines “success” as not going broke during a 30-year test period. To people like you and me who will enjoy 60-year retirements, that would not be successful – we want our money to last much longer than 30 years. Luckily, the math in this case is pretty interesting: there is very little difference between a 30-year period, and an infinite year period, when determining how long your money will last. It’s much like a 30-year mortgage, where almost all of your payment is interest. Drop your payment by just $199 per month, and suddenly you’ve got a thousand-year mortgage that will literally take you 1000 years to pay off. Increase the payment by a few hundred, and you have a fifteen year payoff! In other words, above 30 years, the length of your retirement barely affects the safe withdrawal rate calculations.
So far, we’re liking the 4% rule quite a bit, right? But yet whenever I mention it, I get complaints. Let’s review a few of them:
That’s all well and good. While there are solid economic analyses that I believe can out-argue the points above, I’m not patient or clever enough to re-create them here. Pessimists are free to enjoy their pessimism and even write about it on their own blogs.
Instead of debating unprovable points like those above, we can completely squash them with our own much more powerful list of points:
The trinity study assumes a retiree will:
In short, they are assuming a bunch of drooling complete financial illiterates. Of course, you and I have far more flexibility in our lifestyles. In short, we have designed a safety margin into our lives that is wider than the average person’s entire retirement plan.
So now that we’re feeling good about the 4% rule again, let’s bring the point home:
Far from being a risky proposition, assuming 4% Safe Withdrawal rate is actually the most conservative method of retirement saving I could possibly recommend. To apply it in real life, just take your annual spending level, and multiply it by 25. That’s how much you need to retire, at the most. A $25,000 spender like me needs $625,000. I’ve got more than that, plus various safety margins in the lifestyle, so all is good.
Without undue risk, and as long as you have skills that can be used to earn money eventually in the future (hint: you do), I can even advocate an SWR of 5%. In other words, get your expenses down to $25k, and you can quit your job on $500k or less.
So there’s no need to debate. 4% is a perfectly good answer, which means 25 times your annual expenses is a perfectly good goal to save for. Along the way, you might find your annual expenses melting away, which makes things ever-more-attainable. But worry, you must not.
“Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.”
― Charles Dickens,
If you realize that you have enough, you are truly rich.
– Lao Tzu
I figured that I would start my wanderings at the edge of the world. Or at least as far as I could go in North America. Alaska – America’s Final Frontier. “Nothing behind me, everything ahead of me, as is ever so on the road.” ― Jack Kerouac, On the Road “Historically, Alaska is a […]