The Road To Early Retirement – Part 5

Long road5

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

HOW WE GOT HERE, EPILOGUE: THE REAL COST OF TRAVELING THE WORLD

2015

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.)

KAV_Vorpal_Flickr

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.

 

 OUR WORLD TRIP

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!)

ENGLEBERG, SWITZERLAND

swiss_alps_sitting

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:

  • Accommodations: $87/night (Air BnB)
    • Hotels in Zurich start at $300/night, so Air BnB saved our asses.
  • Food: $20/day
    • Good GOD food is expensive in Switzerland. So we ate at grocery stores and smuggled in pastries from Germany. This works because we only stayed in Switzerland for 3 days, but it’s the most beautiful 3 days of our entire trip. Not the tastiest, but definitely the most beautiful.
  • Activities: $75/day
    • Since we can’t just parkour our way up a mountain, we had to pay $70CAD to ride the lift, and another $150CAD to get to the Alps by train. Ouch.
  • Transportation: $40/day
    • Just getting around the city was PAINFULLY expensive.

AMSTERDAM

amsterdam_bikes

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.

  • Accommodations: $80 CAD/night (Air BnB)
  • Food: $30 CAD/day
    • Amsterdam cuisine very much caters to its audience: Hot, cheap, and tastes AWESOME when you’re stoned out of your mind.
  • Activities: $20/day
    • You know, in my buttoned-up white-collar cubicle dwelling days, I would have pooh-pooh’ed Trudeau’s campaign promise to legalize weed in Canada. I now stand corrected, good Sir. Weed is AMAZING.
  • Transportation: $20
    • Our Air BNB host is a bike mechanic, so he lends us bikes for the whole week. We biked everywhere for free.
    • The only cost was the $142 flight (for 2) from Copenhagen to Denmark, which average out to be $20/day over 7 days.

SANTORINI, GREECE

 

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!”

  • Accommodations: $60/night
    • This was a crazy good deal, as we were off-season. This is actually a big discovery of ours. Since everyone else has a similar vacation schedule (Summer when the kids are out of school, or the holidays), whether you’re high-season or low-season can make a huge difference. By travelling when everyone else is at work, your costs drop dramatically.
  • Food: $38/day
    • We alternated between eating out and cooking every other day. An AirBNB host from Belgium taught us how to make Waterzooi (it’s cheap and delicious, Google it!) and we are milking that shit like you would not believe.
  • Activities: $0/day
    • In Santorini, nature is the main attraction. And it’s free! Plus I probably lost like 10 pounds from all the hiking.
  • Transportation: $5/day
    • We rented an ATV for 2 days while we were there to get to some places that were further away.

CHIANG MAI, THAILAND

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.

  • Accommodations: $19 CAD/night
    • We stayed at a brand new condo in the middle of the city, with a pool, gym, and sauna! All for $575 a month! What can THAT get you in Toronto?
  • Food: $20/day
    • Strangely, eating out at the hawker stalls and local restaurants is cheaper than cooking. I don’t think we cooked at all our entire time there.
  • Activities: $10/day
    • The Thais love their elephants, and aren’t afraid of showing you.
    • Countless Buddhist temples in the city, all of which are free.
    • Also, Thai massages. My GOD, there were so many massages. And the cost of one of them was actually less than just the tip we gave to a masseuse back home.
  • Transportation: $5/day
    • You haven’t truly lived until you’ve driven through someone’s front yard in a tuk-tuk whose driver insists “This a short-cut!”

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:

  • Living in Toronto (and by extension many North American metropolitan cities) is WAY overpriced.
  • Travelling is not expensive. Travelling with other corporate drones is.
  • And most importantly, we could do this forever.

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?

Yin-Yang-symbol copyHarley 1

Retired Buddah

The Road To Early Retirement – Part 2

Long Road 1

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:

Millennial Revolution – How We Got Here Part 2: PANIC”

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.”

Spending:

Category Cost / month Comments
Rent $800 We move in together because of the “frying pan” incident documented in Part 1 and our rent halved.”
Food/entertainment $2200
Bus pass/utilities/misc $300
Vacation $583.33 $7000 in total for Cruise documented in Part 1
Savings $7033

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At the end of the year, this is what our balance sheet looked like.

Category Amount Comments
Combined income (after tax) $131,000
Total Spend $46,600
Savings $84,400
Savings Rate 64%
Investment Gains/Loss -$58,000  FUUUUUUUUUUUUUUUCCCCCKKKKK
Total Net Worth $134,900

nw_2008

2009

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.

Spending:

Category Cost / month Comments
Rent $800
Food/entertainment $2200
Bus pass/utilities/misc $300
Vacation $750 $9000 for the year. Yes, we love our vacations.
Savings $7283

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At the end of the year, this is what our balance sheet looked like.

Category Amount Comments
Combined income (after tax) $136,000
Total Spend $48,600
Savings $87,400
Savings Rate 64%
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

nw_2009
Coming up next: How We Got Here – Part 3.

Yin-Yang-symbol copyHarley 1

Retired Buddah

How to Retire Early

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.

I look like I'm having fun, but in reality I was thinking "Would they mind if I refused to go back up and live underwater forever?"
I look like I’m having fun, but in reality I was thinking “Would they mind if I refused to go back up and live underwater forever?”

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.

Spending:

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.
Bus pass/utilities/misc $300
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.
Savings $5750

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At the end of the year, this is what our balance sheet looked like.1

Category Amount Comments
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.
Savings $34,500
Savings Rate 52%
Total Net Worth $34,500

nw_2006

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.

2007

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.

Alcohol and swimming. It's a winning combination!
Alcohol and swimming. It’s a winning combination!

Spending:

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.
Bus pass/utilities/misc $300
Vacation $250 $3000 for the whole year
Savings $6167

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At the end of the year…

Category Amount Comments
Combined income (after tax) $125,000
Total Spend $51,000 Was I really spending THAT much?!? :hidesheadinshame:.
Savings $74,000
Savings Rate 59%
Total Net Worth $108,500

nw_2007

Right around here, we had noticed our bank balance cross above 6 figures, 2 years out of school. We shrugged, thinking that’s weird, and moved on.

2008

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.

Venice. Basically all the romance, stuffed into one city.
Venice. Basically all the romance, stuffed into one city.

 

The Coliseum. Basically the largest Amphitheatre ever built.
The Coliseum. Basically the largest Amphitheatre ever built.

 

Circus Maximus. Basically an empty field. Way to drop the ball, ROME.
Circus Maximus. Basically an empty field. Way to drop the ball, ROME.

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!”

Hoo boy.

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 National Park – British Columbia

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 Mtn

Yoho River 2

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.

Takakkaw Falls 6Takakkaw Falls 3

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.

WildflowerSquirrelTakakkaw 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.”

Takakkaw Falls 4
The falls are fed by the Daly Glacier, which is part of the Waputik Icefield. The meltwater keeps the volume of the falls up during the warm summer months, particularly in late spring after the heavy snow melts, when the falls are at peak condition.Takakkaw Falls 2
Yoho River
 The Yoho River originates at the north end of Yoho National Park and flows generally south to join the Kicking Horse River some distance northeast of Field, BC. The river also picks up the waters of Whiskey-Jack Creek near Takakkaw Falls. From there it flows another 7.8 kilometres to its confluence with the Kicking Horse River. Takakkaw Falls 1
Here in the shadow of the Great Divide are the secrets of ancient ocean life, the power of ice and water, and the stories of plants and animals that continue to evolve today.
Emerald Lake 1

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. 

Emerald Lake 2

Emerald Lake CanoeingSilt carried by streams from melting glaciers is responsible for the deep and rich turquoise colour of Emerald Lake.
Emerald Lake Tourist

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.

Emerald Lake Tourist 2

Emerald Lake 3

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.
Moosehead

View from B&B 1View from B&B 2

Heritage Softail

 

Yin-Yang-symbol copy

Retired Buddah

 

How Much Money Do You Need To Retire?

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

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:

  • The trinity study is based on a prosperity anomaly: the United States during its boom years. You can’t project good times like that into the future, because we’re just about to enter the Doom Years!
  • Economic growth and stock appreciation was all based on cheap fossil fuels. How will this all look after Peak Oil hits us!?
  • You can’t take a one-size-fits-all rule and apply it to something as varied as an economy and an individual’s life! My health care costs could go up! Hyperinflation could strike!
  • Even at a 4% withdrawal rate, there’s still a chance of portfolio failure. That means I’ll be flat broke and out on the street in my old age. I recommend doubling your savings, and going for a 2% SWR instead because there’s never been a failure in that scenario!
  • This is all wrong! Waaah, waaah!

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:

  • never earn any more money through part-time work or self-employment projects
  • never collect a single dollar from social security or any other pension plan
  • never adjust spending to account for economic reality like a huge recession
  • never substitute goods to compensate for inflation or price fluctuation (vacation in a closer place one year during  an oil price spike, or switch to almond milk in the event of a dairy milk embargo).
  • never collect any inheritance from the passing of parents or other family members
  • and never do what most old people tend to do according to studies – spend less as they age

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.

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“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, David CopperfieldGreed-930x570

If you realize that you have enough, you are truly rich.
– Lao Tzu