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

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

 

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Retired Buddah

 

How Much Money Do You Need To Retire?

Maslow

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