Tuesday, 13 November 2018

I want it all and I want it now

FI gives you freedom to fill your days with whatever you desire. But becoming FI takes time and that does not go well with my lack of patience. People around me buy nice stuff. I have ETFs and an empty fridge. Where is my freaking reward after doing everything by the FI rule book for 5 years!?

The scene
I lived abroad and traveled the world. It was awesome. After being well in my 30s I settled down. I finally started doing everything by the book. Not my book but most peoples book. We got jobs, bought a house and are proud parents. We paid off a substantial chunk of the mortgage. We make good money, spend mindfully and invest what is left. Above all; everyone is healthy.

The mind
Geldnerd recently made an awesome tool which confirmed my own back-of-the-envelop calculations. Ten more years and I can walk out of my office and never look back. At the tender age of 52. Not bad at all. We both work four days. Every Friday is already a partime, pre-pension day for me. My job offers a great DC pension with low costs. The math is clear; I should just sit it out for ten more years.

The heart
I don't like my job. Not this one in particular. I have nice colleagues and the projects are interesting. I probably will not like any job where I sit behind a computer in a company where the only goal is more profit. Ruled by computer systems that say no when common sense says yes. I would love to walk out now and start my own business. Maybe in the same field, maybe not. But my mind is stopping me from doing that, see above.

How is this fair? Once people find the FI concept you cannot expect them to hang around in their jobs for a few more decades! We have better things to do. We could make a real difference to the world instead of working!

Everyone is raving about compounding but it has one big disadvantage. It takes forever. Five years into the FI journey and all I have to show for it is a number of ETFs on my computer screen. And the computer says no again when asked whether it is enough to quit. 

I want it all and I want it now.

Saturday, 10 November 2018

Parental leave or part-time prepension?

I have been on parental leave since our oldest was born. With the youngest starting school halfway next year many colleagues assumed I would show up full-time again soon. With the news leaking out I will not, I got some interesting questions (interrogations!?) showcasing how stuck most people are in their old-world ways.

Parental leave in the Netherlands
Many people over here use their right to parental leave. Unless you are a government worker the leave is unpaid and both parents can take up to 26 weeks. The original idea being that if both parents would work 0.5 fte you can be at home for the first, intense year. Most people including us seem to use it differently. Both parents work 4 days and they typically do so until the youngest one goes to school at the age of 4. 

By that time you run out of days and you automatically fall back to your contractual work week. Unless you indicate you prefer to decrease the size of your contract and only show up 4 days a week for the rest of your life. Makes sense to me.

You lazy bastard!
Not all my older, white, male-dominated colleagues are agreeing. Some call me lazy. I disagree. They seem to forget their wives don't work. This brings their family workload to 5 working days a week. We do 8 working days equally shared between the 2 of us. We also equally share the family workload. Sounds fair and not lazy at all to me. Feels busy enough anyway.

You will have a lower pension!
This I cannot deny. If you work 80% your pension will be 80%, plain and simple. However, this is old-world thinking. You spend all your money every month and your life style requires a similar amount of income after retirement. Not us. We have a savings rate of 35%. While both working 4 days. No need for more pension. I have no interest in pumping more money into a broken system.

What are you gonna do all day long?
No offense but these kids drain your energy and time. Although I have no concrete plan what I'll do when I finally have some own time again, I am sure I will enjoy it! I might do more sports. I might use my bad knee as an excuse not to. I might cook more from scratch. I might decide after the first attempt that making your own pasta is too much work and never do it again. I might write more posts. I might binge watch Netflix. I might find a new hobby. I might sit on the couch staring in the distance enjoying the silence.

I have no concrete plan but I am convinced I will enjoy my part-time, prepension every Friday!

Saturday, 27 October 2018

Playing with FIRE without getting burnt

Living your life with a FIRE strategy essentially means there are two phases. You'll first have to accumulate money to invest by spending less than you earn. At times this can be difficult as spending money can be a lot of fun. On top of that the markets can be turbulent at times (for instance, right now!) which makes you wonder even more why you are doing this to yourself. Luckily at the end of the rocky road you'll reach your FI number and enter the next phase; early retirement! Can you now relax and enjoy? Let's have a look at the numbers.

30 years of investing
Let's assume someone started a career at the age of 25. She starts pumping 500 into an ETF from day 1 and does so for 30 years. It is 2018 now, where does this leave her?

500/month investment in VWRL using historical data.
Well, obviously in a much better place than someone who had mindlessly spend it all! Almost 700,000 in the bank. Let's assume this is 25 times her yearly post-retirement spending number (€28,000). Based on the 4% rule this is enough to pull the trigger and retire. The ride probably felt rocky with 2 major market crashes but hey, you made it, congrats! 

Retirement is nerve racking!
After early retirement you'll have to stay in the market. Otherwise you will run out of money. The dampening effect of buying low when markets are low is not available to you any more. You don't have the income to buy more stocks. Therefore it makes sense to not go for 100% stocks anymore. To partially avoid volatility you can go for 50/50 stocks and bonds. 

What will happen? Off course we don't know. Many scenarios have happened in the past, depending on when you retired and what the market did next. I used the Trinity study to produce the graph below.

After retirement volatility!
The volatile of the line from the first graph (accumulation phase) suddenly looks very stable. What happens afterwards (dots on the right) is where the scary volatility is. The median of what could happen to your €700,000 in the first 30 years after retirement is that it grows to almost 2 million. You could get lucky and end up with more than 3 million. Mind you, this is while using money from the stash every month even increasing your income with inflation.

You could be unlucky and run out of money after 20 years. Yikes! Not sure how relaxed I would be with the different scenarios being so, well, different in how they impact on the rest of your life. If you feel uncomfortable with the current minor market correction, imagine what you would feel like when your income fully depends on it!

A way out
If you think you might not be able to handle this insecurity and the vastly different outcomes your retirement might have, there is a way out. You can buy a traditional pension from your €700,000. Retiring at 55 like the lady in our example would mean you receive €2227/month (best offer I could find here). Not bad and fairly close to your 4% withdrawal rate. You get this amount guaranteed until you die. The catch? After that the money is gone. Nothing left, guaranteed! Peace of mind is expensive. But might be worth the money for some.

Sunday, 21 October 2018

Subtle ways of unintended market timing

The basic idea of many people aiming for FIRE/HOT is to invest in low-cost ETFs that exactly track the performance of the world-wide stock market as a whole. Besides not picking winners, people keep the costs low and don't time the market. The latter one is most tricky. Even if you think you are not timing you might be timing after all. At least I am.

Why timing is bad
Our investment strategy is to buy the same amount (in euro's) of an ETF every month on the day our salaries arrive. This means there is no need to log into our account at any other point during the month. This keeps the psychological burden low and for me it is most easy to stick to the plan like this. 

My timing is not always bad, sometimes it is really good! See for instance here a post I wrote just before the recent market correction. I could have prevented a 7% drop of my portfolio by selling. The problem is that I have no clue whether the correction has now ended. Hence you would have to time correctly twice, not only to get out but also to get back in not to miss an upswing. 

Sometimes my timing would have been bad from the start. Five years ago I felt the markets were on the high side, considering the financial crisis was resolved with more debt. This had to go wrong! But it did not. Markets went up by a lot in the last five years. It still feels we are overbought at this point but I'll stay put.

Timing happens all the time
So that is clear, I should not time. Unfortunately it is not that simple and I am still doing it. Not the obvious way as described above but in more subtle ways.

With the markets down around 7% at the moment, I thought it was smart to buy an extra portion of our favorite ETF this month. Buying extra can never be bad as I also still stick to the plan, right? Wrong! Where does the extra money come from? Apparently our cash position is too large as I am happy to throw more into the market. This is a sneaky version of dollar cost averaging which the numbers tell you should not do

Dollar cost averaging is certainly better than not getting into the market at all. So if investing a lump sum scares the crap out of you by all means use dollar cost averaging. But be aware that you are, and that the numbers are against you. I only realized I am doing it after a recent discussion in the FireNL Slack group.

I don't see the point of having a bond position. Not because I feel I have balls of steal and can handle the full volatility of the stock market. No, it just feels the interest rates are so low that this has to end somewhere soon. As a consequence, bonds will go down. I prefer to keep cash instead of bonds. Darn, timing again! Who says interest rates cannot go down further or stay around 0 for another decade?

Any other sneaky versions of timing I am blatantly unaware of? Let me know, it might help me to avoid them!

Monday, 15 October 2018

Mind the gap; a remortgage hack

In the current low-interest environment many people are considering to pay an interest penalty fee ("boeterente") to remortgage. We recently did the same and I was surprised by the simplicity of the calculation by the bank. Many people in the FI community aim to pay off their mortgage early and in that case there is a substantial amount of additional money coming your way that the bank seems to ignore in their calculations. 

An example; what the bank does

Let's assume someone has a 30-year annuity mortgage. The interest is fixed for ten years. After five years the remaining mortgage is 200,000. The interest rates offered by the bank are substantially lower nowadays. This person goes to the bank to calculate the interest penalty fee to be paid. You can calculate your penalty fee here. Let's assume the penalty fee is 5000. If your new, lower interest rate decreases your monthly interest payment by 200, the bank will argue you earn the penalty fee back within 25 months. 

If you fix the interest rate for longer than 25 months you should go for it! If you would fix it for 15 years (up to 2033) you'll have 155 months to benefit from the lower interest rate after the break even point. It should be said (but never is) that there is also a scenario of even lower interest in the future. In that case you have paid a fine for nothing and are again stuck with a what-turns-out to be relatively high interest rate.

That being sad, people should really check out this option as it can save you a lot of money which you can invest. In our personal case our monthly interest payments went down to 325/month. This is before the tax benefit which brings it down to approximately 200. We felt this is a no-brainer and are happy to fix this ridiculously low amount for the coming ten years. Ten years might be enough to save up enough to pay off the rest of the mortgage!

What the bank does not tell you
Back to the example mortgage. There is nothing wrong with the bank's argumentation. But there is an additional advantage if you pay off your mortgage faster than the standard 30-year plan. And it is rather big. 

Debt left when paying off €200,000 in 25 years with a 2, 4 or 6% interest rate.

In the graph above the mindset off the bank is like the majority of their customers who will remortgage and struggle for 25 more years to pay their mortgage. Afterwards the full mortgage is paid off, regardless of the interest rate. No need to take this into account in the remortgage calculations as their is no difference at the end of the full mortgage period.

Many people in the FI community are paying of their houses much faster than the standard plan.  This is where the magic happens. If someone decides 15 years from now (in 2033) to pay off the remainder of the mortgage, there is a gap in what you owe the bank depending on the interest rate you paid along the way. This gap between 2 and 4% interest is 12,000 and that amount roughly doubles looking at 2 and 6%. 

This is awesome! By paying less interest for 15 years you end up in a situation where you owe the bank less. If this is not win-win I don't know what is!

Thursday, 11 October 2018

Pension gate - paying fees for bad performance

My defined contribution (DC) pension has an option to invest in the passive ishares developed world index fund. This is what I obviously do but most of my colleagues have Nationale Nederlanden to actively manage their pension. This means they buy into the NN first class return fund. A fund with a name like that must surely outperform the market! Let’s have a look at the actual, shocking numbers.

Did they really underperform every year on record!?
I can’t go back further than 2014 as the NN fund became operational in that year. I used performance data from Morningstar and initially compared the NN fund to the ishares developed world index fund as these are the two options I have within my pension. The passive tracker outperformed the higher cost active fund each year. Simply investing in all stocks in the developed world resulted in a more than double yield (69.72% vs 32.82%) compared to “experts” picking stocks for you…

Performance (%) of NN active fund vs. passive strategies (1-10-2018).
You could argue I just got lucky as the developed world outperformed the developing world in the last 5 years. Bringing VWRL (passive whole world tracker) into the mix proves that argument wrong. The developing world is relatively small and only has a minor negative impact on the still impressive performance (66.62%), and still hugely outperforming the "experts".

You could also argue the NN fund is not only investing in stocks but also in different categories like real estate (stocks anyway), a hedge fund (mostly stocks again), as well as commodities and bonds. All these positions are acquired by buying into their own funds again, let’s at least hope they don’t charge fees again inside the NN first class return fund. 

Play it safe

Why they try to play “safe” by diversifying out of stocks is beyond me. While you get older they throw larger proportions of bonds into the mix anyway (via 3 separate funds to complicate things further). Plus if anyone can bare the risk of going 100% stock for young people it is pension funds, as the risk is shared with participants from all generations. 

Anyway, as 30% of their positions were outside stocks in the 2018 Q2 report, I added a VWRL:bond (70:30 mix) into the equation just to show it still outperforms the NN fund by quite a margin. I used the best performing bond NN has on offer (ishares core euro corporate bond) so this is as much help as I can offer them. 

The conclusion is NN heavily underperforms a passive strategy, whichever way you look at it.

Listen to Jim!
Jim Collins is the author of the legendary stock series posts and the book the simple path to wealth. In essence his advice is to avoid stock picking, market timing, and fees. Many people in the FI community follow his advice. NN is clearly trying to pick the winners which I show here is a fool’s game. Along the way they charge fees to keep the stock picking circus running. 

At least they are not timing the market, right? They simply invest the money that comes in from the salaries of their participants every month instantaneously. Or are they? I noticed cash funds are showing up in the investment list of the NN first class return fund lately. This implies they keep cash inside their fund. Effectively they are trying to time the next market crash. Three basic rules of investing, all broken!

Business as usual
NN did what any pension fund does, or in fact anyone offering active funds. After underperforming for a few years, you slightly tweak the fund and give it a new name. NN send everyone a letter explaining they tax-optimized the fund and added a “I” to the end of the name. 

This comes in handy as rating websites like Morningstar  cannot connect the dots anymore and your fund gets a fresh start. If you are lucky the first couple of years you can even start an ad campaign on TV showing off how much you outperform the market. 

Sadly, in the case of pensions, most people don’t have any choice but to play along and hope for the best. When investing in personal accounts, it should not be a surprise I avoid active funds like the plague.

Monday, 8 October 2018

Why Suze Orman loves the FIRE movement...outside the US

A recent "afford anything" podcast episode created a lot of buzz. Suze Orman hates the FIRE movement and thinks it is stupid to retire with anything less than $10,000,000. Here is why I am not bothered by her remarks.

Who is she anyway?
Suze Orman is a very successful personal finance guru in the US. Successful in the sense that she got rich out of doing it, I did not bother to check whether her clients feel the same. She has authored books and had a long-running TV show. She made a fortune out of her business.

Why does she hate the FI community?
She thinks we are stupid because we underestimate how much costs go up in life as we age. "When you get older things happen" she said. "You're hit by a car, you fall down the ice, you get sick, you get cancer. Things happen."

The rage goes on to even include full-time care of a disabled family member ($250,000/year). If you would spend another $100,000 yourself you would need $500,000 pre-tax income, hence the $10,000,000 as she seems to use a 5% withdrawal rate.

This is excellent news if you are not American! 
This is very good news for anyone from a country with a decent social system! Look at the rage above, it is all health care related! We don't need $250,000/year to take care of loved ones here in the Netherlands. Also I feel Suze could have a critical look at the $100,000 personal spending in this example, flying private jets and owning private islands are not exactly frugal. 

What is the alternative anyway?
You could say Suze has lost touch with reality. For the majority of us ever gathering ten million is so far out of reach we would give up trying and just spend all our money. Not really a viable alternative. Much better to safe what you can, anything is better than nothing. 

I get comforted by the table below. I used data on Dutch male life expectancy combined with the Trinity study data. Just use the 4% rule for withdrawal from your ridiculously small stash of money and the chance of dying is bigger than the chance you run out of money. Eat your heart out Suze if you can afford the surgery to have it put back in like us Europeans!