Thanks random strangers from the internet!

I got a really nice Christmas gift this year, My credit card statement! Turns out four random strangers from the internet have signed up for an AmEx credit card through me which has made our total amount of KLM flying blue miles surpass 100,000! Effectively you gave us free flights to our next holiday destination, thanks!

Finally some good news

With the markets rapidly moving into bear territory our net worth is not moving up as fast as we would have liked (understatement of the year). The timing of this post turned out to be brilliant. I correctly predicted the market peak. But I consider this pure luck and did not act on it. Timing the market does not beat time in the market anyway, remember Bob? So we stick to the plan. We buy and hold our low-cost ETFs and buy more every month. 

This would in fact be a good time to squeeze out every euro we can spare to invest into the market. So that's what we do. OK, maybe we spend some money on Christmas gifts as well but let's consider it a new years resolution.

Flying for free helps. See here for several good reasons to apply for a free gold card yourself (in short: it is making you money and let's you fly for free) and sign up here.

Have a good one!

Last but not least I hope y'all have a great festive season. Thanks for all the nice interactions and discussions, see you next year!

Does free money exist after all?

The price of houses in the Netherlands is exploding. Annuity mortgages are the new norm. Both facts contribute to the increasing gap between the market price and the remaining mortgage. Unfortunately this only makes me (and others) rich on paper. After all your money is stuck in bricks and mortar. It does not have to be that way. With the interest rate still at historical low levels, an alternative can be to take part of the money out of the house and invest it elsewhere to generate cash flow or accumulate wealth. Or both.

The basics of taking the money out

Let's assume someone bought a house for €300,000 in 2013 right at the bottom of the market. They paid off by an annuity scheme, lived frugally and did some extra down payments, leaving them with a current mortgage of €200,000. The market went up and the house is currently valued at €400,000. Selling the house would give these imaginary people €200,000 in hand to play with. But what if they don't want to sell but still want to play? 

I checked the situation at Rabobank. These people are wise and don't want to max out their mortgage. The Rabobank has the lowest interest rates on offer for mortgages with an loan-to-value (LTV) under 67.5%, meaning a mortgage of up to €270,000 for the example house. Hence an extra mortgage of €70,000 can be taken. An interest-only mortgages ("aflossingsvrij") comes with an interest rate as low as 1.5% (1-year fixed rate) or €87 a month. That is not much at all to get €70,000 in hand to play with! 

Be aware there is no mortgage interest tax deduction ("hypotheekrente aftrek") on this extra mortgage as it won't be used for improvement on the house. This tax benefit will go down to a maximum of 37% by 2023, so we are talking about €32/month you can't deduct. The Dutch government typically stimulates debt but even they have their limits.

On the other hand there is no wealth taxation on the €70,000 as there is a mortgage debt of the same size in tax box 3. This saves 0.58% or €34/month, assuming you already filled up your free wealth tax bracket (first €30,316 of savings for 2019). 

Where not to invest

This is one of those rare cases where I would not feel comfortable investing in a low-cost index fund. I am sure you can find a fund that yielded 8% over the last few decades but the problem is that this is an average and the deviations are huge. Imagine the market goes down 30% in the first year. At that point you borrowed €21,000 more than you still possess in stocks! This is not even considering your monthly interest payment of  €87. 

The one rule not to break when investing in index funds is to sell in a crash. I am not sure if I would keep my calm in the not completely unlikely situation described above. I prefer to not test my nerves and stay out of this construction all-together. Still very happy to dump anything into index funds that is left at the end of each month.

You can be the bank!

Websites like sameningeld.nl and mogelijk.nl connect people looking for money to purchase real estate for the rental market and people who have that money. Interest rates are around 6%. No defaults have occurred. In our example the €70,000 would generate interest-based income of €350/month, so a net cash flow of €263/month after taking off our interest payment to Rabobank. This is excluding annuity payments that apply at mogelijk.nl and sameningeld.nl which further enhance the cash flow (but does not impact on wealth accumulation). 

Essentially we are the bank now. We get money in at a low interest rate and we lend it out at a high rate. We are also the bank in the sense that there is a notary document between the parties. If things turn for the worse and our monthly payments stop we claim the real estate and sell it at an auction, just like the bank! We also don't care if property prices drop. Not our problem, we don't own the real estate.

At sameningeld.nl projects typically run for 5 years. If you would fix your interest rate at Rabobank for 5 years (2% at the moment) and lend it onwards at 6%, you generate a 4% cashflow. This fully excludes any risk of your interest payments going up while your interest income stays the same. So the cash flow is guaranteed for the full 5-year period. Can someone explain me where the flaw is in this reasoning? Otherwise the imaginary people might go to the local Rabobank soon to execute this plan 😉

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.

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!

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.

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!

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!

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.

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!

Millenials ain't seen nothing yet

More and more people blog on how they became financially independent or are doing great on the journey to get there. At this stage it starts to feel like only idiots still have to work for their money.

The raging bull

There has been a bull market for about a decade now. Blogging is popular with millenials and I much appreciate the fancy lay-outs and formats of their blogs as compared to the rather basic level this old fart is typing in. The longer the current bull market will continue to march on, the more people will be around that have never experienced a significant market drop. And also the more people that were hesitant at first, take the plunge and dip their toes into the stock market. 

Imagine you are 32 now, started working a decade ago and you were smart enough to start investing from the beginning. Or a bit later because you thought stocks were scary at first but it turned out everyone was making money except you. Here’s what your investment world looks like:

I am so smart; my investment tripled over a decade!

The old farts

So the last decade is exactly like all the older legends of the FI community have been telling you it will be, the market always goes up. This is in fact also true if you look at the 30 year time frame:

Fantastic, it went up 10-fold in the last 30 years!

Well, yes it did go up a lot. But look closer, there is two nasty drops of around 50% there. These represent the internet bubble bursting and the financial crisis. Sure, with hindsight everything worked out fine for your investments but trust me that is not what it feels like when the floodgates open.

The aging bull

I see a lot of people reporting monthly performances of their “young” portfolios reporting things like “we had a difficult first week of the month but it recovered nicely afterwards”. This 1-2% drop you experienced should really not be confused with the flood gates opening. We are talking -25% before you could blink an eye. And it is a given fact this will happen again at some point. It regularly does. We just don’t know when so we can't time it. And bear markets always move much faster than bull markets. We only know the turning point comes one day closer every day. 

Off course we are all confident we will just buy more stocks when this golden opportunity of low prices arrives. However, the people around me that are into Bitcoin all told me the same at the beginning of this year. “We'll see $50,000 later this year. If it first drops below $10,000 all systems will crash because of the great opportunity to buy more, everyone will flood in!”

Then the shit hit the fan. Only thing that happened was that people stopped reporting their daily double-digit gains at the coffee break and now tell me block chain is a long term investment. Market volumes have dropped dramatically. People bought high and do nothing now that prices are low.

Prepare yourself for the trouble ahead

Please don’t let the same happen to you wise, young, low-cost index fund investors. Stick to the plan. Buy low, sell high. Or even better, never sell. Have a few interviews with Jim Collins lined up in your playlist. Write a letter to yourself with the long-term plan. 

Once the shit hits the fan, listen to the soothing voice of Jim. Read what the plan was in the letter from your rational self to your panicky unstable current self. Do your breathing exercises. Calm your “I told you stocks are risky” spouse down. Buy more stocks every month. Celebrate the low prices as if there is a sale at your favorite clothing store.

The really long-term ride is not easy. You young investors just got a lucky start with your first decade. The road will be rocky but extremely rewarding if you do what you know you should do in the storm ahead. Don’t drop off the wagon, stick to the plan and prosper! I'll try to do the same on a -1.5% day like today. Because quite frankly, you'll never be experienced enough to get the mindfuck completely out of your game plan.

playing with FIRE; the documentary

The long awaited trailer of the documentary "playing with FIRE" is online!

The documentary includes footage from many legends of the American FI community. The idea is to get it mainstream and available on Netflix. This would obviously help a lot to make more people aware of the concept. To fund the full development of the documentary, a kickstarter initiative has been launched. Also find a podcast here in which the mad fientist interviews the director and executive producer of the documentary - Travis Shakespeare.

You can donate as little or as much as you want, $25 will give you early access to the documentary once it is finished. You can pay with AmEx, so at least it helped me a little in my travel hacking 😉 Hope you will help a little too to spread the FIRE!

UPDATE: We made it, fully funded within a couple of days!!

How I get paid to build up my pension

As discusses here I am a big fan of my current defined contribution (DC) pension and have moved one of my ex-employer's defined benefit (DB) pensions into it to increase my anticipated pension substantially. This post discusses the yearly expense ratio of my DC pension.

What is the yearly expense ratio of a DC pension?

I can only talk about my own pension here as I do not know the numbers for any other DC pension. I currently participate in the Essentiepensioen from Nationale Nederlanden, although it will not be long before it merges with BeFrank. Essentiepensioen offers 3 full-service profiles with different risk profiles (defensive, neutral and offensive). Moreover, participants have an option to run their own show and buy their own funds. 

Fund choice is limited but includes one low-cost index fund, namely the ishares developed world index fund. I put my full pension payment in this fund every month. It has a yearly expense ratio of 0.17%. Very decent, especially considering the fact that all other (actively managed) funds are around 1%. 

Collective discounting brings my expense ratio below 0!

The cool thing is that my company negotiated 0.2% discount on the expense ratio. >95% of people are in one of the full-service profiles so they still pay somewhere around 0.8%. Nationale Nederlanden seems to have overlooked the fact that there might be one or two smarty pants who pick their own funds AND go for a 100% ishares developed world index fund. I guess this is mostly caused by their old-world thinking, you need multiple old-school funds (real estate fund, new energy fund etc.) for diversification purposes. As there is only one cheap option it seems they assumed everyone would also buy at least one of their more expensive funds, averaging the cost to above 0. 

But with the developed world index fund I own stocks of 1000s of companies in the 23 developed countries of the world! No need for further diversification. My costst are -0.03%. I get paid as a thank you for them taking care of my pension!

Costs are killing dreams

Pension funds charging above 2% fees are not unheard of, see a comment by Bart here. Needless to explain the FI community how devastating this is but I still added a chart showcasing just that. Someone with a job paying a bit above the median will pay around €500 of his gross salary into his pension fund. If that pension fund had invested this amount into the MSCI world index 30 years ago, this is what had happened with real returns of that index. Just over €217k down the drain after 30 years by charging 2% fees... This is what happens if you feel a €2 fee for every €100 you want to invest sounds reasonable. You get hammered by the lower interest compounding!

I am happy to show off how well my pension fund is treating me 😉 However, the real point I am trying to make is that it is well worth investigating the different pensions you have from different previous employers and move them to your new employer if this makes financial sense. Unfortunately it is not always easy to establish the cost structure of a pension. A lot is hidden (on purpose?) and I would not be surprised if there is a “pension gate” around the corner even before we have fully dealt with the “woekerpolis” issue here in the Netherlands. It strengthens me in my firm belief sorting out your own financial future is by far the best way to go.

Financial update Q3 2018

With the blog launched and Q3 ending, it is time for the very first update on our personal financial status!

Savings rate

How we calculate our savings rate is explained in this earlier post. Our monthly savings rate has been steady at 35% in 2018. Great to see we invest 1 out of every 3 euros in our future rather than stuff we don’t need. Considering the non-regular money coming in, we used the holiday money for holidays and the tax return is still parked in a saving account. We probably will “invest” the tax return in a mortgage hack that I will blog about in the near future (UPDATE: see here). If we do so the yearly saving rate will drop below 35% but will certainly stay above 30%.

The mortgage

As reported here we have been investing in paying off the mortgage with most of our money until the beginning of 2018. We have paid off approximately 30% of the initial mortgage by now. See a great post here doing the math of mortgage down payments vs. index fund investing. We have reached the tipping point. Our mortgage payments are comfortably low and include annuity payments anyway. The mortgage will take care of itself in the coming 26 years. The money locked up in the house is not included in the journey to FI number, it just helps to keep the FI number low as a future paid-off house will mean we need less money for a comfortable life.

FI percentage

Dedicated investing in the low-cost exchange traded fund VWRL will be the way to go from here! Our FI number consists of our emergency cash fund, VWRL and my defined contribution (DC) pension. Have a look here why I feel I can include my DC pension in the FI number. That being said, our current FI percentage hovers just above 16%. With the bull market raging for a decade now some head wind would not be unlikely in the years to come which would only make the journey more interesting to follow. 

It's all relative 

The inset of the figure above presents the relative amounts of our net wealth in real estate (house WOZ value – mortgage), our cash emergency fund and ETFs. We are aiming to get the ETF percentage up but the booming housing market is not helping 😉

Accumulating the American dream pension

A defined benefit (DB) pension is most common in the Netherlands but defined contribution (DC) pensions are becoming increasingly popular. Here you can find a guest post I wrote for cheesyfinance.nl explaining why I love the DC pension at my current employer and how I moved one of my DB pensions from an earlier employer to my current DC one. This post discusses why I allow myself to include the value of my DC pension into our net worth which speeds up our journey to FI. 

Withdrawal rate of a DC pension

A DC pension is like a 401k in the USA. At least mine is, I have full control in the sense that I buy a low-cost ETF every month and I can login to check the current net worth of my portfolio. Most Americans striving for FI include their 401k in their net worth calculations. I do the same with my DC pension.

On specific websites like this one you can check how much pension you can purchase from a lump sum that you have saved in your DC pension throughout your working career. By modifying your date of birth you can mimic different retirement ages. E.g. if you have €100,000, the best deal I can currently find pays €5448/year from 68 years of age onward. Applying the 22.95% after-pension tax bracket will leave you €4198 in hand. In other words you have a withdrawal rate of 4.2%. It is perfectly save as it will be paid until you die. Nothing left for your heirs afterwards though. Sounds pretty similar to the 4% you are supposed to maximally withdraw yearly from your personal stock account after reaching FI.

Adding up the numbers

To see how far we are in the journey towards our FI number I add up our emergency cash fund, our personal ETF position, AND the value of the DC pension (consisting of an ETF). Like many, I consider a 4% withdrawal rate on the total position safe. I could access the DC fund earlier than at 68 but this will be taxed in a higher bracket so this is not the plan. 

By the time we reach FI the personal stash is twice the size of the DC pension and there is around 15 years to bridge before the pension payments kick in. So if we would ignore the DC pension, I am withdrawing 6% from the personal stash which has a 99% chance of being OK for 15 years in a 50% stock - 50% bond portfolio according to the Trinity study. We’ll  be fine until the DC pension kicks in! At least the chance of dying at work accumulating more money is bigger than the chance of ever running out of money, time to take the plunge! Especially considering the fact we are still ignoring state pensions (AOW) and DB pensions we have as well. We just made the journey to FI shorter!

Travelhacking in the Netherlands

Credit cards are very commonly used in countries like the USA. To lure new customers in most credit card companies have very good welcome bonuses, typically consisting of points for major hotel chains or airlines. Many people in the USA FI community are into travel hacking and are constantly on the lookout for the best credit card deals. Credit card use is much less common in the Netherlands. Most people have one credit card through their bank. Without competition the welcome deals are usually non-existing and there is no travel hacking. There is one amazing exception, keep on reading!

KLM Flying blue

If you travel regularly with KLM I would advise you to obtain a free flying blue card to collect miles and XP points. Buy flights and earn miles for free flights and XP points to get silver/gold/platinum status with all sorts of benefits at the airport (queue jumping, free check-in luggage, free seat selection etc.). This year we earned around 10,000 miles and 44 XP points. Bit of a bummer is that you lose your XP points if you don’t collect enough before the end of the year to get a status upgrade. Keep on reading, there is a happy ending!

KLM  Flying Blue AmEx card

You can connect an American express card to your KLM flying blue card. This is very helpful as you can now earn miles from other purchases than airplane tickets. For instance Jumbo, Tango and bol.com except this card. There is different level credit cards (silver/gold/platinum) that earn you different levels of miles per euro spend. 

And there are great welcome bonuses! We just received our platinum cards. Say what, platinum cards in the FI community!? Yup, the welcome offer includes half price for the card the first year, still a whopping €25 per month. That is a not-so-frugal €300 euro for the first year. But what does it give us? We get 20,000 welcome miles which covers a free flight within Europe (€150). We'll get another free flight from using the card for groceries, fuel etc. We get a 60XP welcome bonus. For an upgrade to silver flying blue status you need 100XP so we made it!

No more waiting in line, no payment for check-in luggage and free reserved seats to keep the family together in-flight (we spend around €100/year on extras). On top we get free rental car insurance. Last year we rented twice and spend €80. No more surprises at the car rental counter! You get the point by now, we are making money while getting better treatment at airports.

Don't use your credit card for credit!
Obviously you should pay your full bill at the end of each month to avoid the insanely high interest rates to be incurred on your debt. With the KLM AmEx cards this is the only option you have, no worries!

What's in it for you?

If you have our traveling habits you could obviously repeat what we did. However, a silver and gold card are worth considering as well, do your homework at the KLM website. A silver card is for free the first year and gives you 5000 miles. A gold card costs €85 with 20,000 welcome miles and 30 bonus XP.

We can help each other out to make the deal even better! AmEx provided me with a link. If you use my link you get a gold card for free and 22000 miles! It helps me as well as I also receive 22000 miles! There is better deals for silver and platinum cards through the link as well (more miles than the standard offer).

Once you have a credit card AmEx should provide you with a link as well so you can do the same and invite your friends to grow your miles. Let's travel hack together? Get your card through this link.

Backtracking 2016 & 2017; paying off the mortgage

With both of us working 4 days a week we had found a nice balance between family and work life and more than enough money was coming our way. 

How low can you go?
Our mortgage interest rate had a risk increase of 0.4% because of our loan to value (LTV) of 90%. Inspired by Gerhard Hormann it seemed silly to be considered a risk by the bank and we started using our savings to pay off the mortgage. Helped by the booming housing market our LTV decreased below 67.5% in mid-2017 which meant the 0.4% was alleviated from the mortgage, leaving us at a handsome interest rate of 2.9%. The urge to pay off the mortgage faster than the annuity vanished (the house will be paid off in 30 years anyway).

The FI journey really starts
At this point in time I had found the FI concept and read everything I could. I am a logical thinker and a number fetishist; finding the stock series by Jim Collins and Karsten’s save withdrawal rate blog posts tools sealed the deal, as  these tools allowed me to do the math to establish the most sensible plan and stick to it. That’s why from now on you’ll find that most of our savings are directed towards the low-cost exchange traded fund VWRL.

Backtracking 2008-2015; growing up while financially screwing up

After some initial hick ups (imagine my first Monday morning stuck in traffic after 12 months of traveling) the routine of working life kicked back in. A decent income led to some sort of a savings rate that cannot be backtracked precisely. 

How not to invest

I had had an earlier bad experience with a financial advisor (for you Dutchies; think woekerpolis!) so at least I was aware I would be better of sorting myself out. This kept the costs of my investments down so at least I got that right.. However, it turned out I suck at stock picking and timing, which I now know is true for almost everybody. Arguably, the market nose-dive because of the financial crisis was not helping and I chickened out disillusioned around 2010.

What really matters 
I was more successful in other areas of life and had met my girlfriend (by now FI partner in crime) and by 2013 we had our first child (the count is stuck at two at the moment). We initially rented a small and expensive house but in 2014 the financial crisis had drawn down housing prices and interest rates by so much that an annuity mortgage on a semi-detached house would work out cheaper than renting. Whether that is really true when you include maintenance can be debated but we took the plunge and bought our family home and don’t regret it one bit. 

The money we had been able to save from 2010 onwards was used to pay for the costs involved in purchasing the house (tax, mortgage, formal documentation etc.) and to pay 10% of the house in cash. The leftover cash was mostly used for renovations. With 90% loan-to-value (LTV) our mortgage had a 3.3% interest fixed for 10 years.

Backtracking 2004-2007; working abroad and traveling the world

My first full-time job was abroad on a tax-exempt status. At that time I had a clear financial goal; traveling the world for a year after the two year contract had finished! I decided to simply not spend the roughly 1/3 of my income that would have otherwise gone to the tax office but rather put that money into a savings account. After 2 years this allowed me to take a year of and, as I spend roughly the same amount of money during my travels as I did during my working life, I came back from this life changing experience without any money left.

The aftermath 

My perspective on several things had changed dramatically. I had only possessed 12 kg of stuff in a backpack for a year and not missed anything materialistic. Although with my income I consider myself among the fortunate within the Netherlands, on a worldwide scale this is even more true. Hence, I saw absolutely no reason why I would not be able to save a substantial amount of my income from now on. This nicely matched with my ambition not to spend the rest of my life working as a year is not nearly enough to see the world! 

On my trip I had traded all my money for all the time in the world to only do what I like; a saving account is not a very sustainable strategy as I spend all the money I could save in 2 years in just 1 year. Disregarding social securities, this implies that to enjoy life for 25 years I would have to work for 50 years, e.g work from 20-70 and enjoy from 70-95 years old… At this point in time I was 33 so this did not seem a feasible route to take, I needed an investment strategy with higher returns that would work for me when I was not anymore.