Six digits in four letters

As of today we have over 100k invested in the low-cost index fund VWRL. Arguably divided between my pension and our private investment account. That does not stop me from being proud and happy we made it this far on our FI journey! But what can reaching this 6-digit milestone bring to our financial future? Let's look at some scenarios.

FU money

100k is over 4 years of net median income. If one of us looses a job here or there, we will be fine. And that is even ignoring social security we would be entitled to the first stretch of time. Seems like we are getting close to the point we don't have to put up with BS in case we start to dislike our job. And no big worries in future economic downturns, our jobs might not be save but we are!

Let's start withdrawing!

Maybe we should just give up on this whole FI idea. Let's spend the money! Well, maybe stick to the 4% rule, we don't want to loose it all. As off today, we can start paying ourselves 333 euro every month. We'll throw in an inflation correction as well each year, no problem we are loaded!

And you know what is really cool? Without saving another euro of our income in the 30 years ahead, and while spending an inflation corrected 333 euro each month from our current stack, the median outcome is that our portfolio will grow to just over 1 million. That is a handsome bonus by the time I reach my traditional retirement age!

How much can you spend anyway?

One problem in the above scenario is that I would not have a clue what to spend all our income plus the bonus 333 euro on. So a more realistic scenario is that we just continue saving and acquiring even more VWRL. Compounding will mean that the second 100k will come faster than the first one! 

One thing to consider is diversification into real estate. This is an option that does not come cheap. Substantial investments are required but are becoming realistic.

The future looks bright. I feel like a bank, too big to fail! 😊

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.

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!

What we do

Financial independence (FI) is a state in which a household has sufficient wealth to make income from any form of employment optional. People in the FI community typically own assets that generate passive income, e.g. stocks that pay dividend or real estate that generates rental income. 

For now our focus is on stocks, but this is a personal choice and others are doing fine with real estate. I suck at timing the stock market and at predicting which stocks will outperform. Turns out most people do!

Low-cost ETFs

The good news is there is no need to do either, simply invest in a low-cost exchange traded fund (ETF) every month. The Vanguard fund VWRL holds over 3000 companies worldwide and in my opinion is one of the best choices if you live in the Netherlands, especially considering the fact you can purchase VWRL for free every month if you use DeGiro as your broker. To acquire these assets people safe a significant portion of their monthly income, typically aiming for a savings rate of at least 30%. 

Needless to say that the higher your savings rate the shorter the journey to FI. This is even more true than you might intuitively think; it is a double edged sword, if you safe more you spend less so the amount you need to retire also goes down.

From wealth accumulation to wealth protection

Above is all the essential background information to build a plan for the wealth accumulation phase, the strength is in the simplicity! Once you start living of your assets, you enter the wealth protection phase, meaning the main goal is not to accumulate more assets but to be as sure as one can be that you don’t run out of money before you run out of life. 

A widely used rule of thumb is the 4% rule of thumb, implying you can spend an inflation-adjusted 4% of your initial portfolio value every year without ever running out of money. The other way around, you should save up 25x your anticipated yearly expenses in retirement. Your exact safe withdrawal rate will depend on your personal circumstances and there are great tools to crunch the numbers. For people in the accumulation phase of the journey, the 4% rule of thumb is all you need. 

It helps to set a concrete goal and nicely reveals that while many people would guestimate you need millions to retire, in fact you “only” need €600.000 when your monthly expenses would be €2000. Such FI number is achievable if you save €500 a month for 30 years and invest in VWRL, assuming a ROI of just over 7% which is realistic looking at historical returns. 

You'll have more chance to make it to FI compared to someone ignorantly spending all his money every month, guaranteed! Start when you are 20 and you are done at 50! If you want to save less per month you’ll have to start earlier or arrive at FI later. If you wish to be there faster you’ll have to increase your savings rate, unfortunately I can’t change the math for you.

That’s all folks!
Don’t spend all your money and invest what is left to generate passive income to support your future life. That’s how simple the basic principle is. All other posts on this blog are discussing nothing more than the details.