H1-2019-financial update

Halfway the year, our first financial overview of the year is long overdue! One of the reasons not to write about our personal finances is that the road to FIRE is a marathon and we are just steadily moving forward. Our incomes are stable. We set up an investment system and we stick to it. Very effective but very boring. Still good to see our lines are moving up north steadily!

Our savings rate

is at an impressive 44.54%, well above the 35% annual target. We have had a few helpful events that boosted our savings rate. The costs of remortgaging are tax deductible. So our yearly tax refund was bigger than usual. I ditched my worst insurance ever. I had a one-off side hustle that paid out 700 euros in January. No surprises are expected from expensive holidays either in the remainder of the year. Our next holiday flights have been paid with KLM flying blue points. This severely dented our points total, so if you want to sponsor our travels, have a look here how and why you should get an AmEx flying blue credit card as well 😁. Or just click here to get one.

The mortgage

is boring. With a 1.8% interest rate fixed for over 9 more years there is no need for extra payments. So in H1 we simply paid our monthly instalments, resulting in a slightly lower remaining debt. We have paid off 32% of our mortgage by now.

FI percentage
is over 22% now. A stock market going bzrk is really helpful and is only getting more helpful now that we are playing the game with 6 digits at stake.

It's all relative
It is very hard to lower the amount of cash locked up in our house; 54% of our net worth currently. Putting substantial money into VWRL every month does not seem to help much. This calls for drastic measures! I added a new category to the inset of the figure. No money is in it yet but that might chance very soon. We'll keep you posted!

Financial update 2018

Another year has passed and the stock market stopped gradually moving up in Q4 of 2018. At the moment the market is volatile and intraday swings of up to 5% are not uncommon. Swings are more down then up and as a consequence stocks have lost around 20% of their value. Let's see how this impacts our journey to FI.

Savings rate

Our monthly savings rate has been 35% throughout the year. We simply pay ourselves first. On top there is the once-a-year lump sum consisting of holiday money (2x), an end-of-the-year bonus and tax returns. We aimed to simply save 35% of all this as well to keep our yearly savings rate at (surprise!) 35%. However, we miserably failed this year and spend it all. 

We paid a substantial fine to lower our mortgage interest rate for the coming 10 years to 1.8%. This will save us money in the long run (see here) but is hurting our savings rate for 2018. We love our holidays and they are worth every penny. Our holidays are getting even more expensive as we are mostly forced to travel in the peak season due to our school-aged daughter. To top it all of we prepaid a holiday that is coming up in January and with that the full lump sum has gone with the wind, leaving us with an annual savings rate of 30%. 

The mortgage...

is boring. In Q4 we simply paid our monthly instalments, resulting in a slightly lower remaining debt. We have paid off 31% of our mortgage by now. With the new interest rate our monthly payment will now go down, while a larger percentage of the payment goes to paying off the house (rather than interest). Pretty neat, eh?

FI percentage

Our FI percentage is stuck at 16% for Q4. In fact our net worth is down a tiny bit in Q4, despite throwing more money into ETFs at least once a month. It's all part of the game. You can't be on FIRE if you can't stand the heat. We'll stay calm and stick to the plan. Markets will always recover in the long run. Plus we are buying cheap at the moment, we love discounts!

It's all relative

Our house still represents over half of our net worth (inset of the Figure). This will get even more dramatic when the new higher valuation comes in soon ("WOZ waarde"). We did manage to increase our ETF percentage a bit by throwing in some extra money to buy discounted stocks. 

We are happy campers and hope to keep up the good work in 2019! Many things will change this year, more on that later. For now we'll continue saving 35% of our income every month.

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.

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!

How we calculate our savings rate & FI number

Let's have a look at the math behind the two most important numbers on our journey to FI; our savings rate and our FI number.

What's in?
Your savings rate is simply what you have left at the end of the month divided by what came in at the beginning of the month. Our net income consists of 2 (after-tax) salaries and child support (in Dutch: “kinderbijslag”). 

We do not consider the subsidy for the daycare bill (in Dutch: “kinderopvangtoeslag”) income, as this amount is directly coupled to a specific expense. We have an annuity mortgage which will make sure we have paid of our house in 30 years. Hence, we pay the bank interest and a down payment that lowers the remaining mortgage debt every month. The down payment combined with the portion of our income we don’t spend, is our monthly savings rate. 

We also keep track of a yearly savings rate that includes the non-monthly extras  (annual tax return, extra salary payments). However, we like the simplicity of the monthly number as there is no reason why that would vary. We use part of the extras for larger non-monthly expenses (typically maintenance of the house & holidays) and save at least the monthly savings rate on it to keep that number afloat.

Are we there yet? Are we there yet? 
Not surprisingly, we calculated our FI number based on our anticipated spending after retirement using the 4% rule of thumb. We plan to retire at the same age, not the same point in time. This means the first 7 years of my retirement the lady of the house still brings home a salary. In fact we are half FI for that time period. 

By the time we are both FI there is around 15 years left to bridge to my pension payments starting to kick in. We might like our jobs longer than the numbers require or start a side hustle that brings in cash we don’t need. Taken together, the 4% rule feels very safe to us especially considering that the time span we both fully depend on this passive income source is relatively short (the original Trinity study looks at 30 year retirement periods, the update even longer periods). 

Anyway, all the 4% rule does is provide us with a number to work our way up to, we’ll sort out the details when we get closer to FI.