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.
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!
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.
We are working parent with two small kids living in the Netherlands. We love our jobs but have too many other
ambitions and dreams to feel comfortable with the ever more realistic risk that
we will be obliged to work until 70, only to hope we get a decent pension by
the time we get there.
Financial independence
We joined the small but rapidly growing financial
independence (FI) community which is filled with people that do not (only)
complain about the slowly deteriorating Dutch social system but
have identified opportunities to sort their own financial future
out. In this blog I will keep track of the financial steps we take on our
journey to FI, while the lady of the house has better things to do than filling
a blog 😉
The blog started with a few posts backtracking our story so far and from October 2018 onwards will keep track of the details of our personal journey to FI. I plan to blog about investing, pension, traveling and mortgage-related stuff I come across, as well as any other FI fun. I Hope you enjoy reading it! Feel free to leave a comment or reach out to us via DutchjourneytoFI@gmail.com.
