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! 😊

Should I trust the government?

There is a big fuzz about the lowered income tax. Almost everybody will have more money to spend in 2019. Repeatedly promised by the government. Is this actually gonna be true for us?

In
Our January after tax salaries were definitely higher; €44 and 117 to be precise. Arguably the €117 euro includes a 2% raise as well but this cannot explain the higher net salary fully. So at least part is thanks to the lower income tax. Can't be bothered to separate these out, we have a €161 higher income. Thank you government!

Out
The daycare got more expensive. But the tax return ("kinderopvangtoeslag") increased even more! €29 extra coming our way. Our child support ("kinderbijslag") goes up €14. I changed my phone contract, €4 in my pocket. Basic health insurance covers the same whichever company you take it from. So check the cheapest one each year! We could save €9. Total extra's: €217.

Minus

There is some bad news as well. Hard to predict exact numbers. But energy bills will go up, around €25/month. VAT tax will go up. if you would for example spend €10,000 per year (bye bye savings rate!) on taxable goodies, you'll pay around €300 more tax. So another €25/month. 

I am surely forgetting a few other things that will get more expensive. But I am confident we'll get out with more money to spend save invest.

Should I trust the government?

The government is not living up to it´s promise. Many stories appear of people being disappointed and I fully understand. But if you are a below-average spender you'll be just fine! Simply invest what is left at the end beginning of the month. 

Unfortunately it is not easy to convince the general public that switching to a FI spending life style helps much more than complaining about the few euro´s on the income side of things. Not complaining saves me tons of energy as well. Free to spend on the nice things in life!

The worst insurance. Ever.

Back in the days it was common to buy a funeral insurance for your kids. I got one. I can see the feel-good emotion behind it but let's talk numbers and see whether such insurance is a smart money decision. 

Penny wise...

I can't be bothered to look back into my own over 40-year old forms to do the math on my own policy. Let's pretend we buy a new one and see what happens. Let's assume we buy an insurance policy for our new born. No need to congratulate us, it is a hypothetical child.

I only checked the situation at Yarden, one of the bigger players on the Dutch market. We'll be paying €5.63/month for 30 years to get  paid for an €8000 funeral. 

At first sight not a big monthly amount. If you would invest this amount yourself in an ETF you would end up with €5486. This is assuming a 6% annual return. So Yarden is offering more than a modest ETF can bring you. €2027 of premium payments gives you an €8000 funeral. 

Pound foolish!

But what happens after the 30 year payment period? At Yarden the payments stop after 30 year but the amount you'll get for your funeral remains €8000, however long you may live. Off course we don't know at which age we die. The average for today's newborn is well over 80. 

This is where the calculation starts to look different, very different. If you would leave your €5486 invested in an ETF and have an average return of 6% for 50 more years (until the age of 80), you'll end up with €100563. The opportunity loss is enormous!

Calculations with averages are nice but in real life this is not what happens. You should obviously check whether you can carry the financial burden of the black swan event (a way-before-average age funeral). However, many people also have partner pensions or life insurances or savings. Or all of them. So that it quite likely more than enough financial backing to decide not to go for a funeral insurance policy.

Do the math and act on it

The friendly people of Yarden only give back half of the money you paid if you want to back out of the deal while still alive... In the example above this would be half of €2027 once you are over 30. With - in my case - a life expectancy of around 40 years left, you should still decided to take half the money you put in and run. A 6% return on €1013 will yield €10368 in 40 years. 

So as of today, I am out of there.

Passive me against my pension fund

Let's see how my passive investment strategy did when compared to my active pension fund in 2018!

The bull run

Most of my colleagues have their pension actively managed by our pension fund. This is the default option. This means Nationale Nederlanden puts your pension money in their NN first class return fund. This fund is currently a mix of actively selected stocks (70%) and bonds (30%). This can always change in the future. Whatever the wise experts decide.

I am one of a few that has taken matters into his own hands. I am fully invested in a passive tracker. Stocks only, worldwide. I reported before that my returns have been consistently higher for years on end. While my costs are lower. We started using this defined contribution pension in 2014 and my total return is more than double that of the pension fund. Passive wins active. No surprises there.

The cool thing is I am in the pension steering committee. So I got a chance to address  their poor performance. "Why do we pay you fees to pick stocks that underperform the market average?". They had a clear answer. My risk profile was too high and the only reason they underperform was because of the bonds. 

They were derisking as they expected some turmoil on the markets. In a turmoil I would loose more money. My risk profile was wrong and I just got lucky because of the long-lasting bull market. I would reason they are timing the markets and this is a loser's game. But anyway; turmoil there was in 2018. Great opportunity to put them to the test!

The bull shit

Indeed my pension strategy did not work out great in 2018. My ishares developed world index fund yielded -5.53%. And now for the NN first class return fund -drum rolls-; they managed to go up by..... -5.80%. They have again failed to keep up with a passive strategy. 

I am not great at statistics but just picking random stocks should have given them a winning year by now. It is actually quite an achievement they did worse than a passive strategy every year since 2014. Can't wait till the next meeting with them!

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!

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!!