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!

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!

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 😉

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!

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.

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.

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.

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!

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.

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.