Take it off the top

I mentioned that I might write a post about AFIATRE: Achieve Financial Independence and then Retire Early. I have problems with the acronym but the concept is revolutionary, but apparently not that new. I’m going to stick with FYM (teaser acronym, definition coming soon).

The persisting retirement concept sold to the public is defined by the government when they set the retirement age. This is probably 60 or 65 depending on where you live. And going in the opposite direction of our goal, I found this article suggesting that you should retire at 70. Work your ass off during your prime years and during daylight for most of your days, and then retire just before death. Where do I sign up!?

Adding to the skepticism is the seemingly impending pension crisis. In short, people are generally living longer and having fewer babies so there are not enough young people paying into the pensions to fund retirements for the growing number of retirees. Dogs and cats don’t pay into government pension plans, unfortunately. Compounding on this, is that pension funds are invested and assumed to earn the standard investment return of 7-8% in their calculations.

Critics have argued that investment return assumptions are artificially inflated, to reduce the required contribution amounts by individuals and governments paying into the pension system. For example, bond yields (the return on guaranteed investments) in the US and elsewhere are low (and the U.S.and other stock markets did not consistently beat inflation between 2000 and 2010). But many pensions have annual investment return assumptions in the 7–8% p.a. range, which are closer to the pre-2000 average return. If these rates were lowered by 1–2 percentage points, the required pension contributions taken from salaries or via taxation would increase dramatically. – Wikipedia

This number is probably coming from some version of an Andex chart. On the right side of the chart it shows the annual rate of return per index, bond, funds and other investment vehicles. When I had tried to open a trading account at the bank, I pointed out the Andex chart on the wall to the seller Financial Advisor, as I hadn’t seen it before. He mentioned that it was a “good tool” to sell you their actively managed, high expense ratio mutual funds.

Last month, Japan’s Abe administration came under fire for rejecting a government report that warned, suddenly, that retirees should have ¥20 million or ~185k USD in savings to make up for the government pension shortfall. I’m guessing that these sudden pension issues are going to bubble up globally, like moving retirement ages, so keep an eye out. Otherwise, bathe in your unchanged comfort.

All of this to say, you should not rely on anyone else for your retirement. Take charge. Maybe even throw in the possibility that you will never receive your government pension. Pay into it maximally, but don’t skip a beat if it doesn’t work out when you need it.

At this point we’ll go down the rabbit hole. Hold on your butts.

I had first heard of Fuck You Money (let’s call it FYM going forward) in at least one of Nassim Taleb’s books. On a quick search, this term has been traced back to 1971. In essence, it’s having enough money to be able to say “Fuck you” to your employer and retire. I recall that I had done a calculation years ago to come to the number of $10 million as my FYM number. The calculation was based on living the same dual-income upper-middle class lifestyle with comfort. While, the article above mentions a few scenarios ranging from $850k to $3 million. The number really depends on how small you can squeeze your expenses down while safely investing your nest egg and adding multiple streams of income if possible.

Forking, Timothy Ferriss at least popularized the concept of “mini-retirements” in his book, the 4-Hour Workweek, in 2007. Rather than working towards the traditional retirement age of 60, 65, or even 70, why not try it out to see how you like it? Enjoy your life while you are young. So the idea is to find a way to take time away from work for a few months or more and see the world or pursue a lofty passion. It depends on your situation and what you want to do, but essentially if you rent out your main residence, for example, cancel or suspend the rest of your first-world expenses, you can travel around the third-world for a longer period of time stretching the same amount of cash.

It’s possible. But it might take a psychological toll to travel for months or years and then go right back into the 9 to 5 grind for years again and still retire at the government retirement age. Maybe that’s why people quickly discounted mini-retirements and headed straight for early retirement…

Then comes along Mr. Money Mustache, MMM, who actually retired before the 4-hour book mentioned above, in 2005 at age 30, but launched his website and perhaps popularized Financial Independence Retire Early (FIRE) in 2011. Let’s group all of the terms that you might see: financial independence, financial freedom, early retirement, FIRE. Technically, financial independence can be achieved when your monthly passive income matches your monthly expenses, which would happen before retirement. These all look like slight variants or perhaps synonyms of FYM, but also represent an active community of average people who are able to achieve early retirement without a financial windfall nor being in the upper echelon of their field. The active and frequently referenced example being MMM as an early, modern, realistic example.

This topic has been my latest wave to surf over the last couple of months. And it feels like there is some parallel with the minimalist movement. More on that at another time.

Here is a documentary trailer on the concept. It also appears that there is a sustaining cache of content being built around the concept on the website complete with book, movie, and podcast. It is like Malcolm Gladwell’s blogposts books on steroids. Or, The Secret.

There are many different sets of levels or stages defined for the path to financial independence to get you motivated by climbing different rungs but the cold hard simplistic levels for our purposes are:

  1. Drowning in debt
  2. Breaking even
  3. Retired

Okay, maybe it is a bit too simplistic. I tried.

We could put in more levels to keep you motivated like ‘fully paid one loan,’ ‘opened a tax free account,’ ‘bought your first stock,’ and so forth, but I don’t need such encouragement. There seem to be too many different takes or rehashes on the same content so scouring the internet for information feels like combing through a wall of chewed bubblegum. Or worse, you could be scraping up pieces of an apple that was shot with a paintball gun (yes, from experience).

Here is my take on the main concepts in 5 easy steps but there are sub-steps and spoiler alert: the 5th step is Retire:

  1. Squeeze your expenses. Sell your cars, cancel cable, Netflix, stop buying the latest phone, Starbucks, stop going to nightclubs, stop raising your pet to Sultan status and becoming it’s slave, move to Thailand. Stop keeping up with the Joneses. Do the opposite of the Joneses. Take the renovation virus vaccine (RVV) to protect you from the urge to renovate all other rooms after the first room is completed. This all sounds extreme but hopefully it will drum up some ideas and shock you out of spending. The idea is to trim and cut down regular expenses to a minimum and also be mindful of possible sudden expenses, waiting in the dark, like Christmas! Don’t sell the house tomorrow to live on a hammock on the beach but bring everything down to just enough of a comfortable level that you can happily sustain it, for years.
  2. Calculate the prize to keep your eyes on. Budgeting! I’ve added in multiple steps to the budgeting step to really get you motivated.
    1. Calculate your FYM. This is intended to see where you are at right now and calculate how much you need to have, invested in your retirement plans and other assets, in order to retire with your FYM. One simple calculation for your FYM is to calculate your annual expenses and then multiply that by 25 to get your FYM. You should do this again after cutting down your expenses to a sustainable level (if you skipped step 1!). This will be the goal to keep you motivated for however many years it takes you to retire, with 10 years being a realistic amount of time.
    2. Calculate your savings rate. What percent of your income are you saving? This is the key factor to increase the speed of either paying down debt or getting closer to retirement. This is more of an efficiency metric that could be applied to irregular income, while knowing your maximum possible monthly savings amount itself is more practical if your income is stable. This will be the foundation of your nest egg, and is what you will be saddling up to ride into retirement. Typical advice is a cute 10% savings rate outside of this FIRE community, but the community recommends 50% as a minimum. If you are a dual-income couple, one of the salaries could completely be used for savings.
  3. Take money off the top, as my father would say (“there it is. He said the title of the blogpost!”).  This is a simple concept but is key and perhaps the most important of all of these steps. Knowing your savings amount per month, if your income is regular, or savings rate multiplied by your irregular income, you should be immediately sending it either towards debt, if you have any, or towards investments. This is also Robert Kiyosaki’s “pay yourself first.” This is the path out of the rat race.
    1. Become debt-free. If completed already, congratulations, skip this sub-step! Otherwise, take your savings and pour it into paying off your debts starting with highest interest rate loans first; the mathematically superior method. Mortgages are more of a grey area open to interpretation but everything else should be paid off immediately. These are the holes in your pockets. My favourite pants, from Australia’s SABA, over the course of a year or so, opened up 4 holes in the 2 front pockets. On my recent trip to Canada, my pen and coins would randomly trickle down my leg and roll out onto the floor. This happened at a friend’s house, on the street, and in the airport. While the pants themselves were an embarrassing $140 or so, they are still my favourite pants and I have resisted buying any more pants since, to support the justification to buy them in the first place. A light indulgence. Debts are the holes in your pants, taxing you. The pants themselves also taxed my early retirement :(. Heard of the term compound interest? Well, if you let your debts grow, you will be paying compound interest. Unfortunately, you can’t print money and change interest rates like central banks.
    2. Break even. Pause. Celebrate a little. Pat yourself on the back, do a victory lap, or a victory dance. All for free. You are now going to flip from paying compound interest in debt, to receiving compound interest in your assets.
    3. Invest. Once you are debt free, invest the same savings that you had been using against debt, every time you receive income. Same source, different destination.
      1. Max out every tax-free and matched benefit at your disposal. I have kept this step general so that it can be applied globally. If your company has a stock purchase plan or retirement contribution matching, max it out. If your country has any kind of tax-free accounts, find out which ones apply to you and max them out. For example, the USA has 401(K)s, IRAs, Canada has TFSAs, RRSPs, Japan has iDeCo and NISA, etc.
      2. Invest the rest. If you have money left over, consider yourself privileged. Pour the rest into a standard investment vehicle of your choosing: your own taxable portfolio of stocks, bonds and others, or real estate, or perhaps a side business that is hopefully a proven concept and generating income. As for portfolios, there are many choices and ratios out there, the key is to pick one and get started. I wrote an article covering some, while the simpler portfolios will be just stocks and bond funds, for example 90% stocks and 10% bonds. Vanguard funds are a popular choice due to having the lowest available fees on the funds. Actively managed bank mutual funds on the other hand will cost 1%+ in fees, and are known to have hidden fees, and should be avoided. Look for less than 0.25% fees. This portfolio can be the same as what you will use in the tax-free accounts in the previous sub-step. Some people prefer real estate rental properties, house flipping and such over stocks and funds. This requires knowledge of the ins and outs, it takes more work with tenants and repairs, and I would consider it to be more risky based on the use of leverage: mortgage debt. With your small downpayment, the bank creates money out of thin air at a multiple of your downpayment, which you now owe. Debt can sink you and send you back to step one. Be careful and keep your stick on the ice.
      3. Reinvest the dividends. You should have expected this already but don’t blow your “winnings” like this. Or George Best: “I spent a lot of money on booze, birds and fast cars – the rest I just squandered.” It should all roll into more of the previous sub-step: invest the rest. Compound your compound interest.
  4. Generate multiple streams of income. At this point you are well ahead in the game, perhaps optimizing your savings rate or tax free account options, or your portfolio holdings. You have already squeezed the drain of your expenses so now it is time to open up the faucet of income. After these are set and your savings are regularly fueling your investments, you should be frugally enjoying life and peace of mind. You may also have a lot of time on your hands. Why not increase your income? I believe that this is why there are so many FIRE blogs… This is perhaps the hardest step and is more optional and fluid. Ask for a raise, take a new job with higher pay, start a new blog, write a book, sell products, etc. Ideally, this is where you will follow your life’s passion, if you haven’t already, and test out that dream that seemed out of reach before. If you don’t have find time for this, keep plugging away at your investments until you finish building your FYM.
  5. Retire. Your investment portfolios should be generating an average annual return of 7% (where did we see that before?), and now you should be able to safely withdraw 3-4% per year while still growing the nest egg by 3-4%. Also called the 4% rule. Congratulations on your retirement! While, both the 7% returns and 4% rule are assumptions, and you may have many years left in your early retirement, you can now choose your own adventure without the necessity of a regular job. You can work freelance or start that pet project at your own leisure and harness your true enthusiasm, whether it is 4 hours per week, or less, or more. I don’t recommend working for Wal-Mart part-time, but having something to keep you engaged will further comfort you and your early retirement nest egg.

One of my high school math teachers did the traditional retirement at 65 or so. He said that he went to the post box to get his mail and found the other retirees checking their mailboxes. Perhaps they were looking at grocery store flyers for discounts or bragging to each other about how many grandchildren they had, but he said it wasn’t for him and took a contract teaching in Qatar. He was then back at my school, teaching and telling this story. Teaching was his passion. Can you imagine working towards retirement at 65 only to learn that it wasn’t for you?! See mini-retirements. Or, design your new retired life now.

A few of my Japanese coworkers have retired. I said congratulations to them, but they seemed sad and said that they wanted to work until they died. I guess if you don’t have anything else to do with your time then you might be doomed to loneliness or boredom, Or maybe the company job was the passion, or they wanted to stay away from home. I had read somewhere that some people work to live, some live to work, but Japanese work to work. Ultimately, they weren’t their own bosses and weren’t able to decide for themselves when to retire.

It seems important, and it is a heavy topic on the FIRE blogs as well, to have a passion or pet project. This is what you will dedicate the rest of your life to. This will be your retirement, whenever that may be. A nice combination is if your passion also makes money, that way you would “never work another day in your life.” Rather than FYM, this should be the ultimate goal in your mind.

The concept starts when you are in grade school, to follow your passion, and returns again in a heavy way when you retire.

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