Feeds:
Posts
Comments

Archive for July, 2014

11513997086_c0000b14fc_z

I’ve recently discovered Mr Money Mustache and have consumed all of his posts and delved headlong into the Forums. What a treasure trove!

One of the themes of his blog is The 4% Rule, which is essentially a rough guide to how much you need to retire. This little figure is based on The Trinity Study, a study to determine “safe withdrawal rates” from retirement portfolios that contain stocks and thus grow (or shrink) irregularly over time. This study defined ‘success’ as not going broke during a 30-year test period.

So if I accept that a 4% withdrawal rate won’t leave me broke in my old age, then the assumption is that I would need a portfolio of $1 Million to give me $40,000 per annum.

The interesting thing for me, is that (as MMM points out) the trinity study assumes a retiree will:

  • never earn any more money through part-time work or self-employment projects
  • never collect a single dollar from social security or any other pension plan
  • never adjust spending to account for economic reality like a huge recession
  • never substitute goods to compensate for inflation or price fluctuation
  • never collect any inheritance from the passing of parents or other family members
  • and never spend less as they age

I fully expect that we will do a bit in our retirement to keep some money trickling in; we expect to get a bit from superannuation in our old age (but when or how much is yet to be seen); and we know that we can downscale our life if circumstances require it. So, in short, the 4% rule is theoretically quite conservative.

After reading all of this, I started to feel like maybe it was possible to retire easily at 40. However being the careful person that I am, I wanted to test some assumptions by running a few scenarios. This is where some Early Retirement calculators came in very handy. You can check them out here:

I decided to base my simulations on the following set assumptions:

  • Starting portfolio $600,000
  • Property portfolio providing an income of $20,000 per annum
  • Superannuation or pension of $30,000 per annum starting when I turn 60.
  • Additional savings of $50,000 per annum until 40 (retirement age).

cFIREsim1

Scenario 1. In the first simulation, I assumed that we continued to spend like we currently do (minus things like childcare that we would no longer use), that we would continue to rent a house in our retirement and that we make no additional income. This scenario has a 63-71% chance of success (i.e. that we don’t go broke).

Scenario 2. On the second run, I cut our living expenses by 25%. This time, we have a 95-100% chance of success. Okay, that sounds better, but we don’t really want to rent forever. We want to buy ‘The Farm’ when we retire! Let’s see what happens.

Scenario 3. Ok, so this time we bought ‘The Farm’ for $500,000 upon retirement. I reduced our expenses by the equivalent of the rent we wouldn’t pay. This scenario has a 73-81% chance of success, which is not good enough for conservative old me.

Scenario 4. What if we bring in a small income of $10,000 per annum in retirement? Well, it looks like we have 97-99% chance of success! That will do!

So what does all of this mean? Essentially I can retire easily at 40 IF we reduce our current living expenses by 25% before then. If we want to buy ‘The Farm’ then we have to be prepared to find an additional $10,000 per annum from some side hustles, which I think is more than achievable.

That was a very worthwhile exercise and I feel like we now have something concrete to work towards:

  1. Develop a budget such that we can live comfortably on 25% less than what we currently spend (not including childcare and other work-related expenses that would disappear in retirement).
  2. Identify some opportunities for side hustles that could bring in $10,000 per year.

 Photo by: Matt Shalvatis 

Advertisements

Read Full Post »

40

2556176764_12059f5465

In just over 2 1/2 years I’ll be 40 and that’s the deadline that I’m setting for my retirement.

I’m putting it out there and publically setting a goal of retiring before mid 2017.

So, how did I arrive at this point?

I started working when I was 12, cleaning the floors of a pizza restaurant every morning before school. At 16 I was working three jobs in addition to going to school, playing sport and being involved in other extra-curricular activities. I bought my own car and started investing in shares. I finished school and went off to University to earn a degree in Engineering.

By the time I was 23, I decided I’d had enough of working. At that point I set a goal to retire at 40. My staff at that time (who were 20 years my senior) laughed at me and told me to just go out and enjoy my life. After all, you are only young once. I ignored them and decided instead to invest in rental properties that I set up as student accommodation for the nearby University. The property market boom was just beginning and because I had set my properties up to have a positive cash flow, the banks were more than happy to keep lending me money. Within 18 months I had five houses. Between working full-time and managing my rentals, I worked long hours but the hard work and risks I took in those 18 months have set me up for life. Thankyou to my 23 year old self for your foresight!!!

Since then, life has had it’s share of ups and downs. I lost a lot of money in the Global Financial Crisis (GFC) of 2008. It was really, really painful. But….I learned a very valuable lesson about how the global financial system really works.  I won’t go down that rabbit hole right now, else we’ll be here all day. I decided to get out of debt as quickly as possible and re-focus on my goals of financial independence in a different way.

Twelve years ago I met my husband, we got married in 2007 and in 2012 our son was born. Since the birth of our boy, I’ve been in a baby-induced bubble.  Between full-time work and the all consuming role of raising a new human, there has been little time or headspace to dedicate to anything else. I wonder whether other new parents can relate? I am just now finding that I am able to start looking back outside myself and my family to the big picture.

When I finally put my head above the parapet and had a look around, I realised that my husband and I had achieved all of the goals we had set for ourselves. We had lived overseas for a few years, we have paid off all our debt, we had started a family and my husband left work to become a Stay At Home Dad (SAHD). In fact, I just rediscovered this post from 5 years ago and am amazed at how much of that dream has now come true. There are still some parts of this dream I’m still working on, but the ‘bones’ of it we have already.

I’m the sort of person that needs that 5 year vision to be set clearly in my mind. Once I can visualise it, things seem to just fall into place. It’s easy to make decisions based on whether the outcome will take you closer or further away from your dream. Lately I’ve been feeling a bit lost. Without that clear vision, I don’t have a guide for making decisions.

For this reason, I need to start developing a new vision of the future. That starts with my decision to retire at 40…halfway through my next 5 year plan.

What comes after? Not yet sure.

What comes before? That’s what I need to work out with some more clarity.

Photo by: Guille

Read Full Post »