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| Our very fragile sink - we are chucking everything at the kitchen sink of 2017 to make it as successful and anti-fragile as possible |
This year I am kicking off with the basics on how to achieve Financial Independence with a link to my updated Financial Independence Timeline planner that allows you to create a basic budget, track spending and create a financial independence plan.
I will cover a bit of media bias (plenty here;) in the wold of fake news and risk planning especially focus on becoming anti-fragile (Courtesy of Nassim Taleb)
In part 2, that will be released later, I will
discuss our anti-fragiliska actions and what you can do.
Early Retirement does not have to be a dream - maths 101
I have read a lot of articles from the FIRE community and mainstream media. Some are very good at highlighting how it is possible to save what can bee seen as a daunting wad of money. Some talk of extreme "sacrifices" made at a young age to do this. In reality it is sensible to choose somewhere in between.
A happy financial independence is possible with a reasonable wad. It is possible to avoid extreme living arrangements to get there. We "retired" at age 37 and still managed to have a great time along the way. How?
Simply - we worked (at education to get good jobs where we put in the required effort) and saved hard all our lives (50%+ of our after tax income) - See the book Grit. Secondly live with a good standard of living but nothing extravagant which is the premise of the book "The Millionaire Next Door".
A middle class lifestyle is a luxury and there really is no need to overstretch yourself with "luxury goods" trying to keep up with the "Joneses" or "Showing Off". A middle class lifestyle in this day and age means access to cheap world travel, indoor toilets and central heating. These are luxuries in their selves and were not available until recently. Obtaining financial independence just means understanding and applying the following maths:
These numbers are a natural brake on people retiring early. You get your pension projection in the post giving a pension estimation at 65. Usually falls short of your expectations and encourages you to add more funds.
Message: Just keep on contributing (and paying all of those lovey fees that drive the pension industry)! This leads to
Behavioural change: This perception management encourages irresponsible spending.
This vicious circle sets high spending expectations in retirement hence the need to save more. We live VERY comfortably on what is deemed a poor family income in France as we have NO DEBT, NO LIABILITIES and LOW FIXED COSTS.
Whats even worse is there no real guarantee of a good pension payment at the end of your working life (think low returns, unfunded liabilities and inflation). I firmly believe this will leave a lot of people in a bad position in the years ahead as we are starting to see in the US with state pension funds in crisis.
The only way you get these skills are if you are lucky enough to have parents who have filled in the gaps (financial and emotional intelligence to name but two). You have a fascination with making it big or have a mentor of some sort. Knowing the GAME early makes ALL the difference to your future.
Things could dramatically advance just think of free renewable energy for all, new industries crop up overnight that revolutionise the world economy and we all get an iRobot each, eliminating the need for hard work and the ability to fund a living wage for all.
On the flipside to utopia we need to consider a few stumbling blocks (until we get our robot;).
One potential issue is that current asset prices and projections are based on perpetual growth calculations. We buy productive assets to pay for our pensions whose price is determined by predicted growth as measured in GDP and profits. These projections are based on historical "norms".
As we all know from history classes and current problems in countries; Argentina, Greece and Venezuela - upheaval can occur in any country devastating the "normal growth mantra", currency value and pension pots very quickly.
Secondly we have no real leadership in the world - challenging the status quo and changing our path to a brighter future. Leader holy grail is to keep inflation (confiscation) around 2 percent and growth in GDP of 3 percent and debt growing into an even bigger Godzilla than it is now......?). Nothing really changes.
Considering most pensions are based on tracker funds which "diversify" risk buy owning a bit of everything surely this is a problem when we can't have everything when scarcity kicks in. Will luxury goods companies be top of peoples shopping lists? Will people pay for stuff they don't really need in this circumstance? Will society change where conspicuous consumption and keeping up with the Joneses is no longer seen as socially responsible? What happens when cheap debt is no longer available?
Another potential car crash for pension promises is that we are all living longer. Demographics are terrible in major economies (ageing society, less workers per retiree). Populations are highly unlikely to grow at 3% a year....
People stop spending in later years. They sell investments and assets to pay for their living costs - no GDP growth here then either.
But wait we can just print GDP right.....It's just logical - we currently have already bankrupt public finances and pension entitlements to pay just QE it (the law of supply and demand does not apply), NIRP it (negative interest rates what the!) it to make people spend and soon to be helicopter it (give people the money directly).
There is no real growth here just accounting tricks and boon dongles to keep us hyper-normalised. Slowly boiling the frog.
We are looking at a step change in humanities approach to retirement and entitlements. A new deal will eventually be forced upon us.
Future retirees need to be smart and understand their investments instead of a docile awaiting a check at the age of 65+. Their wad has to be structured in such a way to ride out risks and change to real future conditions of an ageing society consuming one rapidly depleting planet. It need to generate surplus instead of being "drawn down" only then can you be confident to splash out.
This is even more important for people considering FIRE (or FISH :)). Empires rise and fall, companies collapse and new ones are borne. We need to be informed, nimble, reactive, critical and opportunistic to have so many years not reliant on our labour.
A happy financial independence is possible with a reasonable wad. It is possible to avoid extreme living arrangements to get there. We "retired" at age 37 and still managed to have a great time along the way. How?
Simply - we worked (at education to get good jobs where we put in the required effort) and saved hard all our lives (50%+ of our after tax income) - See the book Grit. Secondly live with a good standard of living but nothing extravagant which is the premise of the book "The Millionaire Next Door".
A middle class lifestyle is a luxury and there really is no need to overstretch yourself with "luxury goods" trying to keep up with the "Joneses" or "Showing Off". A middle class lifestyle in this day and age means access to cheap world travel, indoor toilets and central heating. These are luxuries in their selves and were not available until recently. Obtaining financial independence just means understanding and applying the following maths:
The MAGIC of COMPOUNDING and the RULE of 72. Divide 72 by the rate of return you obtain and this gives the time for the initial amount to double. If you have 50,000 saved and get a 10% return in 7 years you will have 100,000, 14 years 200,000, 21 years 400,000 etc. This is with no additional capital added! Sprinkle some in and this process speeds up dramatically.
The secret is that at first you don't see the nest egg grow much - the power of 72 is hidden. Add in a sprinkling of the ups and downs of the business cycle and it is easy to see this as a deterrent - it is not working....persistence is the key.
Secondly how much do you need to live off in FIRE 15,000 per year? This requires an investment pot of around 214,000 returning 7% a year........(too aggressive for me - but it is quite startling)
15,000! This surprisingly goes a very long way when you house is paid for, you live in a country that has good health coverage (providing you pay your taxes) and you have low living costs by SMART living choices.
BIG IDEA: Do not be part of the heard, save as much as is reasonable and make sure the money is put to WORK providing an INCOME (not a speculation or gamble).To help you visualise how this all works I have updated my financial independence time line planner with new budget and spending tracking sheets (excel spreadsheet).
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| Click on picture to download expense tracking, review, budget and financial time line* |
Can it really be so easy - if so why don't more people do it?
First up were are told it is not possible - daily. Retirement has been dolled up over the years as golf, beach, cruises. All of this is a massive sales job. Before you now it big bucks are needed in your pension plan (a million dollars or more in today's money). Don't believe this PROPAGANDA.These numbers are a natural brake on people retiring early. You get your pension projection in the post giving a pension estimation at 65. Usually falls short of your expectations and encourages you to add more funds.
Message: Just keep on contributing (and paying all of those lovey fees that drive the pension industry)! This leads to
Behavioural change: This perception management encourages irresponsible spending.
"I am paying into a pension so I will spend the rest - this is fragile thinking"Saving slowly and squandering the rest on a consumerist lifestyle, of junk whose value generally returns to its intrinsic worth of zero over time as it becomes broken, worn or obsolete, keeps you on the treadmill of salary, taxes and fees. Don't FALL for it!
This vicious circle sets high spending expectations in retirement hence the need to save more. We live VERY comfortably on what is deemed a poor family income in France as we have NO DEBT, NO LIABILITIES and LOW FIXED COSTS.
Whats even worse is there no real guarantee of a good pension payment at the end of your working life (think low returns, unfunded liabilities and inflation). I firmly believe this will leave a lot of people in a bad position in the years ahead as we are starting to see in the US with state pension funds in crisis.
BIG IDEA: Everybody needs to be an active manager in their own pensions. Have a plan and a set of pension goals and accept these change over time.Unfortunately this skill set is not part of the education system which is a topic for another day. I will just question why were are pushed out of the education door, to get on with it, without some basic life skills such as budgeting and planning.
The only way you get these skills are if you are lucky enough to have parents who have filled in the gaps (financial and emotional intelligence to name but two). You have a fascination with making it big or have a mentor of some sort. Knowing the GAME early makes ALL the difference to your future.
Hyper-Normalisation - is there a retirement trap brewing?
To compound the issue that returns are not knowable in advance.Things could dramatically advance just think of free renewable energy for all, new industries crop up overnight that revolutionise the world economy and we all get an iRobot each, eliminating the need for hard work and the ability to fund a living wage for all.
On the flipside to utopia we need to consider a few stumbling blocks (until we get our robot;).
One potential issue is that current asset prices and projections are based on perpetual growth calculations. We buy productive assets to pay for our pensions whose price is determined by predicted growth as measured in GDP and profits. These projections are based on historical "norms".
As we all know from history classes and current problems in countries; Argentina, Greece and Venezuela - upheaval can occur in any country devastating the "normal growth mantra", currency value and pension pots very quickly.
Secondly we have no real leadership in the world - challenging the status quo and changing our path to a brighter future. Leader holy grail is to keep inflation (confiscation) around 2 percent and growth in GDP of 3 percent and debt growing into an even bigger Godzilla than it is now......?). Nothing really changes.
Growth has been great but time is running out on this model - back to the rule of 70 (divide 70 by the percentage growth rate to give the doubling time) - at 3% growth the GDP would double in 23 years. Twice as much of everything...!!! yet we live on one planet and there are some serious restrictions to this thinking.
Considering most pensions are based on tracker funds which "diversify" risk buy owning a bit of everything surely this is a problem when we can't have everything when scarcity kicks in. Will luxury goods companies be top of peoples shopping lists? Will people pay for stuff they don't really need in this circumstance? Will society change where conspicuous consumption and keeping up with the Joneses is no longer seen as socially responsible? What happens when cheap debt is no longer available?
Another potential car crash for pension promises is that we are all living longer. Demographics are terrible in major economies (ageing society, less workers per retiree). Populations are highly unlikely to grow at 3% a year....
People stop spending in later years. They sell investments and assets to pay for their living costs - no GDP growth here then either.
But wait we can just print GDP right.....It's just logical - we currently have already bankrupt public finances and pension entitlements to pay just QE it (the law of supply and demand does not apply), NIRP it (negative interest rates what the!) it to make people spend and soon to be helicopter it (give people the money directly).
There is no real growth here just accounting tricks and boon dongles to keep us hyper-normalised. Slowly boiling the frog.
We are looking at a step change in humanities approach to retirement and entitlements. A new deal will eventually be forced upon us.
Future retirees need to be smart and understand their investments instead of a docile awaiting a check at the age of 65+. Their wad has to be structured in such a way to ride out risks and change to real future conditions of an ageing society consuming one rapidly depleting planet. It need to generate surplus instead of being "drawn down" only then can you be confident to splash out.
This is even more important for people considering FIRE (or FISH :)). Empires rise and fall, companies collapse and new ones are borne. We need to be informed, nimble, reactive, critical and opportunistic to have so many years not reliant on our labour.
BIG IDEA: "Hope for the best and plan for the worst" Financial Independence must have INCOME above OUTGOING with continued SAVING and INVESTING.
Seeking Happiness means RESILIENCE building and RIGHT SIZING ones LIFESTYLE to a changing society to survive many years free from working for the man or looking. HAPPINESS is NOT looking over your shoulder each day.
I have a couple of people I want to mention who are doing great work in thearea of building resilience:
Fragile, Rhobust, Antifragile - Nicolas Taleb
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| Source: Amazon |
up with a book on a form of robustness which he calls
I have a few takeaways from his work
- Specialism can be very dangerous - what if your job becomes obsolete - can you do other things \ have other skills?
- Having all your eggs in one basket is just waiting for someone to knock it over - "safe index low cost funds", stocks, bonds etc.
- Being part of the herd will lead you over the cliff - leading a debt based consumerist lifestyle makes you fragile
- Taking calculated risks makes you stronger
Peak Prosperity - Chris Martinson
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| Source: Amazon |
Chris covers risks from the three E's. Economy (massive build up of debt). Reliance on depleting fossil Energy supplies (and resources in general) for day to day life. How we need to look after the Environment we live in which provides us with our nourishment (soil building, wildlife (bees) for pollination, water etc. His latest book "Prosper" is a great resource.
More reasons to be ANTI FRAGILE in Retirement
External Surprises - Life has a funny way of punching you in the face. All is fine then wham - the car is written off, you break an arm or lose big on your investments. There can be an external shock completely out of your control such as war, demographic crash, capital flight and times of deflation and inflation.
This is relying on MULTIPLE DIVERSE sources of income is a must.
Challenge and happiness - Taking FIRE to live in a modern villa with no way to be a bit self sufficient, the bills just covered and a rosy outlook for investment returns is anti fragile and can get you in deep trouble quickly. Sitting in the sun and going for your daily swim can become stale quickly, as humans we need to keep moving or wither.
You make your own luck and happiness through hard work, continuous learning, making
the hard choices. All of these must continue throughout life - its what life is
about, makes you want to get up in the morning and puts a smile on your
face. I did that!
Retirement - use it to build inter-generational Wealth
Our aim is the continuous accumulation of wealth. We want to be able to pass on the knowledge we have to our children so they can do the same for their own. Why? Well the ability to control your freedom is in my opinion a major part of happiness - choosing what you want to do. Money and assets allow you to take risks, build a business out of a passion, make value for the people around you.Having a framework that makes sure you have real title to assets, legally avoid inheritance taxation (think farmland, 100+ year old antiques, passing assets on before they get taxed) is a real legacy for FI seekers. Building a business to hand over or sell in "retirement" provides a spark to your life, a reason to get out of bed, challenge yourself and keep your self healthy (heath is mental and physical and is WEALTH)
Draw down of assets in retirement is what the state wants - not what you want! That way the next generation have to get to work for the man to pay their taxes.
Why should we just accept this? This type of FIRE is not leaving a legacy behind. It is giving it to the state to squander on its latest pet project. By all means pay you fair taxes I have no problem with that but WILLINGLY give up your CAPITAL at the EXPENSE of your family is another issue all together.
BIG IDEA: Financial independence is about leaving a legacy of inter-generational WEALTH and KNOWLEDGE.
In part 2 of this post I will go through the modest steps we are taking to be anti-fragile and build inter-generational wealth for our family.
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