It was actually a pretty big week here at Early Retirement Blog. My article about setting aside 10% of your labor for retirement got picked up by Lifehacker and, over the course of a single day, I received over 30,000 unique visitors between this blog, my other investing blog, and my Spanish blog. Thanks Lifehacker!
Carnival Of Personal Finance
Two Views Of The Economics Of Dating by Mr Cheap at Four Pillars. I really like the idea of setting a weekly limit on spending on my girlfriend. In other news, I will soon be single.
Naturally, posts on saving money on Valentine’s Day were popular this week. Here’s one on saving Frugal Gift Ideas by Financial Highway and another on Inexpensive Valentine’s Day Ideas by One Money Design. There’s still a bit over an hour left to get yourself out of the doghouse on the east coast. Get to it!
How Much Could You Reduce Your Budget If You Were Laid Off? by Darwin’s Finance. When I was laid off, I didn’t actually cut back all that much. But I like this question from a philosophical stand-point. Anytime you think something is impossible, just ask yourself “if somebody had a gun to my head and told me I had to solve this problem or he would pull the trigger, what would I do to make it happen?” Once you’ve done that, you’ll see most impossible tasks are merely a question of motivation, not possibility. With the proper motivation (a gun to your head), you’d be surprised what you can accomplish.
The Secret To Success Is Hustle by Fiscal Geek. Hard work can certainly lead to success. Or you could just cheat if hard work isn’t your thing.
Avatar Isn’t The Biggest Movie Of All Time by Len Penzo. Nor was it anywhere close to being Best Picture. I mean yeah, the effects were impressive. But the dialogue was retarded and I knew how it was going to end within the first 10 minutes.
Why I Ditched My Vanguard Money Market Fund by Amateur Asset Allocator. Probably the best post written anywhere last week. Also check out The Risks Of High Yield Municipal Bonds and Payday Loans Are Detrimental To Your Financial Health.
Judging from the way people talk, pretty much everything is apparently impossible to achieve. I’m confident Columbus’s quest to reach the East Indies via the western route was regarded as impossible by most. I’m equally confident that not even 200 years ago practically everybody believed flight to be impossible. In short, pretty much everything awesome anybody has ever done has been called impossible.
How Do You Know If Something Is Impossible?
Theoretically, one could try to find out whether or not something is impossible by applying scientific principles and mathematical formulas to the problem at hand. If, after being able to rule out all possible scenarios, you discover something is either physically, biologically, or mentally impossible, you have your answer.
But it doesn’t work that way in real life. It’s nearly impossible to actually prove something is impossible (ironically enough). Just because you can’t figure out how to do something doesn’t mean it’s not possible, it just means you don’t know how to do it yet. It’s very easy, on the other hand, to prove something is possible: just do it!
Impossible Is Easy
People have a tendency to believe something is impossible merely because they don’t know how to do it. They’ve never actually tried, of course; they just can’t figure out how to do it. So it must not be possible, naturally.
For example, many people would say it’s impossible to earn a significant income on the internet, but I’ve managed to do it and so have many others. Still more would say it’s impossible to become wealthy without winning the lottery (a very common belief among low-income workers), but thousands manage it every year. As it turns out, impossible is pretty easy, namely because most things people consider “impossible” are merely things they never bothered to try themselves.
So the next time somebody advises you not to do something because it’s “too hard” and “you’ll never succeed,” ask them how they know. Have they tried it? If not, it’s probably fine to ignore their advice.
“Oh, I’ll live my dream someday,” you’ll often here. “I’d love to open a bed and breakfast on the beach, but it’s just not practical right now.” “I’m definitely going to open my own brewery someday, but that’s obviously at least 15 years down the line.”
“But, wouldn’t owning your own micro-brewery make you the happiest man alive,” you might reply? (I mean seriously, what man wouldn’t want their own brewery?) Why wait? If you know you want to do something eventually, why wouldn’t you just go ahead and do it? Tomorrow has a nasty habit of never coming.
But I Can’t Do That Right Now!
How do you know? Have you tried? What’s the worst that could happen? It may not be as bad as you think. What exactly are you afraid of? Poverty? Billions of people around the globe survive and thrive on less than your worst-case-scenario even if everything blows up in your face. Starting over isn’t all that bad because using what you’ve (just) learned, you can climb back towards the top pretty quickly. Every failure gets you closer to success.
When it comes right down to it, you have far less to lose than you think you do. A job you probably don’t like, a car you bought for the good gas mileage, and a house that probably isn’t your dream home is the most you stand to lose, if you’re like most Americans. Big deal? You could get those back in matter of years (if not sooner) if you had to. You lose very little by failing. Oh, but those “what if I’d done…” questions will bug the crap out of you for the rest of your life. Count on it.
Mitigating The Risk Of Failure
Fortunately, living your dream needn’t be an all-or-nothing endeavor. Some, like Tim Ferriss of Four Hour Work Week fame, are perfectly content with the constant threat of financial collapse (they may deny it, but deep down they are). I applaud that quality in a human being, but me being me, I’m a bit more conservative than that. If I fail, I only want to fall halfway down the ladder. Call it a cheap insurance policy (much cheaper than auto insurance, at least).
Ferriss calls them muses, Frugal Dad calls them side hustles, and I say call them whatever the hell you want to call them, so long as they pay the bills. The 40-hour-per-week, 40 year career is dead as a doornail, or at least it should be. My generation (35 and younger) are bound to live a volatile life as far as work goes. Where many decry the loss of the 30-year company man (those people tend to lack imagination), I applaud it. Why not work for a year or two on a project you enjoy and then, 2 years later and just when you’re beginning to lose interest, take a 6 month mini-retirement? Or maybe just spend a month or two at home working on more sources of alternative income between contract jobs? These income streams will pay your bills when you aren’t working regularly, and maybe even fund construction and see you through the early lean months of that new brew-pub you’ve been dreaming of. It’s easier than you think.
Alternative Income Resources
I’ve opted to go the online income route, but there are many roads to Jerusalem, including investment income (if you have sufficient capital, this is by far the lowest-maintenance way to go), speaking gigs, freelance writing gigs you can do from anywhere with an internet connection, freelance web design, and virtually limitless other ways to make a buck without holding down a traditional job. Here are some resources to get you started.
- Problogger – If your goal is to make money blogging, this is your first stop. It’s where I started.
- 10 Ways To Earn Extra Income by Dough Roller
- 50 Resources To Raise Your Income by My Super-Charged Life. Everything from boosting your investments, to negotiating a higher salary at your job, to home business ideas.
- 40+ Alternative Income Ideas And Resources by Moolanomy
I meant to do this yesterday, but I decided to brew some beer instead. My entire place now smells like baking bread. I guess you know where my priorities lie!
Carnival of Personal Finance #239
Baker from Man Vs Debt plans to kick ass in 2010. His goals are even more ambitions than mine are, and I thought my goals were pretty far-fetched! And no, my goal isn’t to retire this year. Maybe next year.
Bible Money Matters presents How To Make Money From A Blog. I can personally vouch for everything in this multi-part series. It works if you work it.
Well Heeled Blog presents Buying A Home Together Before Marriage? This is something I wouldn’t touch with a 10 foot pole; however, everybody I know who’s ever done it has been fine. Against all odds, in my opinion.
Carnival of Personal Finance #241
Carnival of Personal Finance #241 was hosted by My Journey To Millions and included my post How Much To Keep In Cash? I’ve been accused of being conservative, but it is what it is. Other super awesome amazing posts from that week’s edition…
Cash Money Life presents What The Human Bond Can Teach About Personal Finance. I would have gone dirty with a title like that. Fortunately, Craig is more mature than I am. Also, he writes Money Help For Christians, so that rules that out anyway.
I wrote Easy Strategies To Save On Auto Insurance. Obviously, it’s the best advice you will ever get. Anywhere. Saving on car insurance can help save the whales.
We’ve all heard the pitches and seen the graphs: if little Johnny saves just 10% of his income from age 22 until age 65, he will retire a multi-millionaire! By scrimping and saving his entire life, he will be able to kick back and enjoy like! What they don’t tell you is that little Johnny develops a heart condition from all those drive-thru lunches working frantically at his desk, trying to meet the next “can’t-miss” deadline (have you ever tried missing one on purpose? It’s fun). Consequently, by the time he had finally saved enough to retire in style, he wasn’t healthy enough to enjoy it. Poor little Johnny!
But This Doesn’t Have To Be You!
Poor little Johnny followed the conventional wisdom of saving 10% of his income year in and year out for retirement using such traditional retirement accounts as his 401k and even a Roth IRA. Now this is excellent advice, and I definitely recommend you save at least 10% of your income every year for retirement, although I think it should be more like 20-30% of your income just to be safe (some might disagree). Nobody is telling you not to save money, because compound interest is indeed the 8th wonder of the world.
But there’s a better way, or at least a complimentary way that, coupled with diligent savings, will help you reach your goal of early semi-retirement decades earlier than you would otherwise be able. It is not inconceivable you could reach the point of being financially capable of quitting the 9-5 world permanently within 5 years of implementing this plan. How? It’s simple: set aside 10% of your work efforts to income-generating side products in addition to saving the regular 10% of your income for retirement.
Tithe Your Earning Power To Compound Your Results
It is often said a person’s earning power, that is, the ability to earn an income, is by far the biggest asset anybody has. This is entirely true, but what this doesn’t tell you is that you can magnify your earning potential several times over working for yourself rather than somebody else. This means finding a low-maintenance side gig and banking the earnings. This is what Tim Ferriss refers to as a muse in his book The Four Hour Work Week. If you do it right, you can net an additional $15,000-20,000 per year per muse, each requiring only a few hours per week (or month, if you choose wisely) to maintain.
Your muse doesn’t have to be in an area you’re particularly interested in, although that will certainly help keep you motivated. It doesn’t have to be something you want to turn into a full-time business someday, although that’s great, too (J.D. at Get Rich Slowly did it, and seems to be doing very well for himself as a result). It’s simply a matter of recognizing a good passive income opportunity when you see it, and taking action. As it turns out, taking action on an obviously slam-dunk idea is the hardest part for most people. That is why they continue grinding away at the 9-5 until they get their golden watch: they are all talk. But not you. You’re going to take action. For ever 10 hours you spend at work, you’re going to spend at least 1 hour building an alternative source of income (click here for 40+ alternative income ideas and resources). I chose creating not-really-passive online income using niche sites as my muse, but yours could be literally anything. Get out there an explore to find out what works for you.
It Adds Up Over Time
Let’s try a different sort of math, but one that is related to all those “if little Johnny saves X% of his salary every year he will have $Y at age 65.” Instead of saving 10% of his income, let’s assume he spends 10% of his working hours on side projects that generate an extra $1,000 per month by the end of the year, a number that is extremely doable if you work efficiently, although you will doubtless start out a bit slower as you learn the ropes of your chosen business. At the end of 5 years, you will be generating approximately $60,000 per year of extra income with a time investment of only 10-15 hours per week. What’s more, you could probably double or triple that number if you worked more (careful though, we don’t want to create another full-time job for ourselves) or invested a little money to help spur growth.
At this point, you can probably afford to tell your boss what he can do with himself. Or you can continue working for a few years, pocketing the extra cash flow or reinvesting it in your businesses until you feel ready to quit your job. The point is, it’s entirely up to you. And tithing just 10% of your working hours got you there in 5 years instead of 40. Now that’s what I call compound interest!
Check out Tim Ferriss’s 4-Hour Workweek for more on how to get out there and live the good life now. Tim goes through some specifics you can apply to your own situation.
Much has been made of Tim Ferriss’s bestseller The 4-Hour Workweek (check out the accompanying blog, it’s quite good). It’s been met by plenty of praise and lambasted by a few detractors, but practically nobody who’s read it has been indifferent. Let me start off by stating I love the book. It’s inspiring and I can vouch for a lot of what Tim says regarding online business, although I learned those lessons the hard way, well before I had ever heard of the book.
Why The Four Hour Work Week Is A Pipe Dream For Most
It sounds great, doesn’t it? Earning vast sums of money, traveling the world, and living life to its fullest, all working a modest 4 hours per week remotely. Indeed, that would be a sweet life. And it’s entirely possible, for some. But I think most people would find such a life both a.) impossible to achieve and b.) undesirable in any event.
Remember back in high school when your guidance counselor asked what you wanted to be when you grew up? The exercise, a la Office Space, was to imagine what it was you would do with your life if money was no issue. Your answer was supposedly what you were supposed to do for a living. For some people, it’s “help sick animals.” Ferriss’ methodology won’t help you with that, since being a veterinarian requires you to work long hours. There’s simply no way around it. Sure, you could donate money to PETA, but would that really fulfill your dream? Probably not. But as Tim would say, that’s your choice.
What if your goal is to become a powerful businessman? You can certainly do very well for yourself using Tim’s methods online (I can personally vouch for that), but you’ll never become anything approaching a powerful businessman working 4 hours per week. Nor will you ever be president, a respected senator, or even mayor of a small rural town.
What about family? Tim would argue you can take your kids with you around the world, and he’s right. There are people who do just that, quite successfully. Good for them. There are others, however, who would argue a child needs stable surroundings. Who’s right? I have absolutely no idea. I suspect there is no right answer. But one could certainly be forgiven for believing a stable suburban upbringing with the accompanying stable 9-5 job is an ideal environment for a job. Who am I to tell them their life could be better? Perhaps a quiet suburban life is exactly what their hearts desire.
That’s not to say the 9-5′ers don’t occasionally dream of what it would be like to live a vagabond’s life. Everybody does, it’s just that, all else being equal, they prefer the life they have. Maybe it’s just that the conventional life is comfortable, but so what? Comfort is a great thing. For some, it’s worth giving up on other dreams for. For people like Tim (and me), on the other hand, it’s not. I yearn to see the world (even more than I already have) and fill my day-to-day life with the kinds of dramatically different experiences that just wouldn’t be possible living conventionally. Thus, I’m actively planning to semi-retire as young as possible (possibly as young as 30). To that end, I am aggressively working to build defensible streams of passive online income in the hopes of supporting myself for months at a time while on the road. To don’t expect to become or even want to be a full-time traveler, but I would like the freedom to do so if I so desire.
People like Tim and I are rare. Not everybody wants what I want, and still fewer people are willing to sacrifice what’s required to obtain it. The semi-retired life isn’t for everyone.
Buy The 4-Hour Workweek from Amazon.com and see what all the fuss is about.
When retiring on limited capital, you have two options: increase your investment returns (or at least your cash flow) or move to a cheaper locale. There are probably no places in the United States where you can live comfortably for less than $1,500 per month (without farming your own food, at least…let me know if I’m wrong), but there are a few such places abroad. While the typical American vision of living like a king for pennies on the dollar in an exotic third world location is a gross exaggeration, once can certainly build a satisfying life abroad in some locations for a relatively small amount of money.
Places To Retire For Under $1,500 Per Month
It’s true some of the larger cities can be quite expensive, especially if you insist on having all the luxuries you took for granted back in the states, but there are a number of places in Thailand where $1,500 still goes a long way. It won’t get you a beachfront condo, of course, but I’ve been told it’s possible to get a decent (if small) apartment in the $100-150 per month range, especially in the northern part of the country. A beer at a bar will cost you less than $1 and a decent meal might only run you a few dollars more. Great food, sun, the beach, a friendly people on an affordable budget. Doesn’t get much better than that.
Costa Rica is one of the safest and most prosperous nations in Central America. Over half the surface area of the country is protected as a natural sanctuary, and tourism is Costa Rica’s most important industry. As such, there are plenty of English-speaking ex-pats in the area, and many people in the more tourist-oriented areas will speak decent English. Costa Rica is known for its lush rain forests, diverse wildlife, and beautiful beaches. Not the cheapest country on the list, but it’s quite possible to live a decent lifestyle on $1,500 per month outside of the major cities.
Belize is home of the 2nd-largest coral reef in the world behind Australia’s Great Barrier Reef. As such, it’s a mecca for scuba divers, snorklers, and a popular cruise ship destination. Even better, English is the official language of Belize (most everybody speaks Spanish as well), making it an easy transition for ex-pats who don’t speak another language. The cost of living here is similar to Costa Rica (for similar reasons). It will probably cost you around $300 per month for a decent-sized apartment outside of Belize City.
For early retirees investing for cash flow, the lure of the actively-managed high-yield fund can be powerful. Unfortunately, most people underestimate the risks of investing in the high yield market, and reaching for yield ends in disaster more often than not. By virtue of being broadly-diversified as a general rule (there are exceptions), most index funds tend to have lower yields than many income-focused actively managed funds (such as the excellent Vanguard Wellesley Income fund).
But that doesn’t mean you can’t be both an index investor and an income investor. It just means you’ll have to slice and dice your portfolio a bit, tilting more towards higher-paying value stocks (being sure not to take on too much risk as a result).
Income Investing With Index Funds
As a general deal, value-oriented stocks (that is, stocks with a low price relative to the underlying company’s earnings and book value) tend to pay higher dividends. Slam dunk, right? Just buy all value stocks and call it a day! Not so fast. Most of these value stocks are cheap for a reason: the market doesn’t expect them to fare as well as higher-priced stocks. Still, there is ample evidence the market has a tendency to undervalue the potential of many of these value companies. The famous Fama/French value premium states that investors can rightly expect a premium in exchange for owning value stocks, albeit at the (assumed) cost of taking on a bit more risk.
Two Value Index Funds With Good Yields
As usual, you don’t have to look too far past Vanguard for your index fund needs.
- Vanguard Value Index Fund (VIVAX, 2.22% yield, 0.26% ER) – The Vanguard Value Index Fund is a mainstay of slice n’ dice portfolios everywhere. Owing to all the recent dividend cuts in the financial sector (a popular sector for value-oriented funds), VIVAX doesn’t quite have the same yield advantage over the Total Stock Market Index Fund (VTSMX) as it normally does. Still, this fund should regain much of its old poise as the financial sector continues to improve and dividends continue to be raised.
- Vanguard Small-Cap Value Index Fund (VISVX, 2.25% yield, 0.28% ER) – Like the fund above, the Vanguard Small-Cap Value Index Fund is a classic choice for small-value tilters. If there’s one thing that’s more powerful than the Fama/French value premium, it’s the small-cap value premium. Since small-cap value stocks tend to be among the market’s lease favorite securities, their appreciation potential (and yields) are even larger than average. Small-cap value stocks tend to deliver the best risk-adjusted returns of the Morningstar style box over long periods of time. Like the Value Index above, VISVX’s yield has been hit hard by the recent financial crisis. Look for this one to recover nicely.
Don’t Forget REITs!
Value stocks aren’t the only place to find above-average yields in the stock market. Real Estate Investment Trusts, or REITs, offer all the advantages of investing in real estate without the hassle of managing any properties yourself.
- Vanguard REIT Index Fund (VGSIX, 4.31% yield, 0.26% ER) - Due to special tax rules requiring REITs to pay out at least 90% of their net income to shareholders, REITs typically yield far more than most other types of stocks. Real estate can be a great source of steady, inflation-adjusted cash flow without taking on too much risk. I would caution against devoting more than 20% of your portfolio to this particular asset class, though.
Traditional advice holds that retirees should hold somewhere between two and five years worth of living expenses in cash. This is wise advice. You can plan for regular monthly expenses such as car insurance, your mortgage and/or property tax payment, income taxes, and even food/entertainment expenses. One thing you can’t plan for, though, is an emergency. That’s where your emergency fund comes one.
How Much Is Enough?
Workers with a regular paycheck can afford to take some risks here. If something happens, they can rest assured their future income will get them back on trap (but they’d better have long term disability insurance!). Retirees don’t have this luxury. They have no future stream of income to help mitigate their losses. Younger retirees are even more at risk, since their nest egg will have to last much, much longer than the typical 70-something retiree.
So what’s a young retiree to do? How big is big enough when it comes to you emergency fund? There are two conflicting perspectives on the issue:
- Young Retirees Can Least Afford To Gamble – Since a 40 year old’s portfolio must obviously last a lot longer than a 70 year old’s portfolio, the 40 year old can least afford to sustain heavy losses. This would argue for a larger emergency fund, on par with the 2-5 year recommendation, to protect against the risk of having to sell an investment at an inopportune time.
- Young Retirees Can Always Go Back To Work – The other side of the coin is that young retirees can always go back to work. A 40-hour work week may be a terrifying proposition to a free-spirited 45 year old retiree, but he still has it a lot better than the 75 year old retiree. The 45 year old is presumably well-capable of working for a living. The 75 year old? Maybe not. Semi-retirees will have a huge advantage here. Since they never totally left the work force, their skills are probably a lot sharper than somebody who’s spent the last 5 years traveling for a living. This would argue for taking on more risk and using a full- or part-time job as a backup plan.
A Third Factor…
As I’ve written before, most young retirees invest for cash flow rather than total return because they have different goals and different criteria for success. Cash, in most cases, is the lowest-yielding asset class, often earning negative real returns after taxes. For this reason, I advocate young retirees holding a much smaller emergency fund than is typically recommended: something on the order of 12-18 months’ worth of expenses seems about right.
Holding too much cash will impair your cash flow to the point of making early retirement impractical, if not downright impossible. Going back to work may sound unappealing, but I would consider myself very fortunate to have that option. There are also a few other alternatives such as part-time (rather than full-time) work, starting your own business (perhaps a franchise), and various passive income opportunities. The point is, early retirees have a large capacity to take on risk. I think it wise to take advantage of that. It should pay off more often than not.