Why I Love Going Backward

I have been told that rowing is the only Olympic sport where we cross the finish line backwards. I don’t know if it is true. But I like the idea of doing something different than anybody else.

Our “Normal” Lifecycle

A traditional life would look something like this:

  1. Get born
  2. Go to school
  3. Get an education
  4. Get a decent job (For the next 50 years)
  5. Meet a spouse
  6. Get some kids
  7. Buy a house (We can’t afford)
  8. Buy a car (We can’t afford)
  9. Going on expensive vacations or getting expensive hobbies (Because your kids left the nest)
  10. Retire
  11. Die

The main thing as the we get a ton of debt in our young years in order to pay for a vehicle and a place to live.

But why do we do that?

Is it just because everyone else is doing it?

An “Optimized” Lifecycle

What if we turned our life around?

And started to go backward? Just like in rowing.

Yes – we might ending up being the only ones doing so. But what if it makes more sense?

An optimized lifecycle:

  1. Get borned
  2. Go to school
  3. Get an education
  4. Work (For the next 5 years)
  5. Semi Retire (Either work part time, or seasonal)
  6. Do whatever we like (Travel, start a business, etc)
  7. Meet a spouse and get some kids
  8. Have a 5 year maternity
  9. Buy a place to live (We now can afford)
  10. Buy a vehicle (We again now can afford)
  11. Keep working on projects we love
  12. Die

Can you see the difference?

Just Get To The First 100.000 $

Aim for the first 100.000 $ as fast as possible. Then compound interest is going to make sure that you are going to be more than all right.

From there we can do several things with the portfolio:

No Withdrawal

Work part time, or seasonal. And enjoy that you don’t have to work all day.

In 13 years your portfolio will grow to about 300.000 $, and you can now withdraw 5 % of it (15.000 $) which should would do for a semi frugal person.

Withdraw 3-4% Annual

If we feel like working just a bit less, then we can start withdraw a little bit of the portfolio.

3 % annual will make sure we have some passive income. And that we are more than likely to increase that amount every year.

In 30 years your withdrawals will go from 3.000 $/annual to 7.000 $/annual. (Adjusted for inflation).

And our portfolio will be about 230.000 $ instead. (Adjusted for inflation)

Withdraw 5-7% Annual

We can also withdraw even more. If we really don’t feel like working. Maybe because we are on the road travelling most of the time.

By doing so we are risking the whole portfolio is going to vanish within a couple of decades.

And our withdrawals are less likely to increase from year to year.

If we withdraw 5.5 % annual, we will keep up with inflation. And should be able to withdraw about 6.000 $ annual every single year.

Which can make you live like a king in asia for 6-10 months.

After 30 years our portfolio would still be around 100.000 $ adjusted for inflation.

Freedom When it Makes Sense

It makes sense that we have all (or most) of the time in the world to do whatever we like when we are young.

When there is no kids around we literally take the bag, and go for journey tomorrow. And stay away for the next 5 years. If we feel like it.

Being Around Your Kids When it Makes Sense

The only thing kids needs when they are small is attention from their parents.

When they start in school, their friends starts to be more exciting than the parents. Slowly and steadily the will become more and more independent. And in 18 years they will more or less handle things themselves.

Being around our kids when they are 0 to 5 years is not only nice. But a necessity. They can’t survive without their parents at this stage. So why not maximize the time we spent with them when they are small kids?

Buying Stuff When We Have the Money

If we wait to buy houses and vehicles to when we have the money (thanks to compound interest) makes so much more sense.

Our portfolio should grow at about 7 % annual, while the real estate market will grow the rate of inflation 2-3 %. That’s why we theoretically should come out ahead in the real estate market if we have a medium size portfolio as young.

Vehicles are also getting cheaper every year. And with the environmental problems we have at the moment, I personal don’t feel like contributing to that, by buying a gasoline fueled vehicle.

Cut the Period You Reach FIRE in Half, Book Review

I have never read a book from cover to cover before I turned 21 years.

But reading since then has change my life radical. Being able to learn from the best minds in this world is something I love. A book can be distilled knowledge from people who have researched a topic their entire life. And I’m able to learn that in 5-10 hours by reading their books.

I still find that astonishing.

This article will be a review of the book:

Life Cycle Investing: A New, Safe, and Audacious Way to Improve the Performance of Your Retirement Portfolio

Why this book?

Because it have made a huge difference on how I approach my investing. And it has been the reason why I might cut the period I reach FIRE in half the time.

If we just research a little about how to achieve financial independence. We learn that it is wise to buy stock index funds, in order to diversify. And if we want to diversify further, we can add bonds into the mix.

Now we have chosen our assets.

Is there another we can diversify aswell? YES!

We can diversify on time.

The stock market can be extremely volatile in single year. It can go 50 % up, but it can all so go 50 % down. If we start to look on longer time periods, like 5, 10, 15 or 30 + years, the stock market will become less and less volatile.

If we know that we want a million dollars to declare us self financially independent. With an allocation on stocks and bonds of 80 % stocks (800.000 $) and 20 % bonds (200.000 $). It would be way more ideal if would could loan the money upfront as young. And pay of the loan till the day we retire.

If a +50 % stock market crash happens early in our life, it wouldn’t be that catastrophic, because we will have time to rebounce. But if it happens when we are +50 years old. Then we are fucked.

When we are young, we don’t have that much money. So how can we get harder exposure to the stock market as young?

By leveraging.

The authors of Lifecycle Investing tested a leveraged strategy against a normal target date fund. This is where you pick a retirement date, and then the stock allocation ramp down from a 90 % stock allocation to 50 % when we retire. And they tested it against a fixed stock portfolio of 75 % stocks and 25 % bonds.

They tested it with different stocks and bond allocations to see if there was different scenarios where the traditional way would be better. With a stock allocation 200 % – 83 % (moving from a 200 % to 83 % stock allocation in retirement) we will have the same worst output as a 75 % stocks / 25 % bonds, but a median return there is 63 % higher, and in the 90th percentile it will be almost 100 % bigger returns. 

There are many more different allocations in the book.

But the biggest takeaway is even if we are really conservative about your retirement. It can still make sense to leverage early on.

Then the allocation would be like 200 % stocks moving to a 32 % stocks, and the rest would be bonds. By doing so we are likely to end up with 22 % more, than a traditional conservative allocation of 50 % stocks and 50 % bonds.

Lifecycle Investing will appeal to you, if you have bought into the idea of index investing to become financial independent, and want to take it a step further.

The worst enemy with this strategy will be our own psychology. When shit hits the fan, we need to stay calm, and follow our plan. And not everybody can handle that with a 200 % leveraged portfolio.

But if we think we handle the rollercoaster ride, we can diversify with time by leveraging as young. And reach our FIRE number earlier.