Coast FIRE – Ever Heard of That?

The other day I learned a new term – Coast FIRE.

The traditional way of chasing FIRE is to have all of your expenses covered by a passive income, often in a stock index fund.

We know that in order to have enough for the rest of our lives, we need to have 20-25 times our annual spending.

But Coast FIRE is a bit different. And it is quit powerfull for many of the young fellaz out there trying to reach FIRE.

The power of compound interest is very big when we are able to save money as young. If we have a 7 % annual return, our money will double every 10th year or so. This means that if you have a 1000 $ it will double to 2000 $. From there it will double to 4000 $ and so on. If we have a good amount of money when we are 30 years old. That money can easily double 4-5 times.

Or said different. Our 1000 $ at age 30 can easily grow to 16.000-32.000 $ in our life time. 

What Is Coast FIRE?

With Coast FIRE we take advantage of that compounding.

Let’s imagine that you read this in age 25 (no worries if you are older). If you can to get to 500.000 DKK (76.000 $) by the time you are 30 years old, you never have to worry about that retirements saving again. From there we won’t have to add another dollar for the rest of our lives to that account. Because it will compound into A LOT of money.

If we leave 500.000 DKK (76.000 $) in a stock index fund from 1976-2016 we would have ended up with about 13.000.000 DKK (2.000.000 $) (adjusted for taxes, inflation and fees)*. That amount at age 70 will roughly put us in the top 1 % wealthiest here in Denmark.

And that is Coast FIRE. Figuring out how much money you will have to save and invest, and them leave the entire portfolio until the day that you retire.

If we earn 20.000 DKK/month (3000 $) after taxes, and saving 50 % of that in able to reach Coast FIRE, we are only spending 10.000 DKK (1500 $) a month.

If we are able to reach 500.000 DKK (76.000 $) at age 30, we can from there go out and take a part-time job that pays us 10.000 DKK/month. Because that is what our spending is. And with peace in mind know that our financial situation is going to be great because of compound interest.

We can take up jobs that we find more enjoyable than the stressful corporate job. I could see myself as a rowing/crossfit trainer or having a small mason company. Because that is something that I enjoy.

But even if we do stuff that we love for 40 hour/week, that too will be an ignoring task. I love rowing for example, but after two months on a training camp, doing nothing but, eat, rest and train, I look forward to come home. But I still love rowing.

How to Reach Coast FIRE in Two Years

And I’m here to tell you that we can reach Coast FIRE in as little as two years. If you are between 20-30 years old when you read this. You will be able to become very rich and not spend 40-50 hours/week on a job.

Let’s imagine that you get inspired to reach FIRE. but the numbers you need to reach are to overwhelming, so you decide to go for Coast FIRE.

At this very stage, your portfolio is at 0 $, but you have burning desire.

If we earn 20.000 DKK/month (3000 $) after tax, and save 50 % of it. That means we save 120.000 DKK/annual (18.000 $). Because we are young it can make sense to leverage our investments with as much as 2:1. Said another way, for every 100 $ we invest, we borrow another 100 $, so we end up investing 200 $ instead.

Now we are saving 240.000 DKK/annual (36.000 $) instead of the 120.000 DKK. That means that we can hit our 500.000 DKK in as little as two years from now.

But Loui?! Then I would have 240.000 DKK (36.000 $) in debt.

Yes that is correct.

240.000 DKK (36.000 $) can seem like a big sum of money when you are young. But if we compare it to how much money they can compound into AND how much money we can earn in our entire life. That money is only a couple of percentages of our entire earning power.

If you read this, and decide to do it. You can have a full-time job for as little as two years for your WHOLE life. From there you only have to make 10.000 DKK/month, which is something that you could do part-time with jobs you actually like. Or you could work full-time a couple of months, and then travel to cheaper places where 7.000 DKK/month would make you live a royal person.

And that portfolio is going to grow. If we want to, we could start to withdraw from it down the road. Because it becomes big enough to finance everything on our budget, and retire at a traditional age with bit less money than 13.000.000 DKK (3.000.000 $).

*IFA.com

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.

How Much Money Is Enough? Fuck the 4 % rule.

I often read blog posts on how people are retiring with 1.000.000 USD and then live off 40.000 USD/Year.

Put it another way. They stick to the 4 % rule.

There has been made a study called “The Trinity Study”. Which is often referred to in the FIRE community.

They took a close look on how much you can withdraw from a portfolio with different allocations to stocks and bonds.

I think the 4 % rule is ridiculous conservative. 

Take a look at the chart below from the trinity study:

This chart will tell us if you have a 1.000 $ portfolio and a 100 % stock allocation, and we withdraw 8 % of the initial amount (80 $), we have a 76 % chance of success.

76 % of every 30 year period between 1926-2009 would never run out of money.

That 76 % means that you NEVER EVER earn another dollar in your life.

So if we are 20 something years old spending a modest 15.000 $/year. (Which I do)

We could retire with as little as:

15.000 $ / 8 % = 187.500 $ 

And have a 76 % chance of NEVER running out of money if we NEVER earn another dime.

“But I don’t feel comfortable withdrawing 8 % of my portfolio”

All right. Then lets round it up to a withdrawal rate of 7 %.

Then we can retire with a 100 % stock portfolio of:

215.000 $ and have 87 % chance of NEVER running out of money.

If we make a 30 year Monte Carlo simulation with a portfolio of 215.000 $ and withdrawing 15.000 $/year annual*:

If we look at the chart above. We can be pessimistic and say that 1 out 10 times the portfolio will not survive.

We can also be positive and see that 1 out of 10 times we will end up 7.200.000 $. Or put it another way, more than 30 times you initial investment.

We could also only do average. And end up with 1.500.000 $.

And we have done this by laying in over hammock for 30 years.

If we however can manage to earn some money.

And I’m not talking about a huge amount of money.

Let’s just say that we start a business of doing something we like. We don’t want the business to be something we do everyday.

Let’s call it a “Fooling-around-company”.

What if we could make 5.000 $/ year with this company?

Then we only need to withdraw 10.000 $/year on our portfolio. This is how a 30 year Monte Carlo simulation look like if we only withdraw 10.000 $/year instead of 15.000 $/year*:

We have now gone from a 87 % success rate to a 96 % success rate.

And in 30 years you will at the 50th percentile end up with 2.400.000 $ instead of your 1.400.000 $

So by earning 150.000 $ over that 30 year period. (5.000 $/year x 30 years = 150.000 $)

We are likely to have another million on our account.

Or we could withdraw 4 % each year instead of withdrawing a fixed amount of 10.000 $/year. This means if the value of our portfolio goes up, our spending can go up.

Then the situation will look like this*:

After 30 years of withdrawing we are more likely to withdraw 16.000 $ /year. And if we are lucky it will be +30.000 $/year. (Adjusted for inflation)

So please. Be a bit skeptical whenever you read the we need 25 times our annual spending.

If we are willing to be a bit flexible, by doing so we can retire A LOT sooner.

* www.portfoliovisualizer.com/monte-carlo-simulation

How I’m Retiring in 5 years or Less, and How You Can Too

Why should everyone try to become financial independent?

Billedresultat for freedom street art black and white

 

 

 

 

 

 

Whenever I tell people that I will retire in a couple of years they get excited. But whenever I tell them how I do it. They think it is to extreme.

You know what I think is extreme?

To work at the same desk for 30 + years of our lifes. People are getting more stressed by their work than ever before.

If we have the slightest form of ambition in our lifes, the “normal” way of showing that is often by:

  1. Getting married
  2. Work 45 + hours/week in a job with a ton of responsibility
  3. Get a big house
  4. Brand new car
  5. Couple of kids
  6. Get some kind of expensive and time consuming hobby

And when we do those six things. We tie ourselves up for that demanding job, because we have a mortgage and car payment to pay. By obtaining all this stuff, we are not going to have time for our kids or our spouse. The only time we do have time for the family is the mandatory vacation in the summer and the winter.

Is this the life we want to live? Or is it just because that it seems to be the ideal dream for everyone?

The divorce rate has never been higher than it is today. So being in a relationship where everybody is working their ass off. Doesn’t seem to be the way to go if we want to stay together with our spouse.

I don’t think the six steps above is the best solution.

Here is the solution.

How to become financial independent

The media like to present rich people as someone who is having a successful businesses. Working 16 hours a day, 365 days a year. Earning + 1.000.000 $/year.

That is one way of doing it. But there is a way easier method.

Simplicity is powerfull but it can be very boring.

The traditional way of dealing with retirement is to:

  1. Save 5-10 % of our pre tax salary
  2. Work for 50 years
  3. Enjoy the rest 15 years of our life when we are 70 years

Congratulation! We are now 70 years old and financial independent! (Not very admirable)

So what are we going to do instead?

Save a ton of money.

Saving + 50 % of our salary is the way to go if we want to achieve financial independence in the nearest future. By raising how much we save, also means that we can live on less. And will be able to be retire early faster.

The table below shows us how increasing our savings rate will cut off the time we have to work. Table credit: www.mrmoneymustache.com

Savings rate % Years until retirement
5 66
10 51
15 43
20 37
25 32
30 28
35 25
40 22
45 19
50 17
55 14,5
60 12,5
65 10,5
70 8,5
75 7
80 5,5
85 4
90 under 3
95 under 2
100 Zero

But what are we going to do with all the money we have saved?

We invest it.

The table above is assuming that we get a 5 % annualized return on our investments. So we can invest in whatever that gives us that return.

What I suggest?

Stock index funds. As broadly diversified as possible.

If you ask me they are the most simple and easy way to invest our money.

Now you might thinking:

“But Loui, didn’t you write how to retire in less than 5 years?”

Yes I did. But I’m not going to tell you how to save 85 % of your takehome pay. There is a solution for that as well. But I’m going to warn you. It will only be for the risky people who can stomach the stock market going up and down.

Early retirement on steroids

This is only for a few people. With a burning desire to give the corporate day the middle finger as soon as possible. And it will make a lot of sense if we are between the age of 20-30 years.

What is the “steroids” for investing?

Leverage.

Leverage is where we borrow money to invest. People do this everyday with their houses. Often 20:1. (This means we pay down 5 % of the house payment, and borrow the rest 95 %)

We can do this with stock investments to. So whenever we buy for 100 $ we borrow another 100 $ to invest for. We then end up with 200 $ investment.

If we save 50 – 75 % of our takehome pay, and borrow the same amount. We have gone from retiring early in 7-17 years to retiring early in 4-9 years.

This method is not something I have invented myself. There is to Yale professors who had written a very informal book about this concept. It is called “Lifecycle Investing” . (Or visit them on there website for the book here, there is a lot of free videos on it)

Why leveraging short-term can make sense

Let’s say that we earn 4000 $/month and spend 1400$/month or 18000 $/annually on housing, food and transportation. And we decided that we wanted to quit our day job as fast as possible so we are aiming for an SWR of 7 %.

This means we need to hit:

18000 $ / 7 % = 260.000 $ 

And that we have a monthly savings rate of:

65 % 

If we are conservative and say that we will not have any ROI on the money we are investing, we will hit that 260.000$ in 8.5 year.

But the power of financial independence lays not in how much we are making, but in how much we are saving! And this is where the power of leverage comes into the picture. If we leverage 2:1 that means for every 1 $ we are investing, we borrowing another 1$ and invest that as well.

Now we have reduced our working period from 8.5 years at the desk, to 4.25 years. Without any form of return on our investment.

This means that if you read this post as a 21-year-old, you could be retired by your 25th birthday.

Why leveraging long-term can make sense

Let’s imagine that we have read the text above and decided leveraging is not for us. And we do it the traditional way and dollar-cost-average into the stock market. Doing this from a young age means that we have very little money in the market when we are young, and a lot of money in the market when we are old.

If we invest 10.000 $/year, and get 7 % ROI + 2 % inflation from age 25 to age 65, this is how our wealth will increase:

2 % of our wealth is created between the age of 25-34. And an astonishing 64 % of our wealth is created between age  55-65. This also means that we are super exposed late in life, where we don’t have the time to make up for a bad period.

People often talks about bad years. But bad decades occur too. From 2000-2009 the S&P 500 made nearly no return for investors. And how do you think your portfolio would look, if you are expecting to make 64 % of your wealth late in life, and you end up with a decade like that?

Let’s recap

If our take home pay is 4000 $/month, and we are able to save and invest the difference of 2600 $.

We are now saving 65 % of our salary. If we can borrow the same amount. Then we are saving 5200 $/month, and our retirement is 3-4 years away. 

This is a super extreme way to deal with early retirement. And dealing with leveraged investments is only for educated people. But if we are willing to study this, our corporate lifes has never been looking better (AKA shorter)