Goal of Retiring early? Why you don't have to be homeless to do it!
Addressing the misguided assumptions regarding early retirement and financial freedom
So, I’ve recently started to see major returns in my net worth through the fundamental approach I preach of consistent saving, index investing and living within your means.
Also the recently privileged position of having a considerable increase in disposable income since moving to Canada has certainly helped.
The ‘snowball’ effect that occurs after you’ve saved the first $100k, turns out is actually true. The proof is in the pudding, I do love a pun, as you can see from my net worth increase over the last couple of years. My net worth doubled from 2020 to 2021, which still shocks me when I look at it.
I definitely can’t say that I have ‘made’ it yet like many of the early FIRE’d folks out there, but I am accelerating my timeline towards the ultimate end goal of finally leaving the corporate rat race by age 35 with over a $1million dollars, financially free.
It’s actually been very exciting. I am now starting to see my investment growth per month outpacing my contributions. In other words, my money is now working harder than I am.
If you’ve checked out my previous blog posts, you’re probably either already familiar with my story or just came to this website from Reddit or Pinterest posts I have made. I am quite active on those social media avenues. (Tip for any bloggers out there, these social media sites are great ways to drive traffic to your site)
It is interesting reading a lot of the comments on some of these social forums and the responses to some of my posts. In particular a pattern of responses representing some seriously misguided assumptions about the topic of early retirement.
When I first started out, I had the same misguided assumptions because literally no University or College offers personal finance as a module.
This still baffles me given how much not having control over your finances can impact your quality of life, and on the flip side the freedom it can give you if managed correctly.
So, in short, let’s debunk these misguided assumptions once and for all.
Starting with my personal favourite…..
1. “You Must live like a Homeless person, how do you save that much of your salary.”
I get a lot of these responses from people who haven’t tried to actually analyze their own spending and increase their savings rate.
- ‘’Millennials don’t have a clue, their becoming misers’’ or
- ‘’Yolo, just enjoy your life’’ or my personal favourite
- “You’re a liar – no one can save that much in their 20’s”
I did my best to not engage in the back and forth and the hole that reddit can lead down. But clearly a lot of these are completely false, as you can tell from the other folks in the FIRE space who have complete this journey or even my own net worth path so far. Just take a look at my NW updates,
I like to think I still live a good life, I travel as often as I can. Live in an amazing apartment in downtown Toronto (split with my partner). Definitely overindulge on drinks and meals out on the weekend.
While at the same time keeping my cost of living down. This means not buying designer clothes or the latest gadgets, or new cars (I bike everywhere) – you get the picture. I like paying for experiences not material items – so you can still enjoy yourself.
And every month without fail, I save way more than 50% of my income, sometimes as high as 80% and invest it into low cost broad based index funds. Check out my top 3 favourite index funds here. I have been doing this since my mid twenties and it is finally paying off. I am on track to save $1.5M and retire by age 35 while still reaching $11M by the typical retirement age of 65.
Touting these numbers isn’t about showing off, it’s to prove that by focusing on experiences rather than material items, along with consistent saving, investing and living within your means. That the FIRE lifestyle can go hand in hand with living an awesome lifestyle while still mastering your finances.
2. “$1M isn’t enough to retire on, because ….inflation. Also a million bucks is not that much anymore. You are going to end up broke and working in your 70’s!”
Whew, this one is definitely false! I feel like inflation has been in the news so often lately, that the word is just thrown around to back up any point. One of the reasons I made a post about why you shouldn’t worry about inflation as a Millennial Investor, or an investor in general for that matter.
In fact the at least $1M figure I am targeting to have by the age of 35 and retiring on, is actually inflation adjusted already.
Let me delve a bit deeper to explain…
Investing in the stock market isn’t just touching a screen on Robinhood and receiving a digital number of shares. What it actually means is you are buying a piece of that company.
That company offers real goods and services to ordinary people like you and me. They may make the cheese in your fridge, the car you drive or the takeaway you treat yourself to on a Friday night (Well deserved by the way!).
People sometimes forget this, these are actual companies making real profits, hopefully.
So, when we think about inflation which is the increase of general goods and services we use and pay for every day. Companies that actually supply these goods and services can just increase their prices and pass them onto me and you, the consumer! Along with that, all of their real estate assets (corporate offices, manufacturing facilities etc. etc.) increase along with it, which actually benefits those companies.
This in turn drives earnings up, which is the key driver of stock prices. So actually, having a $1M dollar portfolio made up of stocks, when inflation comes that means your $1M is actually going to be worth a lot more. Benefitting from stronger earnings and an increase in the stock prices you own. Win win!
So the inflation impact actually benefits you, the investor!
That’s why, investing in stocks is actually one of the best things you can do in periods of high inflation (along with other areas such as commodities, real estate gold and bonds).
If you do your own research, which I always suggest you do. Historically you can see the data that supports my comments above. The stock market returns since 1926 have been on average 10-11%, while inflation over the same period has generally been in the range of 3-4%.
So anytime you actually hear the widely touted figure of expecting an average of 7% return from investing in stocks (example Warren Buffett) this is actually after accounting for inflation.
So my target retirement number of $1million by the age of 35 assume this 7% return, i.e. it has already been adjusted down to account fo the inflation impact.
So in essence, if I actually applied the 11% return, I would actually be saying i’m retiring on more like $1.5 million future dollars.
I hope that wasn’t too confusing.
All to say that this comment is so false, having your money invested in stocks is the one of the best plays for periods of high inflation. Any you can definitely retire on a million.
Check out Mr Money’s Mustache podcast , in my opinion the founder of the FIRE movement, who retired on just $25k per year comfortably.
3. “What about taxes, you haven’t though about them!”
Ah aul Uncle Sam, as the old adage goes the only certain thing in life is death and taxes.
I won’t get too deep into the weeds here. But interestingly enough and this is almost universal across all regions (e.g. North America, Europe etc.).
Income from investments like stocks such as dividends or payouts from Real Estate investment trusts is actually taxed at a much lower rate than the personal income taxes you pay in your monthly pay-check.
Let’s take the Omaha Oracle himself Warren Buffett who said back in 2013 that he would probably be the lowest taxpayer in his Berkshire office because the vast majority of his income comes from capital gains (i.e. income from the stock market).
Why? Because long-term capital gains are taxed at much lower rates than income from work. Which again benefits you the investor who receives that capital gain income!
For example in the US today, the top marginal income tax rate is right around 37%. Compare this to the long term capital gains tax in the US at just 20%. So it pays more to have more of your income coming from the stock market than an actual typical salaried job.
To prove this point beyond doubt this report actually highlights that the Oracle Buffett’s wealth increased by $24 billion dollars over the four year period between 2014 to 2018 while he only paid a minute fraction (0.1%) or $23M in taxes.
That’s the beauty of FIRE, if you have a portfolio worth $5M and receive an annual dividend of 4%. You would earn $200k per year, while only paying 20% on tax versus 37% from folks earning the same amount in a salaried job!
So what are you waiting for – get started now.
As always, I hope you find some of these areas helpful in your own journey to whatever your goal is. Make sure to follow along on my journey on how this thing called life and my goal of financial freedom works out, I keep my net worth updated here.
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Catch you soon,