<![CDATA[Early Retirement Australia - Blog]]>Wed, 18 Nov 2015 18:57:43 -0800Weebly<![CDATA[It's all about the savings rate!]]>Thu, 12 Jun 2014 11:44:56 GMThttp://earlyretirementaustralia.weebly.com/blog/its-all-about-the-savings-ratePicture
The secret to early retirement in one sentence?

Maximise your savings rate.

This seems kind of obvious. Spend less than you earn.  When it comes down to it, the percentage of what you save compared to what you earn is ultimately what defines how long you need to work for.  Sure, the return on your investment has an effect on this as well, especially if you are only saving money in your superannuation fund.  But you have limited control on your investment returns, where as you are solely responsible for your savings rate. The higher your savings rate the less the investment return matters.

We have already looked at how much you need to retire with the 4% rule.  But it can be
hard looking at saving such a large sum of money and it can seem so far away.  So
today we will look at things in a simple way to make the retirement goal more achieveable.

Let's look at the following graph.

You can see from the graph that if you save 10% of your income, and if the return on investment is 4% (after inflation), you will need to work for about 50 years.  This is roughly what compulsory superannuation will do.  To retire early you need to do better than this. Even if you can only manage to save another 10% on top of this you will drop your working life by about 13 years.  If you are earning $50 000 a year after tax, you only need to save an extra $5000 a year to save yourself an extra 13 years of work!  This is good news.  By reading through the previous posts on house insurance, and car costs, you should be able to save a few thousand dollars already.  Hopefully more. In coming posts we will talk about little things that add up to large savings, not by being cheap, but just by being efficient.

Here at ERA, I am aiming for a 75% savings rate.  So with 4% returns, starting from scratch, I would be able to retire in about 9 years.  So why aren't I there yet?  After all I have been working for close to 13 years. 
I was not always aiming for early retirment and in my younger days I wasn't concerned with saving money all that much.  I went on a working holiday to the UK and did a fair amount of travelling.  These were experiences I enjoyed but they have set back the early retirement date.  But even with the travelling I was probably still saving about 40% of my income on average.  It's only in the last few years that I have ramped it up by becoming aware of my goal.

I know a 75% savings rate may not be possible for everyone, but I am sure that most people can do a little better than their current savings rate by making just a few of the changes we talk about here. 

The other way to increase your savings rate is by increasing your income (without increasing your spending).  If you are at the low end of the savings rate, getting a pay rise can be a very effective way to increase your savings rate, but once you get to the high end of the savings rate scale your income makes less of a difference.  If I earnt twice as much as I currently earn, and we will even ignore the extra tax payable, my savings rate would go up to around 88% (a substanial jump), but this would only reduce my working life by about 3-4 years.  If someone was saving only 10% of their income, and their income doubled then they would reduce their working life by about 35 years. 

What is your savings rate?  Can you make any changes to maximise it?  I hope you find something you can work on.

See you in the new ERA.
<![CDATA[The millionaire next door.]]>Thu, 05 Jun 2014 05:49:39 GMThttp://earlyretirementaustralia.weebly.com/blog/the-millionaire-next-doorPicture
The Millionaire Next Door - The Surprising Secrets of America'a Wealthy.

This is a great book by Thomas J. Stanley and William D. Danko first published in 1996.

The basic premise is that the two authors were recruited to study the spending habits of millionaires so that they could market to the affluent.  What they found was surprising in that most millionaires don't fit the typical stereotype of what the average person thinks a millionaire is. 

The typical media presentation of the ultra rich sports start, hollywood actor, or heiress is by far the exception to the rule.  Most wealthy people in America got there by hard work and being frugal.  As a result the average millionaire does not live in a mansion, in fact they typically live in normal neighbourhoods (hence the title).  Usually they will drive a modest car and don't buy status symbols (eg Warren Buffet the second richest man in America still lives in the modest Omaha house he bought for $31,500 in 1958 and drives a Cadillac he bought "about 6 or 7" years ago).   Interestingly, two out of three purchasers or leasers of foreign luxury motor vehicles in America are not millionaires.  Now when I pass a nice car on the street I think of the 2 different people that could be driving it.  Most likely it is someone that has purchased the car as a status symbol (even though they probably have less net worth than me, driving my 15 year old hatch back) and I feel sorry that they haven't realised that they are wasting their money buying a flashy car. However it might be someone who does have a lot of money saved and they are enjoying their retirement and I give them a quiet congratulations on their success.

The book goes on to talk about high income earners (and often high spenders), vs high net worth individuals and analyses their occupations and spending habits.  They also look at the spending habits of the children of high income (low net worth) households.  By providing their children with everything they want it creates a problem when the children become adults as they are accustomed to a lifestyle that they cannot afford, unless they also become high income individuals. 

I really enjoyed reading this book (even though it is a little outdated and is based on American incomes). If you don't wish to read the whole book there is a summary of it on wikipedia, but I don't feel that the summary has the same impact.

It is a book that changed my outlook on becoming wealthy.  If you are wealthy how can, or how should you spend your money?
To become wealthy you need to spend less.  Spending less does not mean you are denying yourself  life's pleasures.  In fact it is the opposite.  The money that you save is buying you something priceless - freedom.   

Being frugal can be a challenge but it should still be an enjoyable one.  I hope to see you all become "PAW's".  Then join me when we retire early.

<![CDATA[The easy way to earn over $3000 an hour.]]>Wed, 21 May 2014 09:14:49 GMThttp://earlyretirementaustralia.weebly.com/blog/the-easy-way-to-earn-over-3000-an-hourPicture
Yes, there is an easy way to earn over $3000 an hour.  It is a simple, tried and tested strategy.  But you can only do it once a year. 

So in it’s most simplistic form.  When your house
and contents insurance renewal comes due, ring your current insurer and tell them you would like to cancel the renewal and change to a different company.  They will offer you a heavily discounted premium to stay with them.  Accept the discount (or try your luck and cancel anyway to see if they lower it further), and save yourself a few hundred dollars.
This year my insurer took off over $300.  The phone call lasted less than 5 minutes.  At $300 for 5 minutes "work", this comes to $3600 per hour.  In my case the new premium was lower than any other quote I had received so I stayed with my current insurer, but if it wasn’t I could have switched to a company that was still offering a premium about $300 less than my renewal offer. 

Of course if you wanted to go one step further you could compare a few different home and contents insurance options from different companies.  Look at what sort of excess you would be comfortable with (I generally go with a high excess), what a fair replacement value for your house would be and consider how much your contents are worth, so that you know what you could expect to pay with other insurers. 

How much are your contents worth? 

I no longer insure my contents at replacement value because in the worst case
scenario, if everything was completely destroyed, I wouldn’t want to replace
half of the stuff I’ve accumulated. Yes, I have accumulated excessive amounts of
“stuff” that I thought I needed or just plain wanted, but now I have this
“stuff” I don’t use it or realise my life would be just as great without it.  So by reducing the value of my contents insurance to replace just the things I would want to replace I can save
another few hundred dollars.  I hope one day that I will have enough savings that I may be able to get rid of contents insurance completely, but at this stage I still crave a bit of comfort, so we will just have to wait and see. 

So next time your insurance is up for renewal, take 5 minutes to make a phone call, it could be the easiest money you will ever make.   

UPDATE 5/6/2014

My car insurance renewal came due.  I drive a 3 door hatchback to and from work.  My wife has a midsize car, which we use for longer trips.  I only have third party property on my car as it does less than 5000 km a year and is getting close to 15 years old now.  I checked online quotes from a few insurance companies. One was $35.83 less than my current insurer ($130 compared to $165).  I rang my current insurer but they were not able to match the price, so I switched.  Took about 30 minutes in total so earned me about $70 an hour after tax.  I would think that most drivers pay more than this for their insurance so their savings should be much higher.

<![CDATA[Is your car costing you an early retirement?]]>Thu, 08 May 2014 04:51:04 GMThttp://earlyretirementaustralia.weebly.com/blog/is-your-car-costing-you-an-early-retirementPicture
Everyone loves that new car smell.
The nice shiny exterior.  The clean upholstered leather interior.  You spend a lot of time in your car so you want it to be comfortable, and fast, and to be able to tow a trailer or caravan in case you need to.  And the price of a new car these days is reasonable, isn't it? 


Chances are your nice new car is costing you a lot more than you think.  The National Roads and Motorists' Association (NRMA) has produced a simple to use online car operating cost calculator.  The calculator makes a few basic assumptions.  The calculations are for private ownership in New South Wales, based on an annual distance of 15,000 kilometres travelled over an ownership period of five years.
The formula takes into account the negotiated vehicle price, depreciation,
opportunity interest, registration, NRMA membership, maintenance and repairs, and fuel.

So if you have always wanted that BMW X5 you can plug in the details to see that it only costs you $2.21 per km to drive or around $636.78 per week.  However whilst the calculator does include opportunity cost (the money you forgo by having $113800 tied up in your car rather than earning you around $5000 interest from the bank), when last checked it only included the opportunity cost of the depreciated amount, ie. if the the X5 is worth $80 000 after 5 years only $33 800 ($113 800 - $80 000) is used to calculate the lost interest.  You can also enter the cost of insurance which is averaged out into the weekly costs but again the opportunity cost of the insurance is not calculated.  So the running cost of $636.78 is probably a conservative estimate (unless you drive far less than the 15 000 km average).

$636.78 per week * 52 weeks = $33112 per annum.

As we have already discussed in the 4% rule.  To fund this vehicle for the rest of your retirement you would need at least 25 * $33112 = $827814 in savings. 
And this is if you had the cash on hand to buy the car without finance.  Hopefully you already realise that you should never buy a car on finance if that is the only way you can afford it.

But not everyone wants to buy a BMW.  A good family car would be fine.  How about a good sized family sedan like the mazda 6. That's better...only $212.13 a week. A cost of $11030 a year.

$212.13 * 52 * 25 = $275 600 in savings.

The cheapest car? The Mitsubishi Mirage. $93.29 per week. $4851.08 a year.  It requires an invested amount of $121 277.

For households with 2 cars you can double these figures.

Now that you know how much a new car costs, what can you do about it.  
1) ride a bicycle or walk for short trips.
2) use public transport.
3) become a one car family (or 2 car family if you are currently a 3 car family).
4) use your car less so that you don't drive 15 000 km a year (consider moving closer to 
5) buy a motorcycle.
6) buy a used car.
7) buy a cheaper car than a BMW.
8) buy the car you want but realise that it is costing you your freedom.

<![CDATA[The first step to financial independence]]>Sun, 04 May 2014 03:08:27 GMThttp://earlyretirementaustralia.weebly.com/blog/the-first-step-to-financial-independencePicture
The first step to reaching financial independence is knowing how much you spend.  You need to know about your personal finances and focus your spending on efficiency and value for money.  
If you asked me 5-10 years ago how much I spent a year, I would not have been able to give you an answer.  Even when I applied for a home loan I didn’t really know what I spent. I had a rough idea, I knew how much I could afford because of how much rent I paid and how much money I was saving but I didn’t track my expenses.  That has changed now and it is amazing the difference it makes.  
I like to know how much I spend every year.  Some people calculate their monthly expenses but for me that is just too variable.  One month you may have an electricity bill, the next there may be nothing due and then you may be hit with house insurance, car registration and insurance, and council rates all in the same month.  
Annual expenses tend to remain fairly constant.

So how do you track your expenses?  
There are a lot of different apps and programs available, the government even produced one called TrackMySpend.  Most of them require you to enter the data in whenever you spend you hard earned cash. 
I don’t use an app or money program. I pay for practically everything with my credit card.  This is paid off in full before every due date.  If you can’t pay off your credit card in full every month, DON’T use it anymore. 

Credit card debt is the arch nemesis of financial freedom.  

My bank gives me a nice breakdown on my online account of exactly what I have spent my money on each month, or each financial year.  The bank automatically breaks it down into categories (which can be altered), so I can see exactly where it goes.  

But sometimes you need to use cash.  In these cases I put these expenses onto a spreadsheet I made a few years ago (before my credit card had it’s fancy program and I had to do it manually).  At the end of each financial year I check my savings account for the
times I withdrew cash.  I will know where most of this went, but there will be an amount left over which I put under miscellaneous.  For everything else, it is all nicely set out on my credit card account.
Using your credit card like this has 3 distinct advantages.
1)      It helps you track your expenses.
2)      It gives you reward points (which I generally use to get cash back).
3)      It allows you to delay payments so you can keep your money working for you longer (either in an offset mortgage account or other savings/investment) 
So if you don’t know what you spend, start tracking where your money goes. 
The results will surprise you. 

<![CDATA[How much money do you need to retire? Does the 4% rule work?]]>Fri, 02 May 2014 08:24:35 GMThttp://earlyretirementaustralia.weebly.com/blog/how-much-money-do-you-need-to-retire-does-the-4-rule-workPicture
How much do YOU need to retire?
One million, two million or much, much more?
There are a lot of different answers out there. 

For early retirees the simple answer is to have about 25-30 times your annual expenses saved in investments.*  So if you spend $60 000 a year you need to have $1.5 - $1.8 million in investments.

Before you attempt to correct me lets see where this number comes from.

For your nest egg to last forever you need it to increase at the same rate of inflation (this has averaged 5.24% since 1951 but the target is 2-3%) and then a little bit extra to allow you to withdraw some of your money to live on.  The percentage of money you can withdraw is termed the Safe Withdrawal Rate (SWR).  The SWR allows you to increase the amount you withdraw each year to account for inflation.

The measurement and analysis of the SWR comes from a number of different studies.  Most of these are based on US stock and bond data.  The most commonly cited study is the Trinity study which found that you could withdraw 4 percent of your principal for 30 years with a 95% chance of success, where success means your money didn't run out completely.

The Financial Services Institute of Australasia has recently published a report on SWR in Australia.**  They compare data from 5 countries with different annualised stock performance using real returns.  Australia has had the highest returns of all countries so they suggest using historical data from Australia to anticipate future returns may be a little optimistic. The study also extended the time frame to look at 40 year periods (beyond 40 years there would be little change to the overall success rate).  They also used a variety of different portfolio asset allocations (100% stocks, 75% stocks/20% bonds/5 % bills, 95% bonds/5% bills etc).  It is worth noting that generally the higher the proportion of stocks in the portfolio the higher the SWR.  This study has not allowed for fees or taxation which may alter the results.

Essentially whilst the 4% rule would have worked over shorter time frames there was much more risk over longer time frames.  A 3% SWR approached 100% chance of success except in the 2 lowest performing countries studied, which performed so poorly that not even a withdrawal rate of 2% met with a great deal of success.

So why have I said to save 25-30 times your annual expenses?

If you saved 30 times your annual expenses you would have a 3.33% SWR which in most cases would give you a fairly reliable chance of success (possibly leaving you with a nice sum at the end).  

If you wanted to retire and live completely from your investments then a 3% SWR would be quite safe (there is no such thing as a sure thing).

Using a 4% SWR would also work if you are adaptable.  You may do a bit of paid part time work.  You may be able to decrease your spending in economic down turns. Maybe you will receive an inheritance.  Maybe you will downsize your house.  But to blindly withdraw 4% from you portfolio and increase this every year for inflation exposes you to some risk of ruin.

Using the rule of having 25 times your annual spending, if you spend $80 000 a year you would need about $2 million to retire.  If you spend $40 000 a year you would need $1 million.  What is easier?  Saving an extra $1 million or adjusting your expenses and spending less? 

To give you a rough idea of what you could expect to spend, acccording to ASFA Retirement Standard a retired couple would require $33 000 a year for a modest retirement and around $58 000 a year for a comfortable retirement (we will look at these figures and the definition of modest and comfortable later).

So that is how much you need for retirement.  Work out what you currently spend and multiply it by 25-30.

Then look at what you currently spend again and see how much that would be reduced if you stopped work (no uniform costs, no professional fees, no commuting, no work lunches, etc) and then multiply that by 25. 

Now you have a rough goal. 

But we won't stop there.  We will look at every aspect of our annual expenditure and see how much each area can be adjusted for maximum efficiency and fun!

*  This figure is for early retirees.  Those retiring at an older age don't need to have their money last forever so can afford to spend the principal.
**The full pdf format can be downloaded here.  An interesting read if you like numbers, charts and graphs.

<![CDATA[What is early retirement?]]>Mon, 28 Apr 2014 07:27:58 GMThttp://earlyretirementaustralia.weebly.com/blog/what-is-early-retirementPicture
Retirement is traditionally considered the point where a person stops employment completely.

You work until your 65 (maybe 70 depending on the new government budget, but more on that later), retire on your superannuation savings or the age pension.  Join the golf club or become a grey nomad.
Go on a cruise once a year if you have saved enough and live out your days quietly.

But who wants to work until they are 65 if they don't have to? 

There must be another way.

There is a way.  A way to be free to live a fulfilling life without having to work for a living into your old age.    

Financial Independence

Finacial independence is about having enough wealth to live without having to rely on
employment income.  It is about having enough assets to generate income that is
greater than your expenses whilst allowing your nest egg to grow to account for

There are two sides to the equation - increasing income (and assets) and reducing expenses. 

Generally people focus on increasing their income, which allows them to increase their expenses.  However to reach financial independence most people need to focus on reducing their expenses to maximise their income.

I am going to show you how I have reduced my expenses without compromising, (arguably even increasing) my lifestyle.