Despite the obvious importance of financial matters in the success of an overseas early retirement experiment like ours, you may have noticed I generally avoid personal finance posts like the plague. First and foremost, while I did work in the financial services industry for 31 years, I’m not a licensed professional therefore I’d be remiss if I doled out advice about your money. But of course, that never stopped anyone in a social media generation where everyone’s an expert and every month or two brings a new Trump Slump where it seems like the sky is falling. Along with a strong coffee, my morning ritual involves perusing the more reliable financial websites to see what happened in the markets while I slept. And like me, you may have woken up to a stressful email like the one below announcing a reduction of your interest rate thanks to a now fully politicized Federal Reserve Bank compliments of President Shitbrain.
Starting 08/06/2019, your Online Savings Account will earn 1.90% Annual Percentage Yield (APY) on all balance tiers.Your APY is more than 20x the national average — so you can rest assured that your money is working hard in your savings.
With financial journalism now mostly reduced to large websites like Marketwatch and Yahoo Finance hiring millenials that scour other people’s blogs for reposted content, it’s tough to weed your way through the sensationalistic nonsense like this guy who claims the next three months are “the edge of a cliff” or this genius who claims “The Fed should have an emergency meeting and slash interest rates 50 basis points“. Without needing Macroeconomics courses, all you need to know is that the last thing a Central Bank should ever do is cut interest rates while unemployment is at a 40 year low. Despite coming from Barron’s, the first guy supposedly called the 2008 Financial Crisis which means we’re supposed to think he’s got a crystal ball. (He doesn’t, and past performance is NEVER an indicator of future results. Just like the disclaimers on TV and radio say.) As for the second guy, he supports the “policies” of the Stable Genius which automatically nullifies anything he says as pure ignorance.
Throughout my 31 years of cubicle life, I’ve always stayed aware, but ignored the fluff and continuously invested through about five “major” financial crisis’ from The Asian Financial Crisis in 1997 to the 2008 “Great Recession”. As I pointed out in Eight Percent Of Zero, my most comprehensive post on money matters, retiring early without being wealthy comes down to understanding asset allocation, developing a plan that’s right for you, and sticking with it. Period. Having said that, Orangeman causes almost daily shocks to the world’s financial system so including something about money matters in an expat blog about early retirement seems necessary now.
Anyone familiar with Chinese culture knows that wealth and finances are never discussed publically and often not even within the family. By contrast, the stereotypical standard for Jewishness is flaunting wealth. Despite my total non-religious upbringing, Diane often jokes she married the world’s only non-rich Jew which leaves me wrangling with how to compose a financial post relevant to the blog’s topic without disclosing specifics of our personal situation. Initially planning on linking a few articles I found from another personal finance blog written by a non-professional like me, I noticed it was picked up by Marketwatch so I decided to have a look. Unfortunately, despite appearing to be my age, the author represents everything I despise about millennials earning “online Income”. Filled with rules and regulations like “don’t even consider sending me a request for a guest post or link” and disclaimers galore, I found the writing way to condescending to share.
Aside from that, it occurred to me that this guy is way wealthier than Diane and I will ever be. Interestingly, we have followed his five “money-saving tips everyone hates“; don’t own a pet, (we don’t), move to a cheaper location (already did when we retired early), limit debt (we never carry a credit card balance), reduce small spending (we drink Nescafe instant or 50 baht cappuccinos) and own a smaller house than you can afford. Requiring some clarification on the last item, American banks (and Thai banks these days) dole out way too much credit to consumers to keep them in debt for life. In our prime earning days, Diane and I had near-perfect credit ratings thanks to the right combination of spending to credit limit ratio (about 12% is ideal), and limited debt (mortgage and two credit cards; we always paid cash for our cars). In the San Francisco market, that translates into insanely large mortgages and more so when only one income earner is a professional (Diane was a registered nurse; I was an administrative peon).
And when we sold our paid off Canadian house in 2007 for more than twice what we paid in 2002, all the cash was still only a 50% down payment in California. But we resisted and were 30% under what we could’ve been approved for. So despite how ludicrous it sounds to have enough to live in Asia for 15 years from selling an overpriced home in a hot market, we followed his fifth tip also. But I digress. Realizing the author brags about being in one of the top percentiles in America, he discloses his net worth somewhere near four million. And that’s obviously why he’s retired at an early age but still living comfortably in America. Our situation is nothing close to his and it occurred to me I can use net worth percentiles to help illustrate our story without disclosing actual numbers as well as write posts more in line with readers that have contacted me and are contemplating quitting work but hesitate because it’s scary (I worry literally every day; it helps me stay confident in my plan).
Noticing many bloggers often explain why they chose their website title or logo, let me explain why I call it an “experimental overseas early retirement”. Having the financial advantage of no kids, Diane and I always planned on retiring earlier than most North Americans but didn’t plan on starting at ages 50 and 44. And despite the good results after more than four years, I’m still not even remotely 100% sure it will work until we die. It’s a custom-designed plan I made up when I got laid off and I’m constantly fine-tuning it as we go through life without employment income.
To understand our situation, you’ll need some background information. Unlike many retired folks, we can’t live on our investment income since it’s mostly in age-restricted tax-sheltered retirement accounts (more on that later) and we’re not old enough to begin collecting our very modest pensions. Obviously, Social Security won’t come into play at least for another 8 years and that’s only if I take it early. And that also means we’re no longer actively contributing to our investment portfolio. So how did we get here and more importantly, how will we stay retired? First, let’s look at the power of investing during the longest continuous bull market in US history to see what made it all possible.
Many people use a predetermined number like one million dollars in savings or investments as a prerequisite for retirement. Others use total net worth which makes more sense given that most Americans able to afford any retirement at all derive a large portion of the number from the equity in their home. First and foremost, I can’t emphasize the importance of investing. Forgoing instant gratification temptations now for later is essential for retirement and even more so if you plan on a 40+ year retirement without working. Having moved from Canada back to California, Diane started her last job in the summer of 2007. Lucky enough to work for a “quasi-government” entity, it meant her company offered two types of tax-sheltered investment accounts. Similar to the more well-known 401k, she participated in a 403b Plan (thanks to the employer being a cooperative hospital service organization) and a 457b Plan (available thanks to her nursing union).
As usual, it took me longer to get a good job and with the 2008 Financial Crisis right around the corner, I squeezed in and was ironically hired on the day Lehman Brothers collapsed. Although not as good as Diane’s, my 401k offered enough worthwhile offerings. With annual allowable contribution limits of $18,500 per plan, that equated to $55,500 that the government allowed us to deduct from taxable income. And in a case of fluky perfection, despite our good salaries, our “modified gross income” was just below the allowable limits which further enabled us to contribute to $5,500 each an Individual Retirement Account (IRA). Payroll taxes are taken out based on your annual gross salary regardless of how much you can lower your taxable income which means once we deducted $61,000 from our taxable income, the result is an enormous tax overpayment. And after further deducting mortgage interest and property taxes, we took advantage of ridiculously large tax returns and invested it into our taxable investment account.
Seemingly ludicrous for rewarding middle-class diligent taxpayers, everything we did falls perfectly within legal IRS guidelines. Tax reform remains very low on all politicians’ to-do lists because nobody wants to tackle the 10,000-page tax code. And the “R” word (raise) is political suicide which is why the Republicans will continue giving billionaires and corporations enormous tax cuts for as many years as the baby boomers remain in power (and maybe after that if the system doesn’t sustain a major crisis). For my readers, that explains why I stress this point so much especially if you’re still working and thinking of calling it a day.
Always max out all tax-sheltered investment opportunities available in your working years. You don’t miss money you never see and should you have an unexpected event like a premature layoff that forces you out of your career like I did, you’ll be well prepared to deal with it. The smartest way to do this is over 24 (or 26) bi-weekly or twice monthly contributions so you always take advantage of dollar cost averaging (Please read the link if you’re not familiar with this term; it’s as important as asset allocation that I mentioned earler)
Perhaps this still sounds like gobbledygook and you’re looking for absolute proof and a reason why you should listen to me. Without getting into the topic of what’s in our diversified portfolio (more on that in my next post), suffice it to say that the market bottom occurred on March 9th, 2009 when the S&P 500 closed at 676.53. As of this writing, it’s 2,883.09. Having been scared off by the time the market lost almost 47% of its value, millions of Americans panicked, cashed in what they had and never went back to investing. Conversely, financially smart types took advantage of the lowest share prices they’ll see in their investing lifetimes and diligently continued contributing to their plans every paycheck. Granted, timing in life is everything and starting a new retirement plan for both of us only months before the longest bull market in history sure helped. But understanding why you should never stop investing in any set of circumstances (even with a moron spooking the markets daily) is the key.
Through the end of July 2019, the S&P 500 increased 328% since the market bottom and total return is 422% (Click here for an explanation of the difference and why it matters). That means you would have almost quadrupled your money had you simply bought a simple index fund (a “passive” mutual fund that mirrors the return of an index). Because I want to beat the market when it’s up and lose less than the index when it’s down, we invest only in “active” mutual funds which means a manager picks the securities and attempts to do better than the returns of a designated index. Our price return in this period is 271%, which is actually better than I’d expect because the S&P 500 is a stock index and we keep aim to keep a specified percentage of our portfolio invested in fixed income securities (bond funds) to reduce exposure to the equity market and mitigate risk.
Once my layoff occurred in 2014, it meant the end to my 401k contributions. Thankfully, U.S. tax law allows you to “rollover” your plan into a comparable tax-sheltered account like an IRA when you leave a job to avoid cashing out and having to pay early withdrawal penalties and taxes (you need to be 59 1/2 before the penalties go away). Once the initial shock of job loss passed, we crunched the numbers. Having chosen a 15-year mortgage, aggressively making prepayments with all spare cash and refinancing once low-interest-rate policies took hold, the remaining principal was insignificant but even with a bidding war and four offers on day one, getting 17% over asking price still wouldn’t get us a net worth anywhere near the 4 million dollar self-made blogger guy.
We did look at states with a lower cost of living but didn’t find many that held our interest and the main barrier in America is, of course, healthcare costs. Turns out our employer-sponsored healthcare policy with Kaiser Permanente costs about $19,000 if you turn it into an individual joint policy and that’s for two healthy adults in their 40s with no pre-existing conditions. Experts say you’re supposed to replace 80% of your net income to live a comparable lifestyle in retirement. GIven our gross salaries, that would never happen if we lived like typical middle-class Californians. But I ran a spreadsheet on what we actually lived on in our highest-earning year and was surprised to find that we lived on less than 20% of our gross salaries.
Backing me up is this excellent blog article explaining that you only need to replace what you live on. (it’s not an affiliate link; just someone with great advice). With two sets of healthy parents in their mid 80’s, we estimated long life expectancies and tried to devise a financial plan that takes us into our 90’s. While it was hypothetically possible for us to go 40+ years in a redneck shithole Trump state on what we had in 2015, the health insurance cost automatically ruled out America and even though healthcare is socialized in Canada and I have permanent residency status for life, cost of living was equally unaffordable at our ages given our net worth and future income sources. And so the experimental overseas experiment was hatched. Since I hadn’t reached my 50th birthday which is the minimum age requirement for the MM2H Retirement Visa in Malaysia, we agreed that Diane would work for another 15 months and continue her retirement contributions while I played House Husband and did all the prep work for developing a financial plan, selling the house and simultaneously applying for the visa once I was 50.
Calculating total net worth becomes much easier once you sell your house. Although I’ve been calculating ours every month since retiring, I’d never looked at the stats showing the entire American population’s standing. Using the latest available numbers, you can use this website to calculate your percentile with or without equity. Apparently, the average net worth for the head of household in the age group 50-54 is $599,194. But interestingly, the median net worth (the number in the middle of the range), which is a more accurate number when gauging everyone is only $105,717. To be in the 90th percentile, you’d need $1,138,501 and that’s when the graph gets ugly and shows American disparity of wealth at its worst. The 99th percentile or coveted “one percent” has an average net worth of $14,746,583. After Diane’s last day of work, we clocked in higher than I’d expect but well below anything in the highest percentiles.
Planning on letting our fully diversified portfolio grow, the plan is to live solely on the cash component and the resulting CD and savings interest for 15 years and then begin systematic annual withdrawals from the investment portfolio along with our future income sources once all our cash is depleted. As you probably know, this is a challenging plan given how the elite baby boomer politicians punish savers and older folks who rely on fixed deposit interest by resorting to near-zero interest rate policies that push CD and savings accounts rates ridiculously low. Thankfully, there’s a slew of quality online banks that offer rates well above the national average but after we finally got near 3.0% interest for a two-year term thanks to a few interest rate rises by The Fed, The Stable Genius ruined it all and rates are almost certainly going back to near nothing for the immediate future.
So what was the plan coming out of the gate? Using age 65 for me as a base retirement age, we looked at all our future sources of income. There’s a minuscule pension for me for making five years in a defined benefit company-paid plan (it starts next year). Then we’ll have a small pension for Diane that we can take as early as Year 6 when she’s 55 but we’ll probably delay for a higher annual payout. Even if we waited until the latest possible date to start her pension, it’s only supplemental and not enough income to cover a year’s living expenses. And Social Security can start for me in Year 12 and although the IRS’s online calculator surprised me with how much I can get even retiring from work at age 48, it’s also supplemental. After closing on our house, we started out early retirement with 45% of our total net worth in cash and 55% as investments in our portfolios. Deciding it’s way too risky to invest the house money in the markets, I chose to keep almost all of the house proceeds in Certificates of Deposit and a small amount in a high yield savings account.
Recently resorting to taking early withdrawal penalties to get some cash reinvested now before rates plummet again, there’s very little I can do to earn risk-free higher interest. Since our portfolio started well short of what many would consider safe for a long retirement, my plan also encompasses a degree of assumption about portfolio growth that I’ve derived from working in the industry and tracking my own investing performance over the last 20 years.
There’s also major concerns with currency risk for those choosing to live overseas (sans Panama and Ecuador who use the US Dollar). Next week, we’re traveling to Malaysia for the last time to terminate our participation in the MM2H Retirement Program with the Immigration MInistry. Not needing to live in Malaysia to be part of the program, the only requirement is keeping 150,000 Malaysian Ringgit in a fixed deposit a bank in Malaysia and we’ve been earning 3.5% for four years. But a strong US dollar is killing us at the worst time and at current rates, we’ll just barely get our principal back after paying the foreign exchange fees. In the next post, I’ll discuss the currency issues more as well as the tax implications for US citizens with assets in foreign currencies.
And that’s why our early retirement is an experiment despite retiring with a total net worth higher than most Americans at age 50. Promising I’d also discuss how we plan on staying retired, I haven’t yet gotten to the methods I use to track monthly expenses and portfolio progress. As you can probably tell, we’re banking on a lot of things falling into place for us to not run out of money if we live into our 90’s which is why I chose to approach this post by sharing as much as I can without encroaching on our privacy. Clearly, this topic requires two posts so next time I’ll talk about my spreadsheet, how we’ve fared and why our net worth today is actually higher than it was when we retired despite making only paltry amounts of CD interest every year.
Spoiler alert: Markets are resilient and more powerful than Trump, baby boomers in power for at least ten to fifteen more years will do whatever it takes to keep themselves elite and after that, the world is on its own. And I’ll be 65 and hopefully will have attained enough wealth to sit back and enjoy the implosion. Ironically, before I even had time to edit carefully and publish this post, Orangeman caved in and canceled his September 1st deadline for an extra 10% tariff on “everything else China makes”. Proving once again that he’s a moron and can’t win a trade war with China because it would first require a lot of financial pain in Trump country, markets soared while I slept and we recovered the exact amount we lost the day prior thanks to trade war concerns. So ignore the graphs except for the ones like below that show what a good portfolio looks like after all the ups and downs of 15 years or more.
One last thing; Please remember never put all your eggs in one basket and always keep a well-diversified portfolio. A major political event in Argentina clobbered its stock markets yesterday and as a result, Templeton Emerging Markets Bond Fund suffered a 3.5% loss in one day; its largest since the 2008 Financial Crisis. Templeton is a great fund company that we endorse and own in our Canadian portfolio but as with anything, risk factors should always play into your decisions when constructing an asset allocation plan. I speak only from experience so remember my disclaimer and don’t sue me if you buy Bitcoin or something else I’d never touch with a ten-foot pole and then wind up homeless. Happy investing and planning.
Please leave a comment if you’d like to see more financial posts. Or maybe just tell me to leave it to the financial bloggers and online income Millenial Gurus.