Monday, December 09, 2013

Mechanics of Early Retirement.

It's amazing how your identity changes as you get older.

My pals used to introduce me to other people by describing me in certain ways as I was growing up, at some stage I was...

... The Dungeons and Dragons guy
... T$R Chris
...The Toastmaster.
... Chicken Man ( Urgggh... Long Story )
...The Troll.
..The Crazy Guy.
...Guai Peh Peh ( Strange uncle )

And my personal favourite...

...The dude who played with his cats testicles and has the scars to show for it.

These days, people introduce as the guy who's retiring next year and he's only 38 !

...and it's so challenging trying to explain myself because some folks would have all sorts of questions on what my secret is, or whether am I some variant of a phony attention seeker.

Anyway explaining what I did to have scars on my hands was a lot easier.

I thought maybe if I written a short article on my version of 'retirement', things may clear itself up.

The simplest way to look at retirement is from the point of view of a single dude who lives with his parents, has no debt, and manages to save $300,000 before 35.

This $300,000 is saved by earning a regular income at a day job. This dude works overtime and minimises his expenses by eating at food courts and taking public transport. He has no expensive hobbies and only has time to read about taking his career further or making more money by making a few investments.

Now, suppose this dude discovers a way to create a portfolio that generates a dividend yield of 8% a year. It's a combination of business trusts, REITs and mid cap equities which return high yields ( Please refer to other awesome local financial bloggers for actual investment ideas. )

8% of $300,000 is a dividend income of $24,000 a year or $2,000 a month. If this dude can keep his expenses within $2,000 a month, this dude can keep running forever without an earned income and can be considered to be financially independent way before 35 years of age.

But like all dudes, this dude may want to get married and have kids some day. So he marries someone with the same values and they work together to earn multiples of $300,000 to cover each person's expenses within the family. By a certain age, the dude might be able to cover his family expenses and pay for his mortgage using only his dividend income, maybe even saving a portion of it in the process.

At this stage, it is certainly possible for someone to retire based on the power of the raw passive income that they are getting every quarter.

But should they exercise this power and live happily ever after ?

I think the answer is no.

At 38, I'm not naive that there is a 100% chance  that this stage of retirement can be sustained. ( Actual odds are determined by a Monte Carlo simulation ) Even if my portfolio holds up, the boredom will probably kill me. At best, if I peg my odds, I should not need to touch my capital for perhaps 3-4 years, although rising interest rates can ruin my plan in the medium term.

But 3-4 years is just what it takes for a person to take stock of his life and decide to do something for his personal interest and passion.

And that is precisely my plan.

Retire for a couple of years, take stock of my life and then take it in a radically different direction.

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