Instead of living on a "pittance" with the Australian pension, Rob decided he'd spend his retirement writing articles in Cambodia's beachside cafes. For Alan and Ros Cuthbertson, retiring abroad has shaved 15 years off their expected retirement date.
The former IT manager and disability worker have joined a buzzing expat community in Thailand, with more than 73, expats from around the world applying for retirement visas in For the past three years, the Queenslander couple have enjoyed a tranquil lifestyle in Chiang Mai, surrounded by mountains and Buddhist temples.
Lots of family members are no longer with us and we might not get to that age. It just made us rethink everything," they say. Alan and Ros now spend half the year away from Thailand, housesitting throughout Europe and Asia. The pair have travelled to "41 countries and counting", documenting their trips on their website Frequent Traveller. Despite the ease and affordability of Thai life, Alan and Ros say they will eventually return to their Bundaberg home, longing to set foot on our pristine Australian beaches again. But Norah and Rob have no desire to return, keen to avoid the penny-pinching lifestyles they would have to practise as Australian pensioners.
While Norah misses being able to buy a decent-sized leg of lamb back home, she says she'll "die in Spain". First posted May 16, If you have inside knowledge of a topic in the news, contact the ABC. ABC teams share the story behind the story and insights into the making of digital, TV and radio content. Read about our editorial guiding principles and the enforceable standard our journalists follow. Dandan Fan's every move will soon be watched and judged by her government, and she's happy about that.
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Norah swapped her penny-pinching retirement in Perth for a comfortable lifestyle in Andalucia. How to travel the world in your retirement. Grey nomads converge in the hunt for outback gems. Norah brought her two Abyssinian cats to Spain. Norah used her Australian superannuation to renovate her cheap Spanish home. Norah says she will "die in Spain" and is considering taking up Spanish citizenship.
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The Shockingly Simple Math Behind Early Retirement
Party balloons found floating km out to sea photos What would Australia look like without live exports? Strawberry growers aim to sweeten a sour deal. Connect with ABC News. Got a news tip? Editorial Policies Read about our editorial guiding principles and the enforceable standard our journalists follow. A model citizen in a digital dictatorship By China correspondent Matthew Carney Dandan Fan's every move will soon be watched and judged by her government, and she's happy about that.
Emmy Awards best moments Facing dwindling viewer numbers, the Emmys promised to be a more inclusive and entertaining event in GamingYourFinances July 6, , I agree, I love this post, its been specifically bookmarked and I visit it weekly. There is something very reassuring about the simplicity of the math. I made many small tweaks to my lifestyle after this post. Each one worth less than 0.
Free Money Minute February 24, , Visiting the page every week as a motivator is a great idea! Small changes are good, lots and lots of small changes are even better.
The Shockingly Simple Math Behind Early Retirement
Hate to be pedant but I ran the numbers and found that your explanation of how to calculate savings rate is a teeny bit misleading given there are all of these tax advantaged savings accounts out there. Total Savings is every single penny that has gone into a savings or retirement account, whether you have saved into a k or any other tax wrapper, including all employer matches, and obviously all taxed accounts as well.
Matt May 30, , 7: It says that you have to add back any deductions to your take home pay. If you do it correctly, your pay becomes equal to the denominator of your formula. January 13, , 6: Nords did a similar post with the math behind early retirement here: I even hacked together a crude spreadsheet to do all the calculations on early retirement for you, given a set of assumptions saving rate, spending rate, rate of return. MMM, feel free to post it in this post too if you want, or even improve on it and post it.
MMM readers like spreadsheets, so I think some people will enjoy playing around with it. I sure have fun playing with numbers. No Name Guy January 13, , 1: Fist off, when you retire, roll the k to an IRA. Check it out on the IRS web site. One formula is based on your age, another is like an annuity and I forget off the top of my head what the 3rd formula is. MacGyverIt January 13, , 4: EL March 3, , 8: Really great that the IRS has created a loop hole in order for people to access their accounts. One thing that could complicate things is that the amounts are fixed for 5 years straight, and if you have a down year, the income payments from the portfolio might eat into your principle more than you would like or prefer.
Jimbo January 13, , 6: I should specify that my mortgage rate is 3. Jeff January 13, , 6: Your mortgage payment has a 3. MMM January 13, , 7: Reduced expenses are exactly the same as tax free dividends! Even ks have workarounds, see the article right here on this blog: Jimbo January 13, , 7: The concept and principles, I do all the time. Also, have you ever tried talking to a financial advisor about this sort of strategy? You get a loooot of funny looks. Bullseye January 13, , 8: Mortgage paydown definitely has a compounding effect! Every extra payment means your next payment will go more towards principle and less towards interest.
Same effect as a compounding investment. All you need to do is pay the taxes on them. In fact, if you structure it right, and live a low cost lifestyle, you can withdraw it all effectively tax free. Jimbo January 13, , 8: Good advice, I will keep that in mind. And i can definitely retrieve less from the RRSPs than the lowest taxable bracket — especially with the mortgage paid…. As mentioned above, with an early retirement, low-cost lifestyle, and good planning, it is possible to withdraw at least some of the money with little or no tax applied. The problem with RRSPs that is not always understood is that when you turn 71, you are required to convert to an RRIF, and minimum annual withdrawals apply.
These withdrawals currently 7. Actual amounts will vary depending on how much other income I make and tax deductions that apply each year. By doing that, I will keep the same amount of capital working for me, while reducing my future tax liability. Bullseye January 13, , Best to kill that RRSP before 65! By retiring pre and keeping withdrawls low, you essentially game the system. Especially if you are high income pre-retirement. I could forsee a situation where an extreme early retiree could end up with a negative net income tax burden on a lifetime basis.
Dragline January 13, , While you are paying down the mortgage, every extra principal payment gives you essentially a risk-free return on that amount of the mortgage rate. To compare that to a comparable rate in the market, you compare it to a t-bill. T-bills today pay essentially nothing now. So if your mort rate is 3. The correct strategy in this scenario is usually a barbell.
You would have the same expected return, but with less risk. BDub January 13, , Your math is wrong: I simply have a goal of having it paid off when I retire and I base my extra payments on that goal. Unless you plan on selling your home to pay for retirement, it should not be in your investment equation. Ralph November 13, , 4: While the investment shows an obvious compounding effect.
The property does too. By the growth in property value and the savings in rental expense. In the early years of a mortgage, the house is highly leveraged so the compound growth rate can be quiet large if the house grows at any significant rate at all. Of course the leveraging is eliminated as the mortgage is paid off but so is the risk of foreclosure.
Sean January 13, , It may not strictly be the most efficient thing to pay down your mortgage early. This is especially true because mortgage interest is deductible. Also, many states have laws that protect primary residences from lawsuits and debts from other sources. A paid-off home is thus a tremendous source of life-long security. A better way to value it is to pretend to charge yourself rent.
Dougie July 28, , 9: They always carried a mortgage. I suspect they were all told their money would be better served in other investments, rather than in their house. Gypsy Geek January 13, , Alice January 13, , 2: Gypsy Geek January 13, , 4: Your mileage may very depending on your state taxes, unless you living in the 7 states that have none.
Dan January 18, , You can walk in right now and withdraw all you want. That means I get all that money completely income tax free. Bullseye January 18, , This is totally possible, of course, in a technical sense, but has two drawbacks that should be noted;. I used to only pay attention to the earnings side of the equation — I wanted to make enough money so that I could save more. Reducing spending gives you the double whammy of saving more in the short term and needing less money in the long run to retire. Jeff January 13, , 7: Cutting down on spending is better than making more money when you consider the tax implications.
Ericka October 21, , 7: You some how made this theory so clear for me. Totally agree with you, rjack. I was the same way. Most people focus on earning more, and unfortunately this also often results in spending more. In my mind, the math is much simpler than percentages. Rental properties seems to be the way forward for me. I just bought my first foreclosure and am fixing it up now. I estimate I only need about 10 financed properties to retire 5 owned outright. MMM January 13, , 8: Then again, the Everyone thinks there will be no more economic growth, forever.
Much more than the nitpicking over stock market returns and inflation. Benoit Essiambre January 18, , I understand that savings rate is important but rate of return is also important and certainly not a nitpick. There are certainly reasons to be concerned. Money Mustache January 21, , 8: If one adopts a Mustachian lifestyle then one will indeed be fine.
The rub is that it is not easy to change habits especially when one is surrounded by non-Mustachians. Will January 13, , 8: Thank you for the extremely concise breakdown on this point. I overlooked the very important point you both made. A penny not spent is a penny saved for all intents and purposes. Calculating this with your level of taxation is a great way to get thrift motivation. In terms of health care costs, Canadians are super rich by U. One thing I would like to caution super-early retirees on is to allow some slack in your budget for increased health expenses as you get older.
A generous safety margin should cover most such contingencies. Canadian Dream January 13, , 8: Des January 13, , 3: Nerode January 13, , 4: Are you perhaps being slightly hyperbolic here? As another reasonably well-paid Canadian. Sounds painful, and seems to illustrate your example rate. For US readers, remember that includes health care. Heather January 13, , 8: BMO bank in Canada just cut the 5 year mortgage rate to 2. If not, why not? This conflict leaves me gridlocked into inaction. No wonder people spend crazy amounts of money on houses. At least you can see your money. Perhaps financial pessimists are doomed to financial mediocrity.
MMM January 13, , 9: Heather — banks are complicated businesses, and they get to employ leverage on your deposits to get greater returns, plus they have various consumer fees, consultancy and brokerage stuff, and other profit streams. Guess what the dividend yield on CIBC stock is right now? You are correct — financial pessimists ARE doomed to mediocrity. This is still pretty good, because most people are financial illiterates, meaning they are doomed to the even lower level of Shitocrity.
But with optimism and armed with just conventional knowledge, anyone can do better than inflation. James January 15, , Kudos for putting the spreadsheet out in OO format. That sort of thing is right in my wheelhouse. Bullseye January 13, , 9: I believe the way MMM addresses this is to ignore the benefits of the second part, making them part of his Safety Margin. Essentially just a bonus. These savings would have to be invested much more safely due to the need to eat capital in the short term, and any compound interest would be my Safety Margin.
House would be safety margin, and if not needed, go to kids. MikeK January 13, , I then keep cutting back the years of income until the amount in the pre-retirement fund goes to zero at age By my calculations, it is just over 10 years away….
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Like MMM says, cutting an expense and adding it to the savings has an amazing affect on the time required! MikeK January 14, , Ensure that the income is inflation protected. This would mean dying with a sizable estate, but I believe it would actually mean that the required assets would be lower than other methods, if structured right.
Agent9 January 13, , 1: This is the exact quandary I find myself currently in. Risk over 30 years can be spread out, not so with the 5 year. Bullseye January 13, , 2: Many blue chips have yields around this level, and many I would consider sustainable. Agent9 January 13, , 2: Other people I have been talking to are also recommending this path.
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The numbers are less attractive though. Agent9 January 13, , 3: Dividend yield growth can not keep up with inflation if you are spending the yield each year. Bullseye January 13, , 3: Not sure what you mean.
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Just did a number crunch. If your assumption is correct then in 20 years the stock will be paying a dividend of 8. Bullseye January 13, , 4: Inflation compounds as well. Gerard January 13, , 8: A share may indeed one day pay dividends that are 8. Agent9 January 14, , Dividends as a percentage of current share price. I think I understand. Thanks for the clarification. El Beardo Numero Uno January 13, , 9: I see every big ticket item in my collection differently now — would I rather have this item, or the cash I could get for it? Meg January 13, , 9: Thanks for the great post!
Geek January 13, , 9: Though the new job is a little too good for me to want to leave at the moment. John Cheever January 13, , I just calculated how much I spent last year: That was a crazy figure for this reason. My plan is to retire in 10 years at Also, I am single but if I settle down with a special lady and am able to split costs then my financial independence will come even sooner.
Yes, I would be game for that as well haha! Alice January 13, , Education — Without the college degree I received via scholarship and the two Masters I earned with my employer paying for it I would have been in dead end, physically debilitating jobs or saddled with big school loans. That said, your plans should include getting and continuing with your education. Any plan needs to include some provision for catastrophe. Marcia Frugal Healthy Simple January 13, , This was a great post. I am going to make it a goal to figure that out for , at least sometimes in the next month.
Honey Hireme on equal playing field in women's sports and considering retirement
That was very helpful. Matt G January 13, , 2: Every student that graduates from highschool should be required to create this spreadsheet from scratch, rather than books of useless facts that can be looked up on google in less than 5 seconds. The math may be too simple. This model assumes an individual is making the same amount every year. Your model works if it used average take home pay for the career opposed to using salary as a constant. MMM January 13, , 4: Nope — your example would just mean the person could retire even earlier. But despite the incorrect pessimism, you have cleverly discovered yet another one of the amazing MR.
I make everyone assume that they will never get a raise. But then they do get raises. And everything ends up turning out even better than expected. Develop yourself to be tough enough for the worst, yet execute for the best. JJ January 13, , 3: Some expenses grow more than others healthcare.
In some years, expenses will be higher due to things like college expenses for kids, etc. Sorry if this is complainy pantsy. But what I have trouble with is the variability of expenses in the future. George January 13, , 6: The model expects that you are starting with a net worth of zero, and that your savings rate never changes. This model, though, provides a good way to look at savings and some targets to strive for.
JJ January 15, , 6: I have only a vague idea of what our expenses might be in 10 or 12 years. We probably just need more cushion. We pay no universtiy education but we try to help them out in other ways ie. Also as they get older they start developing their own interests ie. I am pretty frugal but if they beg me over and over again like my 11 year old son did for two years to play hockey, then I will try to accomodate their requests. Also our groceries go up because they eat alot in I find after age Just my two cents here.
Brian January 13, , Joe User January 18, , 3: Most mortgages have a clause for consecutive high inflation quarters allowing a raise in mortgage rates. Money Mustache January 18, , 4: But mine was from a small private bank that holds its own loans. Does anyone else have information that can confirm or deny this? However, we also have a world record i taxation, which makes the savings rate perspective ever so relevant.
Ed January 13, , 3: Hi MMM, love your blog. But I have a question concerning this table here: Am I missing something? Yup, you sure ARE missing something! And this is after adjusting all of these numbers for inflation, so the amounts will pay for roughly the same lifestyle in the future as they do today. Without the concept of money earning money, there would be no such thing as early retirement and no such thing as rich people. Both concepts would be impossible. Ed January 14, , 1: Thx for clearing that up. It is an interesting table.
This might be an interesting place to start or combine with high dividend stocks. Yabusame January 13, , 3: My savings percentage has taken a big hit recently. Although the ultimate aim is to grow my income by multiples of what it was, it means taking a major cut in salary right now. Nate January 13, , 7: If you know the percentage of your take home pay that you live on, then why does it matter how much you take home each year? It seems that your calculations are only a function of this percentage, not your take home pay each year.
I tried to make it sound as simple as possible, but yet you have simplified it even further. Fishingmn January 14, , Recently updated studies using the last few turbulant years have cast doubts about it and suggested numbers as low as 2.
How do you get the pension overseas?
If the Safe Withdrawal Rate declines to even 3. MMM January 14, , 3: I understand the desire to be conservative, but I would still totally disagree with the idea of going for an even lower SWR. Fishingmn January 15, , 7: Ari April 22, , It might surprise you to learn that many of the portfolios studied did not even last that long! The single biggest risk that retirees face is longevity risk. Dividend Mantra January 14, , 5: