Anyone hope to become Financially Independent?

CameraBag

In a year, I'll be out of college, so I'm trying to plan ahead. In doing so, I've been following a bunch of blogs, podcasts and forums that deal with the idea of becoming totally financially independent, and often retiring very early (for some people).

The process is basically that if you save something like 60-70% of your take-home pay, regardless of your salary*, with an average return on these investments, you can more than likely sustain that standard of living indefinitely after a few years. Sounds pretty good. This means you can continue working if you like, with a LOT of peace of mind. You can work part-time. You can change career to something you love but that doesn't pay well. You can retire completely and spend all your time doing whatever you want and never work again. Sounds great.

People who achieve this, however, are generally US-based. The higher taxes in this part of the world mean that the formula used in the US would not work so easily here... Is this possible in Ireland? Has anyone here succeeded?



*It's obviously easier the more you earn

antoinolachtnai

Well the tax level doesn't really come into it much and it isn't really orders of magnitude different.

The problem to my mind is how you are going to live on so little money. It is just expensive to live in an Irish city. By contrast I think you can live in a lot of places in the US on relatively little money. (You can also live expensively and lots of wealthyish looking American professionals are actually lumbered down with a few hundred kilodollars of student debt.)

The main way to do what you are describing in Ireland it seems to me, is by buying a home. Your principal repayments are then your savings as you increase your equity in your home. You avoid rent which you would have had to pay otherwise. For the first few years though, you will mainly be paying interest. When you have paid the damned thing off, things are pretty good.

In practice for a young person on their own it is quite hard to become a homeowner in Ireland. There are obviously problems with taking so much risk on one asset.

Of course everybody's situation is different.

dennyk

Salaries here tend to be much lower than in the US for many higher-paying fields like IT, so that definitely makes it harder. The tax burden isn't actually that bad in comparison to the US; after factoring in all the different income taxes I used to pay (both federal and state), the difference came out to be less than 5% at my salary level, if I recall. In comparison, I'm making about 80% of the salary I was in the US for what's technically a higher-level position, so that has a much bigger impact. I'm still able to save quite a decent amount each month on average, but nowhere near even 50% of my take-home pay (probably more like 20%), though I'm also putting away 15% of my gross pay into a pension.

The other trick is cost of living; there's a wide discrepancy in the US, so if you're in a field where you can work 100% remote, you can score a job in Silicon Valley or New York City that pays the typical (very high) salary for that region and then live somewhere really cheap like the Midwest, where the going price for a pretty nice house is less than your annual salary. That makes it really easy to put aside a ton of money. Here there doesn't seem to be as much of a variance in salaries; Dublin pays a little more, but the difference is nowhere near as extreme, so that trick doesn't work nearly as well here.

It would still be doable here, I'd imagine, but for many folks it would mean a combination of living very frugally (like, comparison-shopping-ramen-noodle-prices levels of frugal) and saving for a longer period of time.

CameraBag

Taxes might not be so different, after all. Capital gains tax seems to be higher, though, which would be important? I don't know much about the US tax system, I'm new to a lot of this... The rather uniformly high cost of living and the moderate salaries here are two factors indeed that are a challenge. I think, as antoinolachtnai said, student loans in the US are a big deal, in addition to things like healthcare... and I don't think the "average" American is doing a lot better than the average Irish person. So it's not all bad here.

For me, I'm a frugal person generally (don't own a car, happily rent a box room for college, I am fairly good with budgeting, mad for Lidl, don't happen to drink or smoke, don't really go on massive holidays, etc.), but I can imagine a few things changing this really fast: for example: a car, dependents, and even "lifestyle creep" as you earn more money. So, I guess first things first: it's certainly not something that happens by accident.

Lux23

Have you had much experience in the working world? How do you know you won't like it?

CameraBag

Lux23 wrote: »

Have you had much experience in the working world? How do you know you won't like it?

In fact, I think I'll love the job I'm going into! I expect that I'll stick at it for at least 25 years. But I also love other things. And in 25 years time, maybe I'll want to spend some additional time on those: family, friends, cycling, running, travelling, photography, some kind of mini-business, a charitable project, or other projects that capture my interest at that time. I've always thought I'd retire on a farm...

Anyway, in 25 years if I manage to be financially independent and I decide not to retire, well... No harm in that either. Essentially it's working your way to freedom.

daveharnett

Yes OP, I've drank some of the FI koolaid.

Lux23 wrote: »

Have you had much experience in the working world? How do you know you won't like it?

Financial independence isn't necessarily about setting fire to your workplace and running away. Here's an alternative from one of the bloggers OP has probably read (and definitely should http://www.mrmoneymustache.com/2011/04/13/what-does-early-retirement-mean-anyway/ )

CameraBag wrote: »

Taxes might not be so different, after all. Capital gains tax seems to be higher, though, which would be important?

Tax rates on "unearned income" are a huge factor in FI maths, as (if you choose to retire early) most of the income in your lifetime will be unearned. It's much easier to live off the fat in the US than here, america's rich have rigged the system more thoroughly in their favour.

I'm uncertain that the 21st century will see the same broad market returns as the 20th. Western capital may not be able to exploit the rest of the world quite so efficiently. Our generation is also going to have to foot the bill for a lot of baby boomer and gen x debt as well as our own (financial and environmental).

All this to say, in Ireland in this century, I doubt you or I will be able to sustain a 4% per year withdrawal rate indefinitely. It could be closer to 3 or even 2%.

With all that buzz killing out of the way... the lessons you've learned will still serve you incredibly well. Casting a really critical eye on the stuff that consumer culture tries to convince us is "normal" will make for a happier and healthier lifestyle, more security, and more options, at every stage along the way toward FI.

sneem

Also the US are able to make passive income from dividends and using vanguard index funds.
I don't think we can use that method here unfortunately with taxes. I can't fina any clear guide here in Europe like one sees in mr money moustache and retirby40 websites.
I would love to be FI rather than stuck in a 9-5 job each day and do something I would like to do.

Jim2007

sneem wrote: »

Also the US are able to make passive income from dividends and using vanguard index funds.
I don't think we can use that method here unfortunately with taxes. I can't fina any clear guide here in Europe like one sees in mr money moustache and retirby40 websites.
I would love to be FI rather than stuck in a 9-5 job each day and do something I would like to do.

The average American has a total net worth of around $20k on reaching retirement age! And yes they also have to taxes on dividends from vanguard etc. In fact most Europeans have a higher net worth at retirement age than Americans and a stronger pension position to boot.

Amirani

I've sort of stumbled down the start of this path without realising. Currently saving a minimum of 40% of income, but should be able to up that in the coming months.

I think owning property, particularly in Ireland, can benefit this strategy. However, you want to get as low an LTV loan and as short a mortgage as affordable.

The main stumbling block is probably dependents. If you have/get a partner, they're gonna have to buy into it.

Jim2007

Amirani wrote: »

I think owning property, particularly in Ireland, can benefit this strategy. However, you want to get as low an LTV loan and as short a mortgage as affordable.

Property is a very high risk asset class, producing a very low ROI. When constructing portfolios we try to keep property below about 7%for a few good reason! You just have to look at what happened in Ireland, the US, Finland etc... to realise the negative impact holding property can have on a person's financial well being.

To be come financial independent your best bets are:
- Business invention ( 9 out of 10 fail )
- Deep value investor returning an average of 12% pa ( very doable, but you need the temperament for it)

CPTM

I have a slightly different strategy, but similar thought process.. I'm working my butt off in a large organisation at the mo and I'm hoping to move from middle mgmt to senior mgmt before 35. Work there to pay off the mortgage and so on and then retire in my late 40s, taking on the world of pub music and guitar playing for the spare cash!

appfry

Im 47 and have been retired now for almost 3 years.
Myself and DH decided at 25 that we were retiring in 20 years and we put everything into it from then on with the aim to retire when we were both 45.

I havent planned this post out so i probably wont make much sense in it, so i'll try to outline it.
Its kind of complicated but i'll explain the main part of what we did to achieve this.

The main trick to it was this.
We had a mortgage at the time.
We decided to make the expenses that we wouldnt have in a few years more than the ones we had at the time.

So imagine this (just rough figures and all in euros)
We had a combined after tax income of €3000 and a mortgage of €1000.
So we we make €2000 living expenses and added €1000 to savings. (so now €2k income after tax and €2k outgoings).
We tried to live on the €2k, which was actually easier than we thought.
Every bonus or raise we got we were going to split 50/50 between overpaying mortgage and adding to disposable income, but we found we ended up mostly overpaying mortgage and got it paid off altogether.
After that money was all diverted to investments which built up rather quickly.

We downsized the house and bought a little house in Spain and a car.
Now we live in Spain for 6 - 8 months of the year and Ireland for the summer.
Sometimes we end up renting in Ireland because we have rented the house for when we arent here and the timing is off, but we find we can live anywhere in the country so getting cheap rent is never a problem. We also rent the house in Spain for the summer months or when we are not using it.

So to sum it all up , once your outgoings are less than your income from investments you are retired - thats the key.
Thats where we wanted to get to and it is bliss.
Friends often ask us are we not bored. We can do whatever we like with our time. How could you be bored with that.

I know that post was a bit all over the place but I only just clicked on the thread and decided to post that.
If anyone wants more specific info just ask - within reason )

I should add - We now have more disposable income than we had before we retired. We were living very comfortably then and even more comfortably now. I couldnt praise early retirement enough to be honest.

I remember when I started out in work and for 15 or 20 years I thought I would never wany to retire when it came to it. Eventually I got sick of working though as I got older. A young persons view of working and career is a lot different as the decade go on.

NIMAN

I hate you appfry!

dogbert27

appfry wrote: »

Im 47 and have been retired now for almost 3 years.
Myself and DH decided at 25 that we were retiring in 20 years and we put everything into it from then on with the aim to retire when we were both 45.

I havent planned this post out so i probably wont make much sense in it, so i'll try to outline it.
Its kind of complicated but i'll explain the main part of what we did to achieve this.

The main trick to it was this.
We had a mortgage at the time.
We decided to make the expenses that we wouldnt have in a few years more than the ones we had at the time.

So imagine this (just rough figures and all in euros)
We had a combined after tax income of €3000 and a mortgage of €1000.
So we we make €2000 living expenses and added €1000 to savings. (so now €2k income after tax and €2k outgoings).
We tried to live on the €2k, which was actually easier than we thought.
Every bonus or raise we got we were going to split 50/50 between overpaying mortgage and adding to disposable income, but we found we ended up mostly overpaying mortgage and got it paid off altogether.
After that money was all diverted to investments which built up rather quickly.

We downsized the house and bought a little house in Spain and a car.
Now we live in Spain for 6 - 8 months of the year and Ireland for the summer.
Sometimes we end up renting in Ireland because we have rented the house for when we arent here and the timing is off, but we find we can live anywhere in the country so getting cheap rent is never a problem. We also rent the house in Spain for the summer months or when we are not using it.

So to sum it all up , once your outgoings are less than your income from investments you are retired - thats the key.
Thats where we wanted to get to and it is bliss.
Friends often ask us are we not bored. We can do whatever we like with our time. How could you be bored with that.

I know that post was a bit all over the place but I only just clicked on the thread and decided to post that.
If anyone wants more specific info just ask - within reason )

I should add - We now have more disposable income than we had before we retired. We were living very comfortably then and even more comfortably now. I couldnt praise early retirement enough to be honest.

I remember when I started out in work and for 15 or 20 years I thought I would never wany to retire when it came to it. Eventually I got sick of working though as I got older. A young persons view of working and career is a lot different as the decade go on.

At 25 you decided you wanted to retire in 20 years time but at the same time you say that for 15 to 20 years of work you thought you would never want to reitre

Also 1000 * 12 * 20 = 240,000 euro. If you live for another 40 years that's 6000 euro a year to live on.

How quickly did you pay off the original mortgage? You say after it was paid off you diverted this money to other investments which built up very quickly. What returns were you getting on an annual basis from these investments?

You say when you're not in Ireland you rent the house there and when you're not in Spain you rent the house there. Are all rents pure profit?

dogbert27

For the OP, what will you be qualifying in and what field will you be going in to?

Do you know what the average starting salary is in this field?

appfry

dogbert27 wrote: »

At 25 you decided you wanted to retire in 20 years time but at the same time you say that for 15 to 20 years of work you thought you would never want to reitre

Also 1000 * 12 * 20 = 240,000 euro. If you live for another 40 years that's 6000 euro a year to live on.

How quickly did you pay off the original mortgage? You say after it was paid off you diverted this money to other investments which built up very quickly. What returns were you getting on an annual basis from these investments?

You say when you're not in Ireland you rent the house there and when you're not in Spain you rent the house there. Are all rents pure profit?

To answer your questions.

Yep, at 25 the decision was made to have the option. Watched my grandfather kill himself into his old age and said I wont end up like that.

I liked working for a long time, but it wore off eventually. Once our investment earnings were more than our expenses (with a nice buffer) we knew we would be safe enough retiring.

Didnt always save €1000 a month. What I described in my post was just how we started out. Adjustments were made as time went on and circumstances changed.

30 year mortgage was paid off in less than 10 years in the end.

When we hit the 20 year target we both could have stayed working, we werent too pushed either way. But the robbery of the pension funds by the government kind of worried us and we said its time to get out, before the whole lot gets taken.

Different returns on different investments at different times.
Everything from Pips and Peps to solidarity binds to ETFs.

In Ireland at the moment. You get probably 4 times as much money for renting the spanish house in June, July, August, Sep as you would for renting it the rest of the year. Too hot there in the summer so we come home.
Its nice to come home to be near the kids in the summer and at Christmas and they visit us at other times of the year in Spain.
The house in Ireland we only rent for 4 or 5 months at a time. Sometimes we come home before we expected and there is still someone renting the house, so we rent then for a few weeks.

Rents received need taxes paying on them. After that its nearly all profit.

daveharnett

dogbert27 wrote: »

Also 1000 * 12 * 20 = 240,000 euro. If you live for another 40 years that's 6000 euro a year to live on.

Interest.

Assuming a pretty conservative 4% average net ROI:
- 240,000 would let you sustain a burn rate of 12,000 per year for 40 years.
- If you only burned 6000 per year, the 240k would become 380k after 40 years.

murphaph

Where do you get 4% these days though without some element of risk? Not from a bank on deposit anyway.

keane2097

murphaph wrote: »

Where do you get 4% these days though without some element of risk? Not from a bank on deposit anyway.

You can't get any return anywhere without some element of risk, and you never could.

The poster is referring presumably to index funds which historically return ~7% over the long term.

lawred2

dogbert27 wrote: »

Also 1000 * 12 * 20 = 240,000 euro. If you live for another 40 years that's 6000 euro a year to live on.

you ignored compound interest

daveharnett

murphaph wrote: »

Where do you get 4% these days though without some element of risk? Not from a bank on deposit anyway.

Yes, you'd need to expose most of the capital to some risk to get 4%. That being said, nobody has ever lost money in an index tracker over a 20 year investment window, let alone 40.

Jim2007

murphaph wrote: »

Where do you get 4% these days though without some element of risk? Not from a bank on deposit anyway.

If you are only looking for only 4% the reason would be very low. Over the last 5 or 6 years there were opportunities to buy large cap stocks returning around 4% or 5% in dividends alone before capital appreciation. Also with those kind of returns you can hold them as a source of income in old age.

murphaph

Sorry, I understood "interest" to mean from leaving it on deposit. I've not heard the term used about investment returns.

I am not an expert by any means. I have a few ETFs on the go and that's where it ends for me apart from some properties but I know that your average managed pension fund starts shifting the capital out of the markets and into less risky investments ultimately into cash on deposit (with far lower returns obviously) as you near retirement age. About 10 years out my own small DB scheme from a previous employer does that.

Wouldn't any individual need to do the same or risk all their capital in a crash, just as they need it and if you retire at 45 you need it then?

I just find it hard to believe that 240k is anywhere near enough to retire on in your mid forties.

Jim2007

murphaph wrote: »

Sorry, I understood "interest" to mean from leaving it on deposit. I've not heard the term used about investment returns.

It does not really matter what you call it, it is all income.

murphaph wrote: »

I am not an expert by any means. I have a few ETFs on the go and that's where it ends for me apart from some properties but I know that your average managed pension fund starts shifting the capital out of the markets and into less risky investments ultimately into cash on deposit (with far lower returns obviously) as you near retirement age. About 10 years out my own small DB scheme from a previous employer does that.

Yes of course, that is the conventional wisdom and as a professional money manager you'd be a fool not to do it in order to avoid being taken to court.

But as an individual investor you are not bound to do this. The main thing to be concerned about coming up to and in retirement is generation of income streams not capital gains and bonds initially look like the best bet. But conventional wisdom ignores one issue bonds have a finite live and once it is redeemed the challenge is to find a good replacement. Depending on the economic situation at the time this may not be easy. Hight income blue chips can be held until death, so unless a sale is required market prices will have little impact on your income.

My strategy is to pick up high income yield blue chips cheaply during down turns in the economy with a few to holding them to death. That plus a mix of bonds and cash will make up my portfolio in retirement.

murphaph wrote: »

I just find it hard to believe that 240k is anywhere near enough to retire on in your mid forties.

I would agree, you'd need to supplemented it with something else.

daveharnett

murphaph wrote: »

..I know that your average managed pension fund starts shifting the capital out of the markets and into less risky investments ultimately into cash on deposit (with far lower returns obviously) as you near retirement age. About 10 years out my own small DB scheme from a previous employer does that.

Wouldn't any individual need to do the same or risk all their capital in a crash, just as they need it and if you retire at 45 you need it then?

You don't spend all of your pension all at once. When you're planning to hold for 20-50 years, tomorrow's recession isn't a concern. You just need to hold enough cash/bonds to wait it out for a few years.


I wouldn't try retiring on the hypothetical 240k nest egg (in ireland, at 40) either, dogbert made up that figure.

Azza89

This is a very interesting concept to look into.

What would be considered a good nest egg to have in ireland?

Who do you invest through when buying ETFs?

Nody

murphaph wrote: »

Where do you get 4% these days though without some element of risk? Not from a bank on deposit anyway.

4% is the generally used percentage in the US for what amount you can take out from funds/bonds every year and live on it for ever due to the (over time) increase of the asset values. The basis being take what you need to live on net, add taxes, divide by 0.04 and you have your portfolio value required.

The important part though is what you want to spend money on; if someone insists on a new car every 3 years etc. that will obviously drive up the total cost and by extension savings required to live on. A dentist saving 10k a year on a 80k salary and a manual worker saving 10k a year on a 40k salary could retire at the same time if they agreed on the levels of living. However it's likely the dentist would demand a higher living standard (spends 70k a year vs 30k a year on their lifestyle) and would spend significantly longer to get there. And that's the part most people miss; saving etc. is nice but in the end you only need enough money to cover your expenses; cut your expenses and suddenly the savings required drop drastically.

Tigerandahalf

Depends on what you value in life.
When you are young enjoy your money and the time to travel.

Once you have kids and get older you may never have the freedom again. Kids may have disabilities and your own health may decline. What good is the money then if you can't enjoy it.

I have a neighbour in his 80s who still works away in his small business. Happy as larry. Some people will always want to work or do something of interest.

I do agree that paying off the mortgage early is sensible as interest rates are very low at the moment.

Azza89

Azza89 wrote: »

............

What would be considered a good nest egg to have in ireland?

..............

I reckon a single person can comfortably live on €1500/month if they are mortgage free and the house/flat is low in maintenance and heating costs etc.

So to support that you'd need €18k/annum.

Ignoring state pension (we are on about retiring early essentially) you'd want a pension fund or investments of €450k to provide that at the mentioned 4% return. You also need to be able to access your pension, not an option for many even at 50 iirc.

Personally, I have no dependents really but rather than early retirement I could see myself picking and chosing my work post 50 years of age rather than working fulltime hours 46 weeks/year as I do now.

Nody

Tigerandahalf wrote: »

I do agree that paying off the mortgage early is sensible as interest rates are very low at the moment.

Actually I'd disagree on that one; as interest rates are so very low you'd be better of buying dividend/preference shares for the money while paying minimal on the loan. You'd have let's say 2% interest on the bank loan and get 6% from your shares. That way you'd earn more money to put towards said loan when the interest rates get higher and you'd earn more and your shares will in general have increased in value from purchase price on top of it.

However that requires you to feel comfortable enough to take the risk associated with such a route and having the economical position to do so.