2021 Annual Review

I have mixed feelings about putting these numbers down on the page. On the one hand, I think bringing more transparency and openness to personal finance is a good thing. At the same time, I think that our tendency to compare ourselves to other people is a lousy thing, and I certainly don’t want to encourage that. Fortunately, there are many people out there who have more money than we do, and there are lots of folks in the personal finance space who spend less that we do, so I don’t think our numbers should stir up too much suffering.

I’m also a bit hesitant to do this as I’m not a zealous tracker of every dollar that passes through our lives, and I realize that this isn’t a popular approach in the personal finance space. Until we moved to Canada, for example, I never tracked our spending or wrote out a budget. I’ve always felt that one of the perks of living well within your means is NOT having to track things religiously.

The combination of the international move and closing in on our FIRE number, though, made me more interested in knowing our actual spending. So I’ve been tracking that since we moved to Canada in the summer of 2020. I’ve also been tracking our net worth for about 9 years.

Salary

Currently, I work full-time and my wife works part-time. For most of 2021, we were both employed by US employers, switching over to Canadian employers in the fall. I got a bonus as I received a lump sum payout for my banked vacation time when I left my US employer. Next year, both of our salaries will likely be somewhat lower. And I’m only tracking our earnings from our jobs. In other words, I’m not counting things like the Canadian Child Benefit or investment earnings (which were all re-invested). We also received a small inheritance (~$15K USD) in 2021.

202120202019
Me$123680 (CAD)$84652 (USD)$73599 (USD)
My wife$35341 (CAD)$20418 (USD)$41581 (USD)

Spending

All expenses listed in CAD
Taxes$14,143
Mortgage$13,711
Groceries$12,152
Home Repair / Maintenance$9,754
Household$6,642
Utilities$3,042
Spiritual Health$2,519
Other$20,448
TOTAL$82,411 CAD
~$65,000 USD

That tax amount is as combination of what we owed for the ~5 months we were living in Canada in 2020, plus a portion of my estimated taxes for this year. The utilities number is actually a bit higher, as the pellets that we buy for our primary heat source are counted under “home repair / maintenance” (as that’s where everything from a hardware store goes. We probably spend about ~$750 CAD per year on pellets. Finally, spiritual health is a combination of meditation retreats and classes that we do.

Net Worth

All values in USD
Jan 1, 2022Jan 1, 2021Jan 1, 2020
Cash$69,113$124,913$33,132
Taxable$269,830$134,469$78,060
457(b)s $184,711$154,718$131,036
Roth IRAs$279,360$237,008$201,669
403(b)s and RSPs$645,266$548,075$469,428
TOTAL$1,448,280$1,199,184$913,325
Net worth over the years, in USD

We moved in July 2020, selling our house in Tampa, and clearing ~$100,000. That’s part of both the jump in our taxable account, and also the jump in cash for January 2021 — I was dollar cost averaging into our taxable account at the time. The tremendous growth by January 2022 is primarily market gains. We’ve contributed a bit to our RRSPs up here, but I only had a little room.

Housing

I don’t consider our house as part of our net worth. We purchased our house in July 2020 for $254,000 CAD (~$200,000 USD). Crazily, based on the price per square foot of several recent sales in our neighborhood, I suspect it has already appreciated to close to $300,000 CAD. We have a mortgage of ~$195,000 CAD, with a monthly payment of ~$1100 CAD. I’m currently leaning towards paying it off (or at least down significantly) when the mortgage matures in about 3.5 years.

Conclusion

I suspect our future spending will be a bit lower, as we were still getting established in Canada this year. At the same time, we didn’t have any major one off expenses (we replaced our ERV, but that wasn’t too bad) so it may not be too far off. If we take $65,000 USD as our target for annual spending, the 4% rule would give us a FIRE number of $1,625,000. At $1,448,280, that puts as about 90% of the way there. And neither my wife nor I plan to fully retire in the near future. I’m thinking I’ll go down to part-time in the next year or so, but at the same time with the combination of working from home and generous leave, I’m also thinking I might just stay full time until I’m ready to pull the plug. Regardless, I feel like we’re in great shape.

What is geoarbitrage?

In brief, geoarbitrage is the practice of living somewhere cheaper in order to accelerate your journey to financial independence. It can be done in the accumulation phase, for example by living in employer provided housing or in a low tax country while earning, or in the decumulation phase, moving somewhere that allows for a lower cost of living.

In terms of my personal experience, I’ve never practiced geoarbitrage specifically for financial reasons, but I have certainly seen the impact that living in different places can have on spending and saving. I lived in Taiwan for 5 years in my 20’s. During this time, I earned about $24,000 USD per year, and I saved about half. At the same time, I lived quite well, traveling around South East Asia, eating out every lunch and dinner at restaurants, and so forth. I didn’t pick Taiwan for economic reasons, but it is kind of in the sweet spot as far as earning potential vs. cost of living.

Later, I lived in China for a year. I was working in a smallish city in central China, and my salary was quite low. I earned about $5500 USD per year. Still, because my employer provided housing and some food, I managed to save about $3000 USD, and that’s with taking two month-long biking and camping trips. Again, my goal in China was not primarily to earn money, but clearly the cost of living there can be dramatically lower. At the same time, I returned to China a few years later for a business trip while working for a US university. I was put up in hotels costing $200 USD per night. It was a side of China I hadn’t even known existed. It really drove home to me that, even within a particular country, there can be a tremendous range of both costs and earning potential.

And then, in 2020, we moved from the US to Canada. Again, this wasn’t a financial decision, but it still had financial impacts. Our taxes went up, but our house was a bit cheaper. I was able to take my job with me, so my salary didn’t change, but when my wife found work in Canada her salary was slightly lower. However, as we transition to part-time work or full retirement, we won’t need to worry about paying for health insurance, which can be quite expensive in the US.

In the future, I think it’s possible that we might live overseas again. I suspect we’ll wait until our daughter is in college (which will be a while) but considering both my wife and I have backgrounds as English language teachers, it wouldn’t surprise me if we spent some of our early retirement living in different countries. I don’t anticipate these decisions to be primarily financially motivated, but it’s good to know that if something unexpected happens and our savings are dramatically reduced, there are plenty of nice places around the world where we would still be able to meet the costs of living. Some places I’m personally particularly interested in are Bhutan, Thailand, Chile and Croatia.

What experience do you have with geoarbitrage? What are some of your favorite places to live?

How do you determine your financial independence (FI) number?

The 4% Rule

If you’re interested in FIRE, one of the first things you’ll likely do is try to determine what your target FI number is. The short answer to this question is to follow the 4% rule. The 4% rule was created in the 90s by financial advisor William Bengen. He looked at historical market returns and determined that, if you withdraw just 4% per year, there was no historical case where this would last less than 33 years. The percentage you can safely withdraw each year is often called your safe withdrawal rate (SWR).

Following this approach, the way to get this number is to take your annual expenses (including taxes, of course) and multiply it by 25. So if you need $50,000 per year, your FI number would be $1.25 million.

Other Opinions

Within the FIRE community, you’ll see some debate around this. Some people think a 4% SWR is too high, believing that the stock market won’t do as well over the next several decades as it has historically. Other people think the 25x expenses target is too conservative, because it ignores the fact that many (if not most) early retirees will continue to earn at least some income during some of the years. It also ignores the fact that, for most people, following the 4% rule will mean ending up with more money than you started with. Sometimes you’ll see people argue that, because of your potential to both reduce spending and earn future income, you can safely “retire” when you hit a certain percentage (say 75%) of your FI number.

I don’t have a particularly strong opinion about any of this positions. Determining your FI number (much like your asset allocation) is a combination of art and science. The science part is basic math, but no one can claim to know exactly what that number should be. And the art part is your comfort with risk. If you’re comfortable with risk, and confident in your ability to either adjust your spending and / or earn more money, retiring with a higher SWR seems totally reasonable. If, on the other hand, you’re risk averse, you may be more comfortable targeting a lower rate.

If you have guaranteed income sources (like social security, CPP or OAS), you can subtract these from your expenses to lower your FI number. Personally, I don’t do this, though. Ignoring these future likely but not guaranteed sources of income is a way to build a bit of a safety net into my plan.

Another area where you’ll find some disagreement is around exactly what you’re taking 4% of. Some people, for example, include the equity in their house. Personally, I don’t do this. When I’m looking at my FI number (or even my net worth, honestly) I ignore home equity. Again, this adds a bit of a cushion to things if it turns out my expenses in retirement were higher than expected, or if market returns were lower than historical averages.

One final note — a 4% SWR is predicated on a certain asset allocation (typically 50% stocks, 50% bonds). If your asset allocation is more conservative (meaning more bonds) you’d have to adjust your withdrawal rate accordingly. Personally, I have always had an aggressive asset allocation (90% stocks / 10% bonds) and I plan to continue leaning in this direction in retirement.

Uncertainty

The important thing to bear in mind with the 4% rule (or whatever metric you use to determine your FI number) is that it is a rough estimate. This is not written in stone. There is a fundamental uncertainty that undergirds all planning, financial and otherwise. And that uncertainty grows the longer term the planning is. So if I’m trying to determine a dollar amount that is “enough” for several decades, it is impossible to avoid a significant amount of uncertainty. For this reason, I wouldn’t worry too much about getting your FI number exactly right. And, from my POV, the 4% rule seems like as good a way as any to get that initial estimate.

What is FIRE?

FIRE, as you almost certainly know, stands for Financial Independence / Retire Early. However, I think that definition can be kind of misleading.

In the textbook FIRE model, someone would work, presumably full-time, perhaps also with one or more side-gigs, until they hit their FI number, at which point in time they would stop working forever.

Despite this being the textbook definition, I actually don’t think this is a very common approach to FIRE. Many of the FIRE’d folks that I’m aware of continue to earn money in one way or another. Some are landlords or bloggers. Others sell books or online courses. Still others have hobbies that they have monetized in some way. Please understand — I am not trying to be the retirement police here. I’m not criticizing the behavior, I’m highlighting what seems to me to be a shortcoming in the definition itself.

You may have heard people talk about CoastFIRE or BaristaFIRE. I’ve also seen it referred to as downshifting. Basically, this means working (again full-time, perhaps with side-gigs) until you hit a (lower) FI number. This FI number would be enough so that if you left these savings alone until your full retirement age, you would have enough money. Thus, for the remaining years until full retirement, you just need to coast — earning enough to break even — working a less stressful, less time consuming, or more stimulating job. Despite the fact that this is often treated as a sub-category of FIRE, the sense I get is that most people who “retire” in the FIRE community are actually doing something more like this.

I originally (like, starting in high school) thought my goal was to quit working completely as quickly as possible, but as we’ve reached our (admittedly somewhat arbitrary) FI number, both my wife and I have realized that we want to keep working part-time. We like the intellectual stimulation and the community. And, personally, I tend to do lousy with large swaths of unstructured free-time (even though the voice in my head still tells me that’s what I want). I tend to isolate and get depressed. So I want to ease into it, keeping the structure of work as I figure out other ways to support my mental health.

Plus, I don’t remotely hate my job. I read a lot of stories about people dreading Mondays or feeling stressed out or disrespected. I never feel that way. In fact, if I’m totally honest, I sometimes find myself looking forward to Mondays, because work is a context where I know how to handle most of what comes up and often feel useful. I also have a great boss and really like the people I work with. I also get paid decently (by my fairly modest standards) and am able to work from home.

So here’s how I’m thinking about things:

I’ve been working full-time for almost 15 years. We probably have enough invested now that I could just stop working, but I don’t really want to do that. Instead, I’m thinking about ways I could work differently in order to bring even more work / life balance into my life. At this point, I’m not sure what this looks like.

Possibility 1: Stay in the same (or similar position) but work less hours, either by having a day or two off per week, or alternating weeks on / off.

Possibility 2: Find a different job, perhaps even working full-time, doing something that I was more passionate about.

What it really comes down to is the freedom to choose. I’ve been focused for so long on simply hitting a particular number, that I hadn’t really thought about “what next”. Now that we’re there, I want to make sure I’m transitioning to something, not just away from something. And, again, my point here certainly isn’t to criticize what FIRE looks like for anyone, or to suggest that there is a right way and a wrong way. I don’t even know that for myself yet, let along for anyone else.