Tag Archives: financial independence

When a whole year slips by…..

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This photo does not do justice to the amazing sunsets from our front deck

Hi everyone!  I’m back.  Almost one year later. This time last year, I thought everything was going well.  We were well onto the path to financial independence, I was working part time.  The garden was looking great.

I was about to take a delegation of businesses overseas for work in late September, and I woke up one Saturday morning to go to the gym.  I also bought about $100 worth of groceries and felt tired.  Then I picked up the paper – a usual Saturday ritual with a cup of coffee made by my husband – and found I couldn’t read.  Bam.  Just like that. Burnout.

Of course, looking back – it was really a “bam” kind of moment.  I had noticed that I was having trouble reading work emails – just skimming for the critical points.  I was finding it harder and harder to remember the names of my staff, and the names of things – like chorizo.  I was looking at chorizo, chopping it up and putting it in that night’s dinner, but for the life of me I couldn’t remember the name of it!

So I advised my boss, took some leave and went to my doctor.  I wanted an MRI pronto, to find out immediately what was going on with my brain.  A tumour? Early onset dementia? My doctor calmly and quietly said that I would not be getting an MRI. She also looks after two of my daughters who have quite serious mental health issues, and she told me I’d experienced burnout.  Years of a stressful home life, combined with a stressful work life meant that I’d been living on cortisol and adrenalin and my brain had reduced in size over time.  What? Brain shrinkage? But, she assured me, it would grow back over time.

And she was right.  I lost about 65% of my cognitive ability. And within the space of a year, it’s mostly returned. I need to watch my fatigue levels, but I’m doing ok and getting back into projects.

Thank goodness for income protection insurance – apart from a couple of weeks, I was fully covered between leave, my employer and the income protection insurance agency. They also hooked me up with a great rehabilitation provider, and exercise physiologist and some cognitive brain training.

Financially, because of the income protection insurance we have remained on track. So I look forward to sharing with you the remainder of the year and next year as we count down to early retirement at the end of 2020.

I hope you are all going well on your paths to simplicity and financial freedom.  I’d love to hear how you are going.

Creating your own death spreadsheet part 2 – net worth tracking

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zoo photo

So… once you have the total cost of your expenses nutted out and indexed for the rest of your life, you come to the part where you need to calculate the income required to meet those expenses. I’ve written about the income my family will need in retirement here but another important part of the equation is to keep track of your net worth – particularly for future planning – and not just the income producing assets. For example, our home is worth nearly $1m, makes up about one third of our net worth and while it doesn’t produce any income right now, it is important for us to keep track of the value in case our circumstances change and we are required to think about how to better deploy that capital for our financial needs.

What is net worth? In my head, net worth is your family assets minus liabilities. Prior to getting serious on our financial future, our net worth would have been barely in the black territory – closer to zero, more like it- as we had a mortgage of $350k. But after some serious knuckling down, some employment payouts and some granularity on the value of my husband’s superannuation pension, our net worth is tracking quite well for our early retirement.

Some net worth trackers out there include the family home; others exclude it. I like to think of the family home as part of the potential income earning asset pool, because you can create ways to use it, like Air BNB, hosting a student; or downsizing later for less and using a smaller capital pool to generate income.

As I share these numbers and the calculation methods, it is not lost on me that my family and I are in an incredibly privileged position. We are both educated. My parents started off in financial dire straits but slowly built some wealth over time (they showed me how to do it, really). My husband’s parents were educated and had successful careers. Both of us were fortunate enough to go to university and have had reasonably successful careers, living in the highest income per capita city in Australia. Jobs are plentiful here. Even though we have both been through redundancies at various times, we have enjoyed a short break and found work within a few months, without any financial losses.

But once again, I find the financial independence numbers for an Australian context hard to find out there in web-land, so I put ours out there to start filling the void. I hope others are prepared to do so too, so we can build a context rich picture for other aspiring financially independent people out there.

We paid down our mortgage following the year of austerity and have no other forms of debt, so I’ll be reporting on our assets only. I use an app called Wealth+ and manually enter the numbers each little while. The numbers fluctuate because we invest the share market; our house increased in value by $50k during the year and we got a closer idea of the value of my husband’s superannuation which boosted our assets significantly. He has a defined benefits scheme and we previously valued it based on his annual statements. Now we have moved the fund to cash and have received a pension estimate from the fund, we have valued his super at 25 x the annual net pension, assuming he lives until he is 80 and draws down from age 55.

So here are the screen shots of the app. We started tracking our net worth on the app in February with a commencing value of $3.423m. As at 28 July, our net worth is valued at approximately $3.545m.

net worth 2

net worth 1

The categories I track are below:

net worth categories

I love watching our progress. Investing and saving can be hard if you can’t see the gains. Knowing our net worth has increased by nearly $120k since I started tracking this February is so motivating and really exciting to show my far-less-interested husband (giggle!) about the progress we have made this year.

Do you calculate your net worth? What method do you use? How do you find it compares to the US versions of FIRE?

How to start you own death spreadsheet in Excel – part 1

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death spreadsheet overview

Grimly titled but the death spreadsheet is the most useful spreadsheet I have ever created.

I created the first version of this document back in 2014 when I felt like I was trapped in an awful job, earning quite well but job stress was out of control and I wondered if I had to tolerate this level of angst and frustration for the rest of my life.

To wrestle back some form of control, I decided to create a spreadsheet to work out exactly how much we needed to earn to live a reasonable life – for the rest of our lives. To build this spreadsheet, David and I had many conversations, over a period of time, to think about and design the type of financially independent lifestyle we would be happy with. An extravagant, luxurious one? No – not really our thing. A really nice lifestyle that includes international travel once a year, travelling within Australia, going to other capital cities, money for our hobbies/passions, time for volunteering and one home renovation project a year? Yes, definitely. I’ll take that version of financial independence any day of the week.

In 2014 we were close to paying out our mortgage, so our expenses were about to change considerably. I also knew both had good superannuation or retirement savings, so I wanted to understand, excel spreadsheet cell by cell how much we needed to earn in order to be financially independent.

And so the death spreadsheet was born. On the top line, I created a table out to David’s average life expectancy and mine (there is a little age difference 😊). Then I plotted out our expected income and expenses until we died. Fun, huh!?!

Key assumptions for the spreadsheet:

  1. Indexation of 2% for wages and our superannuation pensions (except for mine – I’ll take a flat rate)
  2. Inflation over our lifetimes (around 2%)
  3. Conservative estimated earnings on our investments at 5% over the next thirty or so years.

I created detailed expenses tabs that adjusts for this year and next when our expenditure circumstances will remain the same. In 2020 we expect to be paying for only one child in total – the other children may be living here and eating with us, but they will be largely responsible for their own expenses.

I have highlighted the current year we are in, and the year my husband’s superannuation commences ( I LOVE to see those two drawing closer together – means we are closer to financial independence).

You can see our net result bounces around a little but that’s ok – over the 12 year period, it works out about even. In my next post, I will detail how I have calculated our expenses over this period, and how I have calculated how our investments will support us in our two stage financial independence plan, paying down like an annuity.

Excel has saved my sanity! Never thought I would say that out loud to the world…..

 

So why financial independence and how does it relate to simple living?

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living area

This is a quiet nook in the corner of our newly renovated living area.  I’ll do a house tour later this year.

So why financial independence and how does that relate to simple living?

I love the fact as humans, we are constantly evolving and changing.  I have always had a really big thirst for knowledge, and when I am really interested in a topic, I emerge myself in all available material to learn and grow and connect with like-minded people.

I have found this is absolutely the case on my simple living journey.

First came the feeling over being overwhelmed. With five kids more than half time, a busy job, two kids with mental health issues and interests outside of work, I felt I was never on top of things and always running behind.  My to do list was always longer and greater than 24 hours in any day and I never truly felt like I could sit down and relax.

My health started giving way and I realised things needed to change.  So we created the year of austerity to pay down debt and not be a slave to full time employment.  We achieved this goal in 2015 after some hard work and a small inheritance.

During this time, I was also organising the whole house like crazy.  I thought if I made some sense of the physical chaos in my life, simplicity would descend upon our household like some kind of magic.  A place for everything, everything in its place.

But of course, I organised every drawer within an inch of its life, felt only marginally less overwhelmed and realised I just needed to downsize and declutter.  For a while I donated, sold and gave away stuff in my house like a possessed woman.  Gumtree, eBay, Vinnes and Buy Nothing New became my best friends.  We also renovated which provided a great opportunity to reassess a lot of clutter in our house. The downsizing was enormous – I stopped counting at 25000 items, and I forced myself to reassess all purchases, use up all cosmetics, audit the fridge, pantry and freezer……..

I found the two upsides of decluttering were:

  1. The house felt refreshed, sorted and clear of things that previously made my brain ache. I confirmed in the maximalist/minimalist debate, I’m definitely in the latter camp, although far from living out of my back pack with less then 100 items to my name.  Funnily enough, the first year of our retirement David and I have decided we will go through the house and declutter again as a first priority because we can still identify many items that need to go.
  2. We spent so much less money following a consciously commitment to this form of living and this has enabled greater savings for our FIRE plan.

Once I discovered the FIRE community and worked out we could work less I immediately amped up our savings plans and began consuming everything I could on saving, investing and planning for an early retirement. I realised the FIRE path was really one that could really support my goals of living simply and with less stress.  FIRE became the wind beneath my simplicity wings and the two goals merged into one. I reduced my working days to three a week and began living a simpler life – with a longer term financial plan.

So – in short – from overwhelm to organisation to minimalism to FIRE.  I’m sure it’s such a well-worn path. With December 2020 looming, it can sometimes be a source of overwhelm all on its own, but I am looking forward to writing about our plans for our post FIRE life and all of the hope for a peaceful life it holds. For me, financial independence and simple living are inextricably linked.  To live a simpler life I need to have a source of passive income to pursue the things I want to pursue – be fast when I want to be fast and slow when I want to be slow.

Are you on any of the paths to financial freedom or simple living? Have you been down a similar path?

Financial independence update May 2018

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NGV

This is from the Triennial exhibition at the National Gallery of Victoria – spectacular.

It’s been awhile on the post (apologies friends!) but sometimes life takes over (like teenagers and their needs) and priorities change. But I’m keen to let you know where we are up to on the financial independence journey and tell you we have 925 days to go until we are financially independent.

NINE HUNDRED AND TWENTY-FIVE DAYS

Feels like an eternity and super close, all at once. I have a countdown app on my phone and I when I started it, the number was 1009 days. In a very short period of time, over one hundred days have passed, so this is going to fly by quickly.

countdiwn

So I am keen to write a bit more on this topic and share with you how and why our finances allow us to live a simpler life.

For this post, I want to share with you our financial independence plan. Not to brag, or to be compared to others. I’m just doing it to actually disclose my numbers and my plan, so anyone doing research on this topic can find some cold hard numbers. Lots of websites talk about “…x times my annual expenses” or $1m at a 4% withdrawal rate. But a lot of these sites are from the US and while they are interesting to read about, I am often left wanting after a google search to find something that represents middle class, urban Australia. And if you can’t find, it create it. Start a conversation. That’s my view.

So we have two scenarios we are working on. One is base level, worst case, where both of us feel compelled to leave our jobs immediately…..(usually a Sunday night sort of conversation at our house – let’s call this the Sunday night calculations) and the more realistic and comfortable version, where there is enough padding (let’s call this scenario Padded FI). Sunday night calcs involve finishing up our well-paying jobs with current savings and just earning enough to make our living expenses between now and December 2020; Padded FI (Financial Independence) see us working in our well-paying jobs until December 2020 and continuing our current savings rate (around $50k per year).

One more thing before I disclose the numbers – we have a two-stage strategy. I am 45; my husband is 52. We are close enough to superannuation to take this approach – Stage 1 Before Super and Stage 2 After Super. But I think anyone contemplating financial independence in Australia can think about it in two stages – pre-super and post-super.

For us, it looks like this:

Now:                   Work to save/pay living expenses until December 1, 2020

Stage 1:               Live on my husband’s superannuation, which he can access from 55 and supplement with investment earnings (2021-2032)

Stage 2:               Access my superannuation at the start of 2033 when I’m eligible to start  drawing a super pension (aged 60) and continue my husband’s (indexed)                          superannuation pension

US case studies rely on the 4% withdrawal rate for thirty-somethings, for the rest of their lives. We only really need to build sufficient passive income for a twelve year period to supplement my husband’s superannuation, before accessing mine.

In Australia, for those families with superannuation, the numbers might work a little differently. You may find you need to live off investment incomes for a period of time until you can access your superannuation. Or you may decide to supplement lower superannuation pensions with some investment income. Either way, it’s important to do your long term financial projections to understand your particular circumstances and discuss your strategy with your financial advisor. Ours got the tick of approval a couple of weeks ago at our annual appointment with our financial advisor.

Stage Income total Sunday night Padded FI
Stage 1 Husband pension $       73,621 $         73,621
Investment earnings $       27,433 $         29,819
Income total $     101,054 $     103,440
Savings remaining $               – $     120,000
Stage 2 Husband pension $       86,414 $         86,414
My pension $       40,000 $         40,000
Income total $     126,414 $     126,414
Savings remaining $               – $     120,000

 

As you can see, the difference in income is not that great, but the financial security of some money in the bank is worth the otherwise sleepless nights of not having a safety buffer. So we push through working more and continuing to adhere to the budget, in order to enjoy the fruits of our work later on in life.

Do you have a financial independence plan? Are you thinking about retiring early from a job and pursuing other business or creative interests? If you are game, share your numbers 😊

Part 5: Retirement planning (or for younger people – financial independence planning!)

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Last financial post for a little while. Well – just for a few weeks…

This week I’m thinking about retirement. I’m really thinking about it because I am having a little mid-life retirement right now, and I’m on the other side of forty.

A couple of things have happened to spur me into action to think about retirement planning at the wee age of 42.

  1. When I was on the treadmill of full time work, I had no idea of how much money I was aiming for, to save for our retirement. If you find yourself in a job that doesn’t thrill you each day, this question about how much money you need in retirement comes into sharper focus (when can you get the hell out of your work place).
  2. At 42, I also had more of an idea of the type of lifestyle I want to live in the second half of my life. And for us, the second half of our lives is less about career and more about fulfilment. It’s less about keeping up with the soccer mums and more about spending time with my family. Being clear on the type of life we want to live means that I can be more realistic about what living expenses I will need

I will ‘fess up. I spreadsheeted our life in excel right out to my husband’s death. I thought about a comfortable retirement where we owned our own house, travelled once a year internationally and pottered about Australia every now and then. I made provisions for:

  • A contribution to either the children’s education or a deposit on a home, given how difficult that is. To do that, I have planned to lock away $20k per child in a growth account until they require it
  • An upgrade to our existing house – it needs a new kitchen, bathroom and ensuite need an update, and possibly the exterior verandah and steps. It’s a 25 year old house and things are starting to peel/chip/rust/corrode/rot – you get the picture
  • $200k to down size and upgrade our house as our birds leave the nest – not sure when this will be, to be honest. But when it happens, I’m keen to live in a house that is consistent with our values like minimalism, leaving a minimal environment footprint and self-sufficiency.
  • We will need to get cars at some point in the future. I’ve budgeted $50k for that, because I know that we will get something second hand or an electric car.

So all up, we need an extra $500k on top of what we need to live on, to meet our anticipated living expenses between now and retirement.

Following these calculations, we went to see a trusted financial planner (word of mouth).

We looked intently at our superannuation pensions and realised that my husband (who I now love a little bit more) has a great pension that he can start to access in five years that will meet our living expenses.

We already have savings. In summary, this means is that we need to save another $440k to meet our anticipated capital or lump sum expenses, maintain our private health insurance and combined with the pensions we will have a standard of living that is equivalent to $100k per annum in five years’ time – and for now, it’s tax free income.

So let’s work backwards. If my husband and I continue to work full time/part time over the next five years, we should be able to save approximately $50-$70k per annum. That will mean that by my husband’s pension age, we will have between $250k – $350k in the bank towards those capital outlays, sans any interest that we have earned.

Come early retirement time, we will need to earn between us around $50k extra per year for 3-5 years to make sure our capital lump sums are taken care of. That’s a very part time job for me at the ripe old age of 48. My husband will be 55.

Prior to completing these calculations, I felt like I was on a working full time treadmill until the ripe old age of 65 at least. The purpose of completing these calculations was to see whether or not that treadmill for life was actually necessary – and guess what – it’s not.

By gritting your teeth through the boring bit of looking at the figures, and getting some advice, you can predict to the greatest extent that’s possible in this uncertain world – what the second half of your life can look like. A part time job for both of us enables us to pursue our passions (volunteering, travel, music, doing up old cars, growing veggies) and taking the slow road in life. It was this calculation that enabled me to take this recent career break and reassess the way we want to live.

Here is the calculation in summary:

  • Current expenses, and then add an inflationary multiplier each year (I chose 3%). Extrapolate out to the time that these expenses are relevant and then reassess. For example, I calculated that we will have kids requiring full care for the next eight years and after that, they will be making some contribution to their own living expenses, therefore our overall expenses will be less. Extrapolate that new figure out until the average survival rates for men and women in your country.
  • Think about the big lump sums that are coming your way in the future. Home upgrade? Medical procedures? Big travel plans? Replacing cars? Home renovations? Contribution to children education expenses? Still paying off the mortgage? When will that be complete? Total this amount.
  • Now add in current income with a wage increase (I used 2% to be conservative)

If you set up the spreadsheet horizontally, and add in when lump sums will occur, you can actually forecast when your cash will be called upon, and the cumulative cash flow position of your family.

Add in when you will start receiving superannuation pensions and there you have the best prediction of your family cash flow. Here’s a blank version of how I set up this sexy spreadsheet:

retirement calcs post tax
Kirsti 43 44 45 46
Husband 50 51 52 53
CPI 0.03
2016 2017 2018 2019
Expense
Capital exp
Extra travel
Kids savings
Renovations
Replacement cars
Total capital
Income required
Salaries
Husband   current income
Kirsti’s current income
Income total
Pensions
Husband pension
Lump sums
Kirsti’s pension
Total pensions
Surplus/shortfall
Carry forward (savings)
Return on savings

I’ve extrapolated this out until my husband’s death at 87…. (cheeky!)

I cannot stress the importance of getting good financial advice. Without ours, we would not have realised how good my husband’s superannuation fund was and how early it was going to enable us to retire.

Now to be clear, retirement for me isn’t about heading off to the golf course and playing bowls at the age of 48 (although if you love golf and bowls, go for it). Retirement for me is retiring from the ball and chain of full time work that I am resentful of. Retirement for me is financial freedom, part time work and the time, space and money to focus on the things that truly bring me joy and fun.

Perhaps this position is best summed up as financial independence and the freedom to live your life as you choose.