27% to FIRE number

As I’ve written before, I have to keep working until 60 due to my work’s retirement laws but I like keeping my options open.  If I can ever afford to self-fund my FIRE date to such an extent that forgoing my employer’s very generous pension won’t bring tears of regret to my eyes, WHY NOT???  The pandemic has accentuated our feelings of our own mortality and awareness that life’s most precious moments can be fleeting.  I don’t want to miss these moments as I’m too busy working.

The FIRE* Number

*Financial Independence, Retiring Early**

**Retiring Early = retiring before the mandatory retirement age of 60 or 65 years old.

My FIRE number is PhPxx million.  It’s way less than a dollar millionaire, but enough for a monthly passive income that will allow us to live comfortably here in the Philippines.  We always have to remind ourselves our basic needs: Food, Shelter, and Clothing.  As long you have a fully-paid home, the food and clothing are easy enough to provide for.

Housing is increasingly expensive in my city, in what used to be where you could get a 400+ square meter plot of land within the city for only  PhP200,000.00/USD3,500.00.  And the seller even allows for payment on installment basis without interest. This was during high inflationary times in the 90s and when credit was really hard to come by in the Philippines. 

Now, credit is cheap and you could buy a car for zero down or a house for 10% down…This can be good as it allows  more people access to cars or houses but… The downside of cheap credit???  Demand skyrockets, driving prices up the wall. 

I’m seeing single detached homes within Cebu City being listed for sale online for about PhP20million/USD360,000.00. Homeowners here can have such unreasonable expectations for the price of their home.  This is also why most homes take decades to even sell.  I’ve just been doing a little market research as  I’ve been contemplating buying bare land for investment purposes, whether for speculating, or for building and selling.

The global economy is quite shaky and companies can go bankrupt so it would be nice to diversify into a tangible asset.  But then, real estate can be a pain to dispose of and so illiquid.  And it is such a PAIN to deal with contractors, etc. There is also the risk of squatters on your land, and potential litigation, etc.  There’s also the social cost of driving prices up when one buys land for pure speculation, at the cost of potential homebuyers who actually need to live in a house.

On the other hand, as our equities portfolio starts to grow, so does our exposure to individual stocks.  It bears repeating, companies can  go bankrupt.  Case in point: PAL filed for a form of petition for rehabilitation in the US during the height of the pandemic. So, we’ll see.

Or maybe, I can go back to investing in mutual funds again. That should be more secure and diversified.    I remember holding mutual fund shares in a Sunlife equity fund back in the day. I made 30% so I have good memories of that fund.  I didn’t enjoy the transaction costs of exiting those shares though. 

Moving towards a fully-paid home

As inflation is forecasted to end higher at 7% by the end of the year, we  are feeling lucky to have locked in the price of our house when we bought it in 2019.  Currently, we own about 56% of it.  That’s how slow the mortgage payment works, only a tiny little portion goes to paying off your principal. 

While the anniversary/repricing time for our mortgage is still towards the end of 2023, FH and I have decided to make another advance bulk payment towards our principal.  Yes, there’s no added benefit to paying in advance given that there’s no recomputation involved yet, or a reduction of the interest, but the mental effect of just a smaller mortgage number.  That should be priceless!

FH and I are looking to pay off the home in just 5 to 7 years.  Only after that can we make another major investment in real estate.

FIRE Number Progress

Recently, I started monitoring the liquid portion of our portfolio consisting of shares, bonds, retirement funds, cash and long-term deposits in order to have a bird’s eye-view of our progress towards our FIRE number.  I imagine that once retired, you only want to consider the portion of your portfolio that earns you passive income like interest, dividends, coupon, etc.  The illiquid portion like real estate or depreciating assets like cars, should be discarded as these don’t earn passive income,  unless they generate rental income, which in a sense, can be a little passive.*

Our FIRE number of is

(Monthly Desired Income x 12 Months) * 25 years

This is the internet’s suggested equation to arrive at your FIRE number.  The 25 years is that period of time you will be generating passive income while waiting for your pension payments to come in at 60 years old.  Obviously, this assumes you have a pension payment or social security waiting for you by 60 years old.  If you stopped your SSS payments, now’s probably the time to continue them.  Or if you distrust the government SSS, maybe turn to a PERA account. 

Or maybe lean on your privately-funded corporate pension fund.  Although I’ve read that you don’t really have much control on where your pension funds are being invested, like in the case of the PLDT pension fund?  Better to dip your toes in all of these, I guess.  To ensure maximum liquidity?

Currently, we have about 27% of our FIRE number.  Frankly, I’m surprised.  We have been doing some revenge spending in 2022 and are still going.  We have been feeling the pinch of inflation but not by much, considering our unusual saving rate of 50% upwards. 

The main thing about FIRE, is that you’re not supposed to be holding any consumer loans as this will impede your cashflow.  And ideally, you need a fully-paid home.  A mortgage will be a pain on cashflow once you’re retired.

Safe Withdrawal Rate

When you retire early, you can only spend a percentage of your FIRE number/retirement nest egg.  That’s your safe withdrawal rate (SWR).

The blogger ERN, in his SWR series, makes a very detailed and impressive analysis on the what is exactly the safest withdrawal rate.  The guy was a former economist for the Fed.  And actually retired early.  He’s the living sample of his own experiment.  So, he’s legit.   

He rejects the internet’s general rule of 4% per annum rate (4% of the current balance of your liquid nest egg) at which you draw from your investments.  In an ideal world, your passive income should be equal to your burn rate/ monthly expenses.  So ideally, your principal nest egg should be intact until you reach 60 years old.  

Not all investments generate cash, like in the case of exchange traded funds (for the Philippines, there’s only one stock/fund that tracks the PSEi– FMETF) that don’t give out cash dividends.  This is when a SWR should be useful to keep us reasonable in our spending during retirement.

Once we reach 100% of our FIRE number, who knows?  We might pull the trigger and start setting a FIRE date. 

Have you ever considered retiring early?  

George

*Rental income isn’t really passive as you have to put in some sweat equity towards upkeep and maintenance of the rental or at the very least, deal with the hassle of dealing with contractors who do the maintenance.


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