Predicting the Future
What professional can be wrong more than half the time and still keep their job? I can think of two off the top of my head:
- Financial Analysts
There are so many people smarter than us out there attempting and failing at predicting the future.
We as humans always seem to take recent history and forecast that forward (good or bad). Knowing this, we have made every effort to assume the near future is the worst case scenario, even though stock markets have been continuously breaking records all summer.
This is why we are locking ourselves into a 2.5% drawdown scenario when the rest of the early retirement blog world is pretty consistent on 4% being the correct number. We don’t ever want to draw down our principal (selling shares) to fund our spending. We don’t want our happiness determined by outside forces like stock numbers going up or down (Red = Down Arrow versus Green = Up Arrow).
Every quarter or every six months our index funds will deposit a bunch of cash for us to spend, just for being an owner of shares. To me this feels ridiculous. (Ridiculously Awesome!) I will get paid no matter how I choose to use my time:
- Sleeping: Getting paid!
- Watching Netflix: Getting paid!
- Climbing a mountain in some far off land: Getting paid!
- Taking a boat ride across the entire Pacific Ocean: Getting paid!
- Surfing: Getting Paid!
Sounds too good to be true right?
Well that’s where dividends come in. They do just that. For owning shares in a company (e.g. being a partial owner of that company), when they make money they just give you some of it. Companies are built with the intention of always growing their sales, decreasing their expenses and ultimately growing their profit so that they can return it to shareholders on a consistent basis. If a company misses a dividend or lowers it, it will most likely take a hit in its share price as punishment from the market.
I’m not a stock-picker and I’m certainly not smarter than a fund manager who has teams of people dedicated full time on predicting the future. But imagine if you could invest in lots of companies simultaneously and know that there will be winner and loser companies in the mix, but over time you’d end up with more winners? That’s where index funds come in. We are investing in civilization; hundreds of the biggest companies in the country and in the world.
I like civilization and I trust that there will always be smart people making the world better over time.
Now, there are of course some potential outcomes that could still derail our plan. Such as:
- Aliens take over
- Nuclear war
- Robot uprising
- Zombie Virus
If a catastrophic event occurred like that, I don’t think I’ll care where my money is invested as I’ll probably be trying to learn how to swing a Katana at some zombies.
So anyways, our current mix of invested assets is split between 3 funds. When we retire we are targeting a 2.5% dividend rate. If we had enough assets to retire right now it’d look like this:
We have this vision of our early retirement lives where we get to travel the world non-stop and experience different cultures. Where we can choose to spend a month in one city then travel to another and another. Repeat. So we put together several years’ worth of simulated “world tours” and priced up lodging, food, travel and entertainment budgets to figure out what we would need to make our dream a reality. Here’s a sneak peek:
The “Current” scenario above refers to our current spend rate doing what we are doing right now. We also mapped out what it would be like living in South East Asia, Southern Europe and Australia. Australia ended up being the most expensive so we added in another 10% management reserve to the budget to arrive at our $55,000 annual goal just to account for those “unknowns”. We also liked the idea of living off of what would be close to an even $150 per day budget. Like I said earlier, we want to assume the worst case scenario and we’re both pretty financially conservative to begin with. We have never spent a year on boats, planes and in other countries before, and no matter how much we plan things out, unforeseen stuff will happen.
If we end up working a little bit too long to have this buffer, so be it. That’s a risk we ARE willing to take.
You’ll also notice that the day rates for Current and SE Asia are green. They are this way because we already have enough theoretical passive income to sustain these plans. As we get closer, the other scenarios will light up green to let us know it’s time to retire!
In mapping out lodging, food, transport, fun, tips/taxes/fees we arrived at about a $100 per day spend plan for our Australia scenario. This is about $38,000 of our $50,000 allocation. The remaining $12,000 is budgeted for cell phones / service, travel insurance, visas, hobbies, healthcare and health insurance. Then we have our $5000 buffer for unforeseen situations.
We have put a lot of thought into this dream. It took us a long time to arrive at this and to realize that this is the path for us and that it is entirely possible to achieve. Now that we have defined our dream and identified the path we want to take, it’s all about waiting until the spreadsheet lights up all green.
Have you figured out what you want your future to be? If so, do you know what it will take to get there?