Reader Case: Do Higher Returns or Higher Savings Help You Retire Faster?

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FIRECracker

FIRECracker is Canada's youngest retiree. She used to live in one of the most expensive cities in Canada, but instead of drowning in debt, she rejected home ownership. What resulted was a 7-figure portfolio, which has allowed her and her husband to retire at 31 and travel the world. Their story has been featured on CBC, the Huffington Post, CNBC, BNN, Business Insider, and Yahoo Finance. To date, it is the most shared story in CBC history and their viral video on CBC's On the Money has garnered 4.5 Million views.
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Hello from Poland! I gotta tell you, it’s pretty jarring to be back in Europe after hoping around in South East Asia, Mexico, and Central America. After being spoiled by ridiculously low prices and letting my budgeting muscles atrophy, I wasn’t sure I was ready to give them a work out again.

As it turns out, I had nothing to worry about. Because as soon as I got off the plane, I was reminded of one of my favourite things about Europe. How fast, easy, and cheap it is to hop around countries! And as it turns out, I didn’t need to work out my atrophied budgeting muscles at all because I’d completely forgotten about the fantastic deal that is Central and Eastern Europe. In fact, we’re currently spending around the SAME amount in Poland as we did in Malaysia. Yup. I kid you not. It’s cray cray. But that’s something I’ll be telling you about in a future travel post.

But since this is a Friday Reader Case, let’s get down to brass tacks:

Hi there,

I’ve discovered your site through a work colleague and I love how easy it is to read and how it explains a lot of concepts very well.
I am new to the investment scene, having only opened my first non-ISA investment account a few months ago (with a spread trading company). However, from your site and from others, it looks like index/ETF funds are the way to go. The number of options has me slightly overwhelmed and obviously I’m not looking for professional investment advice, but rather your own assessment on my situation from past experience.

Firstly, here are some details as per the template about my situation:

=========================

Your gross/net annual family income:
£56,000 (pre tax)

Your monthly family spending:
On average, around £2000 – £2500 (based on approx £3000pm income after tax. After student loan is removed starting this month, monthly income after tax is roughly £3,200, so hopefully spending will remain the same and leave more for savings)

Debts:
None – I finished paying off my student loan last month!

Fixed assets:
– Mortgage for flat in London:
£234,852.44 left to pay (purchase price 480k, deposit covered by family)
Monthly payments are around £1076pm (this is included in my monthly spending figure)
– Car – shared between 2 other family members (insurance approx. £1200py)
* Both of these assets are unfortunately necessary for my current situation, which I won’t go into in detail.

Investments:
– Cash ISA with my bank – £17,300 (this is what I’d like to invest)
– Spread trading account – £5450 (initial deposit of £5000, that’s made around 10% profit in the last 2.5 months)
– Instant access saving account with my bank – £1000 (emergency spending)

=========================

In summary, I’d like to take £10,000 out of my cash ISA account and use it as a starting investment. The rest I’d rather leave in there for now for emergencies.

It seems almost obvious to build my portfolio around an Index/ETF fund – although I’m new to investing I completely agree with the logic that buying and holding shares of this type over long periods is an almost guaranteed win (I’m talking 10 years or more). What I’d like to do is have a long term index/ETF investment that’s designed to grow rapidly over time, and potentially at a later stage diversify into other investments such as IPOs and the like (not sure what your thoughts are on these).

I am however torn as to whether, for a long-term index fund, I might as well be putting 100% into equity and none into bonds – but on the other hand it seems I should cover myself somewhat.

I’d also like to add that I’m 28 now and I don’t plan on doing this to retire early (not until 40-50 at least anyway). What I think makes sense is to take my annual bonus (roughly around £10,000 after tax at the moment) and drop it into my portfolio to boost the rate of compounding. My main goal isn’t quite for retirement or the short term (next few years) but more for a good quality life around my mid 30s to 50s.

My final question – I’m quite concerned that I have left this opportunity to invest far too late. Obviously money for retirement is a given, but I’d really rather not save vast sums of money till I’m 60 and have a pretty cheap existence until then. Even looking at your figures, I’m not quite sure how you managed to raise a portfolio to >1m in under 10 years. Can you elaborate on ways to boost the standard growth rate given my most index/ETF funds? Is this more likely an effect of your rebalancing strategy?

Sorry for the text wall. I really appreciate your time and if you have any advice, I’d love to hear it!

Cheers,
ConfusedBrit”

Wait, CB, you’re only 28-years-old and you are “concerned you have left this opportunity to invest far too late?” Say what? And not only that, you’re planning to invest for the long term because you’re not looking to retire until you’re at least 40-50 anyway. So you have a runway of 12-22 years and you’re worried it’s too late?

C’mon dude. Don’t let the dreary London weather mess with your head. Read Starting over at 35‘s reader case and you’ll see that people who’ve been paying off debt this whole time and had to start over from scratch at 35 aren’t too late, so why would that be the case for you?

You paid off your student loan last month, so you’re at least 7 years ahead in terms of debt repayment. There, doesn’t that make you feel better?

Blegh. I just said “feel”. *Gag* Gross.

Okay, now enough talk about gross gross feelings. Let’s MATH THIS SHIT UP!

Total Annual Income (after-tax) £40,260.00
Total Annual Expenses £30,000.00
Total Debt 0
Total Assets £23,750.00

So, after plugging CB’s income into this trusty UK tax calculator , we get a after-tax income of $40,260 (if this is incorrect, CB is free to redo the calculations himself with his own numbers).

This means that with a yearly expense of £2500*12 = £30,000, you have a savings rate of 25.48%. Based on your expenses and the 4% rule, you’ll need £30,000 *25 = £750,000 to retire.

So with a conservative 6% return over the long term, if you invest all your assets, you’ll be able to retire in:

Year Balance Savings Portfolio Growth Total
2017 $23,750.00 $10,260.00 $1,425.00 $35,435.00
2018 $35,435.00 $10,260.00 $2,126.10 $47,821.10
2019 $47,821.10 $10,260.00 $2,869.27 $60,950.37
2020 $60,950.37 $10,260.00 $3,657.02 $74,867.39
2021 $74,867.39 $10,260.00 $4,492.04 $89,619.43
2022 $89,619.43 $10,260.00 $5,377.17 $105,256.60
2023 $105,256.60 $10,260.00 $6,315.40 $121,831.99
2024 $121,831.99 $10,260.00 $7,309.92 $139,401.91
2025 $139,401.91 $10,260.00 $8,364.11 $158,026.03
2026 $158,026.03 $10,260.00 $9,481.56 $177,767.59
2027 $177,767.59 $10,260.00 $10,666.06 $198,693.64
2028 $198,693.64 $10,260.00 $11,921.62 $220,875.26
2029 $220,875.26 $10,260.00 $13,252.52 $244,387.78
2030 $244,387.78 $10,260.00 $14,663.27 $269,311.05
2031 $269,311.05 $10,260.00 $16,158.66 $295,729.71
2032 $295,729.71 $10,260.00 $17,743.78 $323,733.49
2033 $323,733.49 $10,260.00 $19,424.01 $353,417.50
2034 $353,417.50 $10,260.00 $21,205.05 $384,882.55
2035 $384,882.55 $10,260.00 $23,092.95 $418,235.50
2036 $418,235.50 $10,260.00 $25,094.13 $453,589.63
2037 $453,589.63 $10,260.00 $27,215.38 $491,065.01
2038 $491,065.01 $10,260.00 $29,463.90 $530,788.91
2039 $530,788.91 $10,260.00 $31,847.33 $572,896.25
2040 $572,896.25 $10,260.00 $34,373.77 $617,530.02
2041 $617,530.02 $10,260.00 $37,051.80 $664,841.82
2042 $664,841.82 $10,260.00 $39,890.51 $714,992.33
2043 $714,992.33 $10,260.00 $42,899.54 $768,151.87

27 years. At this point, you’ll be 55 years old, which is about 5 years out from your 40-50 target. However, since your goal is not early retirement, this isn’t a bad thing.

But you also mention you have a £10K after-tax bonus he’d like to invest. Well, let’s see what happens to your portfolio if we deploy that, shall we?

With the extra 10K, CB would boost his savings from 25.48% to 40.31%, and enable him to invest 20,260.00/year. This doesn’t change how much he needs to retire, BUT it does shorten this time to retirement:

 

Year Balance Savings Portfolio Growth Total
2017 $23,750.00 $20,260.00 $1,425.00 $45,435.00
2018 $45,435.00 $20,260.00 $2,726.10 $68,421.10
2019 $68,421.10 $20,260.00 $4,105.27 $92,786.37
2020 $92,786.37 $20,260.00 $5,567.18 $118,613.55
2021 $118,613.55 $20,260.00 $7,116.81 $145,990.36
2022 $145,990.36 $20,260.00 $8,759.42 $175,009.78
2023 $175,009.78 $20,260.00 $10,500.59 $205,770.37
2024 $205,770.37 $20,260.00 $12,346.22 $238,376.59
2025 $238,376.59 $20,260.00 $14,302.60 $272,939.19
2026 $272,939.19 $20,260.00 $16,376.35 $309,575.54
2027 $309,575.54 $20,260.00 $18,574.53 $348,410.07
2028 $348,410.07 $20,260.00 $20,904.60 $389,574.67
2029 $389,574.67 $20,260.00 $23,374.48 $433,209.16
2030 $433,209.16 $20,260.00 $25,992.55 $479,461.70
2031 $479,461.70 $20,260.00 $28,767.70 $528,489.41
2032 $528,489.41 $20,260.00 $31,709.36 $580,458.77
2033 $580,458.77 $20,260.00 $34,827.53 $635,546.30
2034 $635,546.30 $20,260.00 $38,132.78 $693,939.08
2035 $693,939.08 $20,260.00 $41,636.34 $755,835.42

So instead of 27 years, he’ll be able to retire in 19! Shortening his time to retirement by 8 years and moving up his retirement age to 47. So yes, by the power of compounding, deploying that extra 10K will end up giving 8 whole years of your life back! To put that in perspective, it took us 9 years to retire and travel the world, so within that amount of time, a person could potentially start over from 0 and end up being just 1 year from retirement!

Which bring me to CB’s last question. How did we manage to raise a portfolio of more than $1 million in less than 10 years? And do we have some sort of magical formula for boosting our investment gains or tricks up our sleeves for rebalancing?

The fact that CB asked this question, basically exposes one of the biggest myths sold to poor, unsuspecting novice investors by the financial industry.

“The only way you can become a millionaire is by hitting a home run with insane stock market returns. I have just the product for that…”

No. No. A thousand times no!

The point of the Millennial-Revolution is NOT to sell you crap and try to convince you you’ll get 20% returns. These shitty products are exactly how unscrupulous advisors end up making themselves richer while making your poor. My job is to tell you the truth. Even if you don’t want to hear it.

Because in reality, when it comes to your time to retirement (TTR), savings rate matters a WHOLE lot more than investment gains.

Don’t believe me?

Just look at this chart:

This chart is showing the number of years to FI depending on your savings rate, and from it you can see that the number of years to FI decreases as your savings rate goes up.

But we’ve added a twist—the colourful lines represent different investment returns.

And based on this chart, you can see that everyone who saves 10% or less has to work 35 years or more, regardless of the market return. Even if you get a whopping 10% return, you’re STILL 35 years from retirement. Proving that there’s no bullet or shortcut to get you there in 10 years with a crappy 10% savings rate, even with consistent 10% returns in the market. And anyone who says they can get you risk free 20% returns, RUN, RUN AWAY FAST!

As your savings rate increases, that effect from investment returns is dampened even more. If you’re saving more than 75% of your salary (the circled area), you’re going to retire in 10 years or less, and even a jump from 1% return to 10% will only shave of 6 months to a year at most.

In CB’s case, if he invests the 10K after-tax bonus and boost your savings rate to 40%, you’re looking at a best-case scenario of 15 years with a 10% return instead of 19 years with a 6% return. A difference of 4 years. Not as much as the 8 years you were able to shave off by putting away an extra 10K a year. But again, the amount you save is within your control versus the 10% annual return, which is pretty optimistic and not something you can control.

He also wants to know whether he should use 100% equities. Well, given your 27-year time frame, putting a high allocation in equities makes sense, assuming you can stomach the risk of market fluctuations. However, we always advocate going with some bonds (90/10 or 80/20 instead of 100/0), so you have something to use for rebalancing during market downturns.

What do you guys think? What advice do you have for CB?

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32 thoughts on “Reader Case: Do Higher Returns or Higher Savings Help You Retire Faster?”

  1. FIRECracker, Quick question on Bonds:

    Is the desire for bonds purely to smooth out the ride, or to diversify from an investment point of view? Because by owning a broad-based ETF/Index fund, we own companies who themselves own bonds (e.g. Financial Institutions) so in effect we own bonds through them.

    It’s the same logic why I feel no need to add REITS, Gold, etc, to my portfolio, as a Global Index fund will own everything within it. Real Estate companies, mining companies, etc.

    So my question is: Is a Global/Broad Index all we need, as it covers everything?

    Appreciate your thoughts on this.
    ES

    1. That’s a good question as JL Collins has the same opinion, because he has a total stock index fund (with the companies owning bonds, real estate, having international operations, etc) he feels there is no need to buy REITS, international stocks, etc.

    2. Smooth out the ride. Worst thing a novice investor could do is panic and sell at the bottom. Most people think they can stomach plunges in their portfolio, but unless you’ve been through it you have no idea how you’ll hand it…especially if you’re new to investing.

      Good question!

  2. I really like that graph, very useful representation to show the importance of raising your savings rate.

    That being said, I think you’re painting a slightly dampening picture on the effect of returns by using high savings rate examples to show returns are irrelevant. The vast majority of people can’t put away 50%, let alone the 75% you mention (which is completely unattainable for most).

    At 40% (which is what we are hitting currently) your retirement ranges from 19-40 years or so depending on returns, which tells me returns can make or break your early retirement.

    So in conclusion sure, the higher your savings rate the less returns matter, but most people can’t attain a savings rate of 50%+ and returns really do matter at the savings rates most people can attain so I wouldn’t be investing most my money in low return products any time soon.

    I think the guy in the post should go with either 100% stocks or as close as possible to that. Re-balancing actually drags down a portfolios returns, rather than enhancing it, the only benefit is it reduces volatility.

    1. “Re-balancing actually drags down a portfolios returns, rather than enhancing it, the only benefit is it reduces volatility.”

      Not necessarily. *Frequent* rebalancing definitely drags down returns, no doubt about it (because you end up going against momentum and selling off the best-performing funds in the short-term). However, infrequent rebalancing does not negatively affect returns and may even enhance it (but by such a tiny amount that it is probably negligible).

      There was actually an article testing various rebalancing methods and I back-tested it myself. I use the 20% threshold with 10% tolerance band method and it has worked out quite well. To give an idea of just how infrequent rebalancing is under this method: I have been investing for 5 years and have only needed to rebalance once so far.

      I personally would not rebalance each time I added to my investments (I even find the “calendar” method of rebalancing every year to be far too frequent). Admittedly however, my method does require frequent monitoring of my portfolio (which I enjoy but is not for everyone). For people who like to “set it and forget it”, I think the once a year (or once every 2 years) would be fine. As you mentioned, rebalancing plays a big role in reducing volatility so it is extremely important.

      1. To be pedantic, it really depends what you are re-balancing too. I read a long study on this also and it seemed to conclude that if you are re-balancing between equally performing investments (i.e. from two stocks that generally return 8% long-term) then re-balancing is slightly favorable, to the extent of perhaps a half percent increase in returns.

        However, most people re-balance vastly different performing investments like stocks and bonds. In this case, because stocks generally experience long periods of increasing returns and short periods of loss making, constantly selling stocks to buy bonds (in the long period of strong stock returns) will constantly be putting an anchor on your returns that won’t be offset by the short period of selling bonds to buy stocks, such as during a market crash. Over time you will experience slightly lower returns in this instance.

        I actually only just learned this, and was kind of pissed when I did as practically everybody tells you re-balancing is the way to go and I never questioned it.

        I’m kind of curious what the effect is of my position. I don’t re-balance as such as I invest every month, however I invest in a way that I always maintain a 90/10 portfolio so I’m essentially buying more of the under performing asset. I’ve no idea if this is exactly the same thing as re-balancing, but I’m under the impression it is and if so it means I’m dragging down my performance. Perhaps I should always invest at 90/10 regardless of what the current weightings of my assets are?

        1. Yes, you are correct. I rebalance between my three different categories of stocks (US, Canadian, International) which is where the theoretical small performance boost should occur. I also rebalance between those and bonds, which while reducing performance, it does the much more important job of reducing volatility.

          I think it is important to differentiate between boosting the performance of your portfolio via optimizing what you already hold in your asset allocation (which is what “ideal rebalancing” aims to achieve), vs. boosting the performance via changing the asset allocation entirely. I do not think the latter is a good idea, and this is the reason why everyone is yelling “REBALANCE REBALANCE!!” Because ideally, you would have chosen the asset allocation that suits your investing temperament (whether that is 90% stocks or 60% stocks) and you do NOT want to change this (unless you have made a conscious decision to do so, e.g. a lot of people gradually reduce exposure in stocks as they approach retirement–which is another topic entirely).

          Essentially, if you never rebalance, yes theoretically your performance will improve because over time your asset allocation changes from let’s say 60% stocks to 80% stocks. Of course the 80% portfolio will perform better! But of course the problem is, in reality this investor will panic when a bear market hits and they suddenly realize they are in way over their head because they were never prepared for 80% exposure to the stock market. The huge downside of panic-selling far outweighs any gains they’ve made in the previous years as their portfolio gradually increased to become over-weighted in stocks. This scenario is very real and that risk can’t be ignored. This is a trap to avoid!

          What I’m saying is, even though stocks/bonds rebalancing in this case appears to reduce returns, it is definitely the best option due to human behaviour and investing psychology. Don’t be pissed off that you were following this advice because it is absolutely solid. 🙂

          You’re right, you are essentially rebalancing each time you add to your portfolio by always buying the under-performing asset. I just want to make clear that there is absolutely nothing wrong with this and it is definitely the easiest way to manage your portfolio! Plenty of people do it this way. However, you are indeed lowering your overall returns by doing this. That’s why I prefer to always buy at the same ratio (in your case 90/10) ignoring my current weighting–to an extent. This is where the 20% threshold I mentioned in my last post kicks in: the idea is that psychologically, if I can handle a certain weight in stocks, I should be ok if that is off by an additional few %. As long my portfolio remains within that threshold, I get a performance boost while limiting my risk. More than that though, and the risk of panic-selling is too high and any additional gain is not worth it.

          Again though, like I mentioned this method is slightly more complex (requires more tracking and monitoring of your portfolio). In general I would still probably recommend ignoring your current weightings when you buy new funds and rebalance every 1-2 years instead (and if possible, check in on your portfolio when you hear of big swings in the market). This will boost return without increasing risk by that much. But to be honest you are already quite heavy in stocks at 90/10 so the drag on your portfolio from your bonds is minimal anyways–so it really won’t matter too much in the long run. If you keep doing things your way it will be totally fine. 🙂

          (Sorry for the long rambling, rebalancing is something I’ve done a LOT of reading and thinking about before deciding on my own strategy so I can be pretty opinionated about it, haha.)

          1. That’s a really interesting discussion regarding rebalancing, jk9088 and Vancouver Brit.

            I never really read anything about the method jk9088 describes. If I understand it correctly, the (simplified) general idea is that if I invest 1,000$ per month with target of 60% in stocks and 40% in bonds (simplistically), I should buy 600$ of stocks and 400$ of bonds every month, correct? That in contrast to the 60% and 40% being the total portfolio ratios, which theoretically, if stocks performed well and are now worth 65% of my portfolio I might spend my whole 1,000$ buying bonds in one month to bring it toward a total of 60/40 (from the 65/35 due to strong performance).

            Would you mind sharing some of the links to the articles you were reading about the topic? Sounds very interesting.

            Thanks for bringing it up!

            1. The original article (“Opportunistic Rebalancing: A New Paradigm for Wealth Managers”, also known as the Daryanani study) is from 2008 and you can find the link here: http://resource.fpanet.org/resource/09BBF2F9-D5B3-9B76-B02E27EB8731C337/daryanani.pdf

              There are also lots of websites that discuss the concept, you can google “Opportunistic Rebalancing” or “Optimal Rebalancing” (you can also add the keywords “threshold” or “tolerance band”) for tons of links. Here’s one such article: http://www.fa-mag.com/news/optimal-rebalancing-with-tolerance-bands-29623.html

              You’re correct that in your case, you would usually buy in the 60/40 ratio regardless of how your asset allocation looks (the exception being when a rebalancing event triggers). However, to take full advantage of this method you really need to separate out the stocks. So for example, you would have 4 categories in a 20/20/20/40 split (Canadian/US/International/Bonds). Once any one of the stocks drop below 16% or above 24%, or if the bonds drop below 32%/above 48%, you would rebalance. As you can see, this method allows for a significant amount of leeway for the stocks to shift ratios (which should theoretically increase returns) but it isn’t so big that it would greatly increase your risk.

              Once again though, this is a lot of extra monitoring of your portfolio for a very small extra gain. (If you read the study, even the most optimized rebalancing method only produced an increased return of…*drumroll please*…a whopping 0.50% annually! Lol. I mean, sure, I guess it adds up over time but really, it’s not a big amount by any means.) Most people are probably better off not scrutinizing their portfolios so closely all the time! (I’m a bit obsessive though and I love creating spreadsheets analyzing my portfolio haha.) Also, I mentioned before that in the last 5 years of investing I only rebalanced once. This is probably because it’s been such smooth sailing over the last few years. When a bear market hits I will probably have to rebalance a lot more frequently as my stocks keep dropping! XD

              1. Thanks for the link to Opportunistic Re-balancing study, that was very in-depth! I am thinking of moving to this approach going forward but I have one question that I’m not too sure about.

                I understand the tolerance range of 20% seems to be the best choice, as is checking your accounts frequently (daily to bi-weekly provides the best returns). I think I’ll probably stick to monthly checking just because this is when I typically buy shares anyway.

                The way I understand it is this. If you allocate, say, 20% to international equities with a 20% tolerance, you do not re-balance until your allocation falls somewhere outside of 16%-24%. Outside of this range, your re-allocation sensors go off. Let’s say the international equities went to 15%, so I need to re-balance now. My question is, what do I re-allocate to? Does it go back to 20%, or can I re-balance to higher, say 22%, or lower, to 18%? Since anything in the range is acceptable, I’m not sure where to re-balance to and I didn’t see this being addressed in the study.

                Also, what do you sell if all your other assets are within tolerance and only one is out of tolerance?

                1. Vancouver Brit: the general rule is, a rebalancing event is triggered when any fund exceeds its 20% lower/upper rebalancing band. Once this event is triggered, any funds that fall outside of the 10% tolerance band should be rebalanced back to the 10%.

                  So for example, let’s say your target is 20/20/20/40 (funds A/B/C/D). Over time, let’s say in a bear market scenario, your portfolio becomes 15/21/17/47. As you can see, fund A has triggered a rebalancing event but NO OTHER fund has exceeded its 20% band. HOWEVER, fund C has dropped below its 10% tolerance band, while fund D has increased beyond its 10% tolerance band. Fund B does not need to be touched because it is still within the 10%. Therefore your goal will be to get your portfolio to an allocation of 18/21/18/44. Now as you can see, the math isn’t perfect (these add up to 101%). So do a bit of adjusting as appropriate to ensure all funds fall within their 10% (in this case, funds A and C are already at the lower limit of the band so it makes sense to do 43% for fund D to bring the total down to 100%).

                  As you can see, there is no need to rebalance back to the original allocation of 20/20/20/40. This again goes back to the idea that we don’t want to be reducing our returns by going against momentum. It is possible for only one fund to be 20% out of balance and all the others are within their 10% band, however this probably won’t happen that often (because if one has shifted enough that it’s over 20%, chances are at least one other fund has shifted at least 10%). If it happens though go ahead and use your judgment to do whatever you want, as long as all funds are within 10% at the end of the day it’s fine. No need to split hairs over it.

                  Hope that helps clarify things!

                  1. Thanks man! So to summarize, if one of your investments goes out of the tolerance range of 20%, you adjust ALL other investments to be within a 10% tolerance range in order to bring back the investment that is out of tolerance, back within tolerance.

                    Not too complicated. Like Newb Investor says, I like checking my investments frequently too so this is just a small step to increasing returns a bit.

              2. Thanks so much for sharing. Haven’t read it in full yet but I intend on doing it soon.

                a 0.5% difference in return is a lot IMO when one aims for a modest 6-7% return anyway.

                As for the extra work, in the age of spreadsheets it is so easy to implement that it is in effect as easy as what I am doing now. I just need to add a few “if’ clauses to my google sheets workbook.

                Question regarding re-balancing (similar to Vancouver Brit below): I am currently in the accumulation phase. I don’t ever really “RE”-balance, I just make buys such that they are always balanced. I assumed I would do the same when using the “Opportunistic rebalancing”?

                Buy according to my allocation, and when my portfolio assets get out of the threshold simply buy more of what is below the threshold? Would I actually sell if anything is too high above the threshold or just stop buying it until it is back in the threshold? I guess it is too specific, and probably the difference is so negligible that its not even worth calculating. 🙂

                1. You’re right, it’s not all that much work–for people who like constantly looking at their portfolios! Since I like doing that, the 0.5% increase is absolutely worth it to me. Sounds like it’s worth it to you too! But I’m sure there are lots of people who prefer to let their portfolio do its own thing and spend their time on hobbies, their business, family, vacations, etc. etc. So I just wanted to make sure people realize that if constant checking up on their portfolio feels like a chore, it’s definitely not necessary to go to this level of rebalancing. In addition, the +0.5% return is compared to NO rebalancing. If you rebalanced, say, once a year, you would still see a benefit of, let’s say maybe +0.25%, over no rebalancing (note: I didn’t actually check the accuracy of this one!). So the extra effort put into monitoring your portfolio weekly vs. once a year is only maybe +0.25%.

                  Now to your question: I might be misunderstanding this so can you clarify what you mean by “I don’t ever really “RE”-balance, I just make buys such that they are always balanced”? For example let’s say your allocation is 20/20/20/40 and you’re adding another $1000. Are you always buying $200/$200/$200/$400 regardless of what your portfolio currently looks like, or are you let’s say buying $100/$100/$100/$700 because the first three funds have increased in value and the last one has decreased? If you want to follow the opportunistic rebalancing theory, always go for option 1, never option 2 in order to increase return.

                  For your other question: it doesn’t really matter if you sell & buy or just stop buying, provided it’s over a reasonable timeframe (my personal rule is bonds (i.e. sold $4500 of US and bought bonds with it) because I did not incur any fees or taxes with this transaction. However, doing the same switch from US -> Canadian would have meant paying commissions/taxes. Therefore I rebalanced over 1.5 months by buying Canadian instead of US during that time (i.e instead of buying $200/$200/$200/$400, I would’ve bought $400/$0/$200/$400). This was a reasonable timeframe to me–if however it would’ve taken me 3 months to do the rebalance by just ceasing to buy US, I would’ve found a way to minimize costs and done the switch. (In my example, it would’ve taken me too long to rebalance if I tried this method with both the Canadian and bonds portions, that’s another reason why I immediately did the $4500 US -> bonds transaction.)

                  You will also find that as your portfolio size increases relative to your regular contributions, it will become increasingly difficult to rebalance without selling & rebuying.

                  1. Thanks for the detailed examples. My question was indeed what you described: I am currently using option 2, and planning on moving to option 1 (which is in line with the opportunistic re-balancing method). Since my portfolio is small, method 2 simply keeps it always “in balance” and I never need to actively sell in order to stay on my target.

                    But I am playing with the numbers now to switch to option 1.

                    Again, thanks for sharing the info, very interesting and fun!

                    1. No problem!

                      Btw I just reread my comment and it seems like the computer glitched out due to my use of “greater than/lesser than” signs because it cut out a section of my comment so the third paragraph makes no sense lol. This is what I originally typed:

                      “For your other question: it doesn’t really matter if you sell & buy or just stop buying, provided it’s over a reasonable timeframe (my personal rule is less than 3 months but you decide what you are comfortable with). Always try to minimize costs when you rebalance though. For example, during the one rebalancing event I had, according to my calculations I needed to sell $8500 of US, buy $4500 of bonds, buy $4000 of Canadian (International was untouched because it was within the 10% tolerance band). I immediately did the switch of US to bonds (i.e. sold $4500 of US and bought bonds with it) because I did not incur any fees or taxes with this transaction. However, doing the same switch from US to Canadian would have meant paying commissions/taxes. Therefore I rebalanced over 1.5 months….”

    2. Savings you can control, returns you can’t.

      You are right that if your savings rate is lower, returns matter more.

      That being said, if your savings rate is 40%, since this blog advocates for index investing, we’re looking at returns in the average 6%+ range long term and NOT shitty 1% savings accounts. You’re actually looking at a range of 19-24 years. So a difference of 5 years. The range is large in order to illustrate how it collapses at high savings rates.

  3. Great answer, and great supporting facts. Anecdotally I didn’t start saving in tax advantaged accounts until I was nearly 30 because they were new back then and my employer didn’t offer them. But at 30 my employer did and I was able to save up 7 figures in my 401K by the time I was in my 50’s and a similar amount in other accounts. But I did it by maxing out my 401k and a Roth and being frugal. I’m convinced that savings rate is the main thing. Fees and having an age appropriate portfolio matter but the real engine is how much you put into investments. Now I’m retired with no $ worries. I didn’t start until 30 so 28 ought to be a walk in the park!

    1. That’s awesome! Thanks for sharing your story. Now CB has even more evidence that 28 is definitely not too late to invest.

  4. Very sensible advice FireCracker. I really like that graph of Years vs. Savings rate. Putting the various returns on there is a great way to illustrate that *savings rate matters the most*.

    I know London is expensive, but the best advice I could give is to save like a mad mo-fo. Seriously, get that savings rate up to at least 50% and then keep it there. As ConfusedBrit gets older, his income should rise. If he manages to grow his spending slower than income growth, he’ll be golden.

    1. “save like a mad mo-fo”.

      Word, yo! 🙂

      If CB just saves his bonuses and raises, keeping his expenses the same, that’s already pretty close to 50% without breaking a sweat!

  5. As mentioned in the comments, of course returns have an impact on your time to reaching FI.

    However, I think the important thing to pull from this post is that you have more control over your savings rate than you do your returns.

    Yes, you have some indirect control over your returns by the investment choices you make (i.e. index funds with low expense ratios). But, as we savvy FIers know, we can’t control or predict our returns in the market. What we can control is how much cash we shove into the market knowing that, over time, the market always goes up.

    As mentioned, not everyone can save and invest 75% of their salary, but they can strive to do so. My wife and I are true examples of how a super high savings rate can get you there in a short amount of time.

    How did we increase our savings rate?
    Downsizing, dual incomes, working overtime, side hustle/work, buying much less of the stuff that we don’t really need, etc. All of these actions enabled is too have a super high savings rate. Our super high savings rate IS INDEED the largest contributing factor to our success in becoming FI.

    So, you control what you can. Find ways to increase your savings rate.

    BTW…

    That was a great discussion regarding rebalancing. It’s something I think about quite often. I have been pretty much following JK9088’s line of thinking. I haven’t had to rebalance much. Although, recently my portfolio has gotten out of whack by more than three percent. Right now, I’m just letting it ride. It’s well within a threshold that I am comfortable with.

    1. “I think the important thing to pull from this post is that you have more control over your savings rate than you do your returns.”

      Yes, exactly.

      Well done on getting your savings level up!

  6. Love the chart at the end. Do you know the source? I’d like to use it in a future post.

    I’m currently back in aggressive saving mode bc my income has recovered. Feels good! Been just hoping for a 4-6% return, but am now amping up.

    Sam

    1. Thanks, Sam! The source is actually Wanderer. He made the graph for a presentation he did on FI a couple of years ago. Feel feel to source it from this article if you like.

  7. We agree that having a higher saving rates is the key to reach FI. Kudos to you guys for saving so much so quickly. Then having investments that alllow you guys to retire in your early 30’s to travel the world! The great thing about the PF blogs is that readers can see what people did to reach FI and then pick and choose what will work for them. I really enjoy your reader’s case studies!

    Since we are ultra conservative we have NO money in the stock market. We only do blunt force savings. As a result, it took us a lot longer to reach FI at age 49 compared to many PF bloggers and readers. We had NO choice but to, as Mr. Tako put it, save like a “MAD MO-FO!! We always saved 50% of our incomes since we were married 25 years ago. When we heard rumours of a bad re-org and laid offs in 2010, we drastically cut expenses and increased our savings rate up to 85%. Having our life savings in CD at 1% over 7 years ago wasn’t enough to cover expenses. We needed a investment not in the stock market. Luckily, someone told us about tax free muni bonds.

    Healthcare in the US is very expensive and it is making me work until 55 to double my pension to 70K and to get 8K yearly for medical. In 2016, Healthcare for retirees is 11K. In 2017, healthcare for retirees is 12.5K. Since Jane is retired, she pays 4.5K (12.5K-8K) out of pocket for healhcare in 2017. If I quit before age 55 then my pension is 37K at 55 and I would get $0 for medical. Golden handcuffs for me to stay another 2.2 years until 55!

    Here’s our current yearly passive incomes from fixed interest investments.
    87K from our 4-5% tax free municipal bonds
    80K from our 401Ks in 4.4% fixed savings and accessible at age 59.5
    60K Jane is retired and collecting her pension 52K and medical 8K now.
    78K my pension 70K and medical 8K when I retire at 55 in 2.2 years
    36K combined Social Security at age 62

    147K current passive income at age 52 from munis bonds and Jane’s pension
    225K passive income at age 55 from munis bonds, both pensions
    305K passive income at 59.5 from munis bonds, pensions and 401K interest
    341K passive income at 62 that includes social security

    Our expenses are 55K and we will have passive incomes at least 3x expenses starting at age 55. We are fortunate to have pensions and to not risk any money in the stock market. Since life ALWAYS throws a curve ball, we are NOT comfortable with passive income covering 1x expenses. We want at least 2-3x expenses to feel financially secure. If we lose 1-2 streams of incomes then we would still be OK.

    It is even more difficult for us to reach FI because we are so damn financially conservative. If I had do it over again then I would invested some money when I started working in VG S&P 500 index fund and just let it ride.

    Adam

    1. Obviously you guys are set for life with so much passive income coming in, that’s really amazing! So you will be totally fine no matter what you do. But if I may add my two cents…it sounds like you guys are way too conservative at 100% fixed assets (especially with the pensions!). It isn’t too late now to put some money in stocks. If you are risk-averse, it’s actually better to have some stocks because adding a small amount of stocks to your portfolio (~10%) will actually REDUCE risk (while also increasing return!) compared to 100% fixed assets. It’s one of the few “free lunches” in the investing world so I really encourage you to take advantage of it. Look up the “efficient frontier” (can’t find a great article off the top of my head but the last graph on this page touches upon it: http://www.ci.com/advisingtheclient/sbuild/sbuild_11.html)

      So I would definitely at least start at the 10% if I were you (and then maybe gradually go higher if you feel more comfortable with the stock exposure).

      1. Thanks for you comment and info! I took a look at the link. Interesting charts. Since we are in our 50’s, we prefer to not take any risk with the stock market especially when the DOW is in its 8th year bull run. Dont want to buy high ..panic and then sell low. I lost money in 2000-2001 during the tech bubble and I learned my lesson. I may consider it after a “major” correction but we prefer to sleep at nights and not worry if the market it up or down. We want to simplify our life and to protect our financial nut. Since I am retiring in 2.2 years I dont want to lose any principle.

        Adam

        1. That’s fair. 🙂 Like I mentioned you two are doing amazing with how much assets you have so definitely no need to add stocks if you don’t feel comfortable. I mostly just wanted to correct the (very common) misconception that a portfolio of 100% fixed assets is the most safe–when in reality, the lowest risk portfolio contains a mix of mostly fixed assets with a small amount of stocks.

          However as you alluded to: math and theory is one thing, human emotion is another! If you’ve been through the stockmarket ups and downs and know that you won’t sleep well at night with any of your money in the market, there’s no point in torturing yourself that way! 😛

  8. Hello, hello!

    I’m currently living in UK (originally Spanish, sorry in advance for my English :D) so I have a little of knowledge about UK tax system ( https://www.gov.uk/income-tax-rates ).

    Premises:
    – Expenses £2500 per month (upper limit of the band proposed).
    – Not willing to retire early
    – £56k + £10k = £66k salary

    Argument:
    – £2500 after tax means £39.3k gross ( http://www.thesalarycalculator.co.uk/salary.php ), so you have £26k gross to use.
    – MAX out your employer pension matching contribution (I believe the minimum it’s a 3% match: £66k x 3% = £2k for FREE)
    – Use any amount higher to £45k (higher tax band: https://www.gov.uk/income-tax-rates ) to put into a SIPP. Gov will return you 66% for FREE: BEST… INVESTMENT… EVER! (you pay 40% in taxes for that money so for each £0.60 you put into SIPP, Gov will give you £0.40). Be careful as this money is locked until 55 years old(currently willing to raise it to 57).
    – If you could save more: ALWAYS, ALWAYS, ALWAYS, use an ISA. Benefits are tax free FOREVER! so money could compound even quicker. You dont have to pull out the money from your Cash ISA, you could transfer it into a Stock and Shares ISA.

    So to put a quick example:

    £66k gross – £45k = £21k into your SIPP/Pension + £2k Employer match = £23k.
    £45k gross = £33.880 net – £30k expenses = £3.880 into an ISA.

    Total saved: £26.880
    Total expenses: £30.000
    Saving rate: Awesome!

    P.S. Great site, keep with the good work guys!

    1. Thanks for the UK tax advice, Miguel! I always love hearing from international readers and listening to your 2 cents!

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