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It’s Friday, and you know what that means…another Reader Case!
Today’s is from a reader in France. I am constantly amazed by the international audience we have, and doing this case also had the added benefit of forcing me to figure out how to type the euro symbol on a Mac with an American keyboard. It’s Alt-Shift-2. The more you know!
Dear FIRECracker,
We got to first know you through the video “Millennial Revolution” on YouTube which totally inspired me.
You said out loud in a very rational manner what I was feeling for so many years. I am glad that other young and educated people in their 30’s are questioning the status quo and the miserable path that is presented to us by the previous generations.
My wife and I are respectively 33 and 35. I am a mechanical engineer with an MBA and my wife is a business major.
We live in France and have 2 kids aged 4 and 2.
We’ve saved 610k€ and target 1M to 1.5M€ before retiring FI.
Where we live, house prices range from 3000-3300€ per m2 for sale, when rent prices are 10-12€ per m2!
We spend 1350€ per month in renting a 130m2 house with 1000m2 garden. Similar houses with 150-180m2 would cost us ~500k€ in the neighborhood.
Given these valuation ratios, do you confirm that even with a very optimistic 2-4% yearly house price increase over the next 10-15 years, we are better-off renting (1350€ per month) and saving/investing aggressively in a diversified portfolio of low cost index funds / ETFs (assuming ~5% yearly CAGR expected on equities) rather than acquiring the 500-600k€ house that would come with 8% property registration tax (for the government & notary) + 3-5% real estate agent fee + 1% annual maintenance fee + ~3000€ yearly property tax ?
Our situation:
· Gross income: ~100k€
· Net after tax income: ~85k€
· Yearly spending: ~45k€ (52% house rent, 19% kids daycare and kids related, 8% groceries, 8% vacations and leisure, 4% car and transportation related, 4% insurances, 2% presents and gifts, 1% health and beauty related, 1% house furniture and equipment, 0.6% phone and internet bills, 0.4% electricity bill)
· Assets: a car bought 2nd hand 2 years ago for 20k€ now probably worth ~17-18k€
· Totally debt and mortgage free!
· Investments: 610k€ allocated as follows:
o Equity exposure (through ETFs): ~30%
o Bond exposure: ~50
o Other Fixed income products (fixed annuities): ~10%
o Cash: ~10%
The reason why we have ~60% of our net worth in low yielding bond and fixed annuities is that this money was intended to be the down payment for a house (300-400k€), which we didn’t want to expose to the volatility of the markets.
As a result, our global return rate is around ~3% per year today.
If we continue with the current saving rate, we expect to reach FI over the next 6 to 13 years depending on whether we only target 1M or 1.5M€ and with a meager 3% CAGR on interests.
If you confirm that renting is superior to buying in our case, then we will increase our equity allocation to 40-50% in order to reduce the time to reach FI.
Another reason why we haven’t acquired our home yet is because we wanted to remain fully flexible without strings attached in order to sease any job opportunity that may arise in a different region or country. We would also like our kids to experience life abroad at some point in the next 2-5 years.
What other recommendations would you give us ?
Many thanks for your time and great work!
I love you both !!!!
Would love to meet you in person at some point.
Kind regards,
HouseHornyInFrance
OK so first of all, before even running any math, I can already tell that the scale will be tilted heavily against buying that house.
Here’s the thing about FIRE. Financial Independence relies on having a big enough portfolio to pay for your living expenses. Note that key word: portfolio. House equity is not a portfolio. You can’t take a shingle off your house and use it to buy groceries.
For that reason, the vast majority of the case studies we do here on Millennial-Revolution.com recommend NOT buying, renting, and instead using that excess cash to put towards a balanced, diversified low-cost and Index-hugging ETF portfolio.
This isn’t a bias. It’s just the math.
But first of all, don’t get me wrong. I am not rabidly anti-housing. Owning a home can be a great move. But only at the right price.
A house, from the perspective of Early Retirement, is a completely useless posession. All it does is cost the reader money, but at the same time not offering any passive income, which is really what determines a person’s ability to retire. The only time owning a home actually helps is when the cost of owning the damned thing is far less than the rent it eliminates. And at a cost of €500,000, I’m not seeing that happening.
But we don’t make decisions based on feelings here. We do it by MATHING SHIT UP!
To summarize HouseHornyInFrance’s situation…
| Category | Amount |
|---|---|
| Income | €100,000 Gross, €85,000 After-Tax |
| Expenses | €45,000 |
| Debt | €0 |
| Savings | €610,000 |
At their current spending level of €45,000, they’d need €45,000 x 25 = €1,125,000 to retire. And considering the fairly impressive savings they’ve accumulated of €610,000, let’s see how long it would take them to get there.
| Year | Balance | Savings | ROI | Total |
|---|---|---|---|---|
| 1 | € 610,000.00 | € 40,000.00 | € 36,600.00 | € 686,600.00 |
| 2 | € 686,600.00 | € 40,000.00 | € 41,196.00 | € 767,796.00 |
| 3 | € 767,796.00 | € 40,000.00 | € 46,067.76 | € 853,863.76 |
| 4 | € 853,863.76 | € 40,000.00 | € 51,231.83 | € 945,095.59 |
| 5 | € 945,095.59 | € 40,000.00 | € 56,705.74 | € 1,041,801.32 |
| 6 | € 1,041,801.32 | € 40,000.00 | € 62,508.08 | € 1,144,309.40 |
6 years. Not too bad at all. Now let’s see what would happen if they drop €500,000 on a house. Interestingly in France, it’s often the buyer who has to pay the real estate agent commission rather than the seller. And that 8% property registration tax the reader mentions is just nutso, but hey. All that sweet sweet French health care ain’t free I guess.
So at the moment of purchase HouseHornyInFrance would be hit with a 5% real estate agent commission plus an 8% property registration tax, so 13% or €65,000 gets lit on fire. Ouch.
They would save on their €1350 rent, but they’d have to pay 1% in maintenance annually, or €417 a month, plus €250 in property taxes. So their annual spending will go from €45,000 to €45,000 – €1350 x 12 + €417 x 12 + €250 x 12 = €36,804 (MAN my Euro key is getting a work out today!)
How does this affect their retirement projections?
First of all, because they have enough money to purchase this with cash, their annual spending does go down right away. So that’s great. This will have the dual effect of increasing their savings rate to €85,000 – €36,804 = €48,196. This also lowers their FI number to €36,804 x 25 = €920,100.
BUT they just locked away €500,000 that can no longer help them fund their retirement (not to mention the €65,000 in taxes that are gone forever). So we have two opposing forces. One helps them retire, but the other hurts them. Is this tradeoff worth it?
| Year | Balance | Savings | ROI | Total |
|---|---|---|---|---|
| 1 | € 45,000.00 | € 48,196.00 | € 2,700.00 | € 95,896.00 |
| 2 | € 95,896.00 | € 48,196.00 | € 5,753.76 | € 149,845.76 |
| 3 | € 149,845.76 | € 48,196.00 | € 8,990.75 | € 207,032.51 |
| 4 | € 207,032.51 | € 48,196.00 | € 12,421.95 | € 267,650.46 |
| 5 | € 267,650.46 | € 48,196.00 | € 16,059.03 | € 331,905.48 |
| 6 | € 331,905.48 | € 48,196.00 | € 19,914.33 | € 400,015.81 |
| 7 | € 400,015.81 | € 48,196.00 | € 24,000.95 | € 472,212.76 |
| 8 | € 472,212.76 | € 48,196.00 | € 28,332.77 | € 548,741.53 |
| 9 | € 548,741.53 | € 48,196.00 | € 32,924.49 | € 629,862.02 |
| 10 | € 629,862.02 | € 48,196.00 | € 37,791.72 | € 715,849.74 |
| 11 | € 715,849.74 | € 48,196.00 | € 42,950.98 | € 806,996.72 |
| 12 | € 806,996.72 | € 48,196.00 | € 48,419.80 | € 903,612.53 |
| 13 | € 903,612.53 | € 48,196.00 | € 54,216.75 | € 1,006,025.28 |
Not even close. Their time to retirement would more than double, to slightly over 12 years.
We’ve written about the toxic effect of housing on retirement ad nauseum on this site, and in this analysis we didn’t even deal with all the hidden costs that creep up on you when you own like insurance, utilities, lawyer fees, etc. since I don’t know how many of those costs apply in France. Many people are shocked when these costs hit them for the first time, as these hidden costs can completely wipe out the gains on their home value.
Buying a house only helps you retire if you can get a house really cheaply in a high-rent area and pay it off right away. This isn’t one of those situations.
What do you guys think? Should HouseHornyInFrance stay in his rental or buy? Sound off in the comments below!
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I think I’d agree – but I’d also just chime in to say that the financial nuances of France may come into play here. I have no idea what the tax implications (or incentives) are for real estate there, but that could make a difference. The same could be true for their savings and investments.
Hell, I’m surprised at their low tax rate they report. 15% on €100,000 of income? I thought France was supposed to be a socialist high-tax country!
Living in France, I find these numbers also quite strange!
Usually, there is a 25% difference between gross and net, followed by another complex tax ruled by a lot of criterias. Plus the employer pays almost twice the salary.
I suspect that their “gross” income is their almost “net” income, and that the 15k difference is their second tax.
I do not see how they would manage to get a such low tax rate and saving so much at 35.
Quite a few folks retire in the south of France and Spain etc from Britain …. just flew back from Berlin and Paris earlier this week … I think your idea of AirBnBing it gives one more variety of choice than being saddle down to one holiday house in France in regards to travelers ………… and yes renting is just fine as it gives you freedom to move around too … if you are French or not …..
Oui Oui! Absolutely correcto! You may remember I shared an article in the past about a developing market housing purchase – Bangalore to be specific. That article just fyi is here: http://tenfactorialrocks.com/house-fever-global/
A rental yield of 3.6% has further declined to 2.5% or so in the last 18 months in Bangalore, since I wrote that article. Even house appreciation of 6% annually pales when you consider inflation in India is 6-7% and equity markets here delivered 14% CAGR over the last decade. Nutso, or as the French would say “krezi uh”!
Interesting to see the different numbers from places like France! I think this is the first “French” case study I’ve seen to date!
Relative to that income level, €500k seems quite expensive!
I had to contain my temptation to whip out my high-school Canadian French on this one.
“Je travail dans un bibliotheque” is the only phrase I remembered. Thanks a lot, French education in Ontario.
Hi Firecracker!
I LOVE these reader cases you guys do. We can relate to a lot of the reader cases as we are 35/39, living in a high cost city (Los Angeles), trapped in the rat race as we try to save as much money as possible while renting and reach FI asap. We also want to live in different areas of the world as you two do, hopping from country to country for a few/several months at a time. However, we are stumped when it comes to coming back home (to California) to visit family or rest for a bit before we head back out overseas. He wants to buy a home so we have a “home base” of sorts whenever we come back here in between traveling, but I don’t know how to accomplish that while still staying on the FI / diversified portfolio track with the buckets of dividends that flow downstream for us to live on (you had a post awhile back on how these ‘buckets’ worked). How do you two regroup when you come home to visit family/friends/rest for a bit before going back out to explore other countries?
We just get an Airbnb back in Canada. Same as every other country.
A “home base” is where your friends/family are, not where you own property.
Wow, going that far in France is impressive!
France’s tax system is really hostile to FIRE. Wanderer, you choked on the 8% property transfer tax, but here is a snapshot of the main taxes:
– what the employer pays is called “super-brut” (overall gross). It’s about 120-125% of what the employee sees as “brut” (=gross) on his paycheck
– then there is 20-25% of “social cotisations” (medical insurance, EI, equivalent of CPP, …), so what arrives on the employee’s bank account is about 77% of the brut. It’s usually referred as “net” in France, although given the number I believe that HouseHornyInFrance referred it as “gross” to match the North American’s terms
– then income tax. It’s progressive and scale down with the number of people in the household, so it’s very variable, but 15% for 100k of revenue for 4 people seems about right. So 85% of 77%, the employee gets to keep about 62% of the advertised wage, or about 50% of what the employer is paying
Outside of a tax-sheltered account, the tax rate is about 60% for investment (capital gain, dividend and interest alike). Fortunately tax-sheltered accounts (PEA) are not limited in the amount, but they comes with restriction on the timing of deposit and withdrawal (you need to wait a few years before withdrawing, and a withdraw prevent any further deposit. you have to open a new one and wait the few years again if you have to withdraw before the accumulation phase is done). Oh, and “tax-sheltered” means 15% tax, not 0. There is other stuff to reduce taxes, but I know them less, and it’s basically the same gist (15% remaining taxes, constrains of the timing, constrains of the investments you can purchase).
On the plus side, France is very family friendly: income tax is reduced with kids, almost-free healthcare, free school, free university. But for a single adult, nope.
But the real issue is that France is on the verge of bankruptcy, and will be looking for money everywhere. The 15% tax on sheltered account is “new” for example (a few years). Many more to come in the next years. The current pension system was created 60 years ago by seizing the private pension fund. If I was still living in France, I would be very afraid that it will happen again
Yeesh. I didn’t know any of that.
That being said, as I often remind any Europeans that are annoyed at their country’s investment tax schemes, if you’re an EU citizen, you can relocate to any other EU country.
Just retire in Greece! Those guys NEVER pay their taxes!
Hahaha, I guess Greece would work. If I could find a job there…
But I moved to Canada (Vancouver) instead. Best decision ever 🙂 (and lower taxes are just the icing on the cake).
The only drawbacks are housing prices (but as a software engineer benefiting from the silicon valley’s influence, it’s very manageable) and being away from my family. One of my motivation for FI is to be able to stay in Vancouver most of the year, but go back for a month here and there. 9 years to go…
I would agree completely with this analysis. I fell into the trap of buying an expensive home ($325,000 US) back in 2008. Many unexpected expenses and the house always needs something repaired (and it is only 18 years old now – was 8 years old when I bought it). It has added years to my FIRE date, plus a lot of stress when I had that huge mortgage hanging over my head. I did get it paid off 18 months ago which was a big relief and as rents keep going up I have felt a bit better about the decision. Having no mortgage and no rent really allows me to save a lot now. But I could have retired 3 to 5 years ago if I hadn’t bought that house.
Wow interesting. $325,000 should have been easier to carry, and it still added that much time to your retirement date? Yeesh. Houses are the worst.
If they want to live overseas in the next 2 – 5 years, buying a house is going to introduce a whole lot of extra issues. Who’s going to live in / look after the house while you’re gone? Math aside, it doesn’t look like house buying is compatible with the goals of ‘remain fully flexible’ and ‘take the kids overseas’.
Once again another great post emphasizing the math and logic behind renting. Throwing all that money into a single home, single location can lead to a life feeling trapped because all your money is in the house. Half the time to fire – rent all the way.
You have been mentioned a couple of times this week on the bearded one’s blog.
Can you refresh our memories on how long after achieving FIRE, you stopped being GT’s client and choosing the DIY route to today.
Enjoy your weekend.
I recently discovered your blog and am ADDICTED. I’ve been binge reading to catch up. Thank you for sharing and providing your amazing insights!
I have the same question as SJF – how long did you use a financial advisor before going it on your own? Once I feel more comfortable with the approach and get a handle on my strategy to divest what I have and reinvest – I’m planning to rebuild my portfolio. Just trying to figure out if I get an advisor, how long I might need to continue to pay their commission before going fully independent.
Thanks!!
We transitioned to DIY this year.
Something you can do is have an advisor manage part of your portfolio, then run a portfolio on your own using a low-cost brokerage like Questrade on the side. Once you’re comfortable, you can take the training wheels off and go it alone. That’s what we did.
Hi FC,
This goes to show that it is better not to own a house if one intend to achieve FI and have the option of RE.
Nice post!
WTK
Another potential option is to take out a 90% mortgage (which I think is available in France at low interest rates). That would deplete their portfolio by €115k while allowing them to slowly build up equity in their house. If the mortgage, plus annual costs, is cheaper than the rent it may make sense
That would add a mortgage payment to their costs and increase their FI number.
One thing doesn’t seem right for me. 85k net income on 100k gross salary in France? This sounds too good to be true…
But your math seems to be right. One addition: even if they want to buy, I wouldn’t pay so much down payment. They would be able to lock a 10 years fixed mortgage below 2% interest. They should be able to beat it easily with investing most of the money instead.
I was also surprised by that, but exFrench provided us a breakdown of France’s tax system.
Thanks Wanderer for the breakdown, I totally agree with your assessment, owning house is going to delay the retirement date and lock you to single city, region and country. I know the users didn’t specify their city, However moving to a lower cost of living city in France can help them to reach the retirement target even earlier where the rent is much cheaper than 1300 € .
“Fairly impressive” on being able to save 610k Euros is an understatement to me. The couple probably started saving since their early 20s. Very frugal and disciplined.
Another thing that caught my attention is the fact that despite the education (mechanical engineer with MBA, plus a working wife too, which I suppose so or else why the expenditure on child care) is only able to help earn a combined 100k Euros annual income, which translates to an average of 4166 Euros per person per month, assuming they have been working for over a decade now. Assuming I am right on this, doesn’t that mean high academic qualification is somewhat sucks? How can they be earning just 100k after all these years?
Wage are quite lower in France compared to other countries for high earners.
With 100k before income tax, assuming 2 equal salaries (4150€/person/month), they make more that 93% of the population. If it was from 1 salary, that would place them in the 1%: https://www.inegalites.fr/Salaire-etes-vous-riche-ou-pauvre
But also keep in mind that 1€ = 1.5 CAD, and 100k€ = 150kCAD, and the employers pays 20-25% more than the advertised wage, so 100k€(employee) = 184kCAD paid by the employer.
For reference, my engineer friends, in their 25-30s make about 35k€/year.
Really? Yeesh. Good job moving to Canada then!
Empolyer pays roughly 50% over the gross salary of the employee
Sorry guys but the post does not make too much sense for me. French here, family and about the same raw income as presented
First 85% net…. No way…
3000€ m2 for a house? That might be out of the areas where you can get high salaries like the ones named.
Buying in France is better than renting, this is because you can get a full bank loan ( including works and buying taxes) at 1.5% annual interest rate with current inflation going about to 2% ….. This means free money, while putting as collateral insurances ( here you’ll have 3 for the bank to give you money) and ultimately the property. If you make the numbers right buying now is basically getting free money into the future. Bad advice given by the poster. Debt is not always bad, specially in the current financial situation in France, the guy could have the house and the money invested ( which can be used as guarantee too) while it makes you more money.
Savings of 630k€ …. That is a lot for France, so congrats, although I am doubting to believe any of the post and I wouldn’t follow the given advice….
But that’s just from a guy that is actually doing it and saving 20k€ a year plus 8% increase due to investments.
Thank you for reminding me that real estate is a sureshot money maker. 🙂
Hi everyone, exfrench is totally right.
MBAs and masters degrees are commodities in France. Almost anyone can get these degrees almost for free and expect if you are a specialized doctor, a lawyer or an investment banker, you net after tax income is much lower than what you can get in Germany, or in the US/Canada.
The whole social system costs so much to employers that when you cost them 100k€, the goverment keeps 50k€ for (healthcare, education, ponzi retirement system, debt interests payment, useless civil servants, expensive useless administration…).
Then on the 50k€ that you see on you paycheck, you still need to pay income tax, taxe d’habitation (for the local district/city), TV tax (~200€), trash and recycling tax (~300€)…it never ends and each government creates new taxes.
Kids and kid related expenditures (daycare, nani…) help reduce the income tax burden however and in exchange for these high taxes, healthcare and education are somehow affordable and accessible even when FI.
Going to Germany or Switzerland can be a great way for french people to double or even triple their net after tax income, while still benefiting from very similar “social” benefits and systems (almost free primary and higher education and healthcare).
These 2 countries even have the huge advantage of having budget surpluses and a trade surplus ! I also agree that unfortunatelly France is somehow doomed to banckrupcy soon or later alike Greece.
Just discovering this blog and adding my 2cts here. As a former canadian living in France for over 20yrs, it is better to buy in France as the mortgage rates are low (less than 1.5% lockedin for 20yrs currently). Property grows currently at 4 to 5% or more depending on areas so even if you don’t live in the same place, it is possible to sell with a profit.
Also in France when you buy a house it comes with an obligatory mortgage death/incapacity insurance covering your payments in event of death or incapacity. Not that we want that to happen, but in worst case scenario your house will be paid for.
It really isn’t a big deal right now. I purchased my Google account and favorable reviews when I first began taking web design courses at https://accfarm.com/buy-positive-reviews/buy-positive-google-reviews . This has greatly aided me in bringing in fresh faces for my group classes. For a minimal cost, this is a reputable business.