Hi! Eddie in EE

[edieseb]

Hi, everybody!
My first post here, although I’ve read many of your precious threads for the last year. Thank you for all the interesting info and hope you can take a couple minutes to analyze our case and maybe make some suggestions.
We are a couple, both 31. We live somewhere in Eastern Europe (where we’re from). We lived for 7 years (23 to 30) in the US and worked really hard to ER. Fueled by my desire to ER before we’re 30, we worked in those 7 years an average of 60 hours / week each, 52 weeks / year, no vacations, working every weekend (working in sales, so weekends were crucial). It’s not as bad as it sounds; we had a lot of fun too, but in truth it was a lot of time and work dedicated to making and saving money and our social life was limited to the people we were meeting through our job (both working in the same company).
Paying particular attention to our spending, we managed to save an average of 71% of our paychecks, considering that rent was taken care by our employer. Right before we were 30 and being homesick, we decided to return to our country, confident that we saved enough to ER. After a bit more than 1 year living in our country, although we didn’t look / get a job, we are not convinced that we are truly retired. I’ll give a couple of numbers and explain what I mean. I’ll convert the Euros in US dollars.

Our Net Worth: $ 632,480 of which
$ 96,480 our current apartment in a mid-size city
$ 215,000 in real estate investments (rentals)
$ 321,000 in CDs (about 140,000 of that recently converted into cash by selling a property, trying to explain why so much in cash)

Our expenses here are considerably lower than they used to be in the US (with a comparable lifestyle and adding vacations):
$3,000 Car (gas, service, insurance)
$1,540 Home Utilities
$3,200 Food
$500 Misc
$900 Charity
$4,100 Trips
These were the expenses for 1 year. The amount for the trips we took is a bit higher than we expect it to be in the next years (probably around $2,000), but that’s because we didn’t take a vacation in the last 7 years. The amount for the car expenses doesn’t include depreciation, which I calculated at about $2,400 per year. Right now, the car is paid for, same goes for our apartment and we have no debt. Property tax and home insurance are ridiculously low, like $100 / year.

Everything seems smooth: pretty high nest egg, low cost of life. The problem is that we feel we don’t do the best with our money. The money in CDs bring us 3.5% interest and the 2 rentals we have are at about 5% before taxes and other expenses, to give a “true income” of about 4%. We actually work ourselves on the properties we have to keep them in good shape, change whatever needs changing and so on. Therefore, it feels that the return of 4% is really low and that’s why we sold recently another property we had. Last year CDs were 4.5%, so we made more money there. Anyway, the return on our “investments” is about 4%. Taking into account the inflation of 1.4% for the last year in Europe, that leaves us with a “real” return of around 2.6% which barely covers our expenses (car depreciation included).
Our nest egg doesn’t seem to be eroding at least, but we feel that we don’t exploit it to the max. Taking a job is out of the question for the next 3 years as we are back in school and the work we do on our properties we consider it our PT job. And then there is the question: how ERed am I? We feel that we do something wrong and we need to attain financial maturity.
We considered putting some of our money into the US Stock Market, money that we wouldn’t need for a long time, but which would grow at a higher pace and give us a sense of security for the long term. We considered choosing a couple of dividend stocks (Dividend Aristocrats), buying them, having the dividends reinvested and forget those stocks there for the long term.

My questions for you:
Is it wrong to expect an annual growth for such stocks of 5% + average dividends of 2.5% (which are to be reinvested)?
Taking into account that we are really risk aversive (worked hard for the money so we don’t like to gamble), do you see a better vehicle (risk-wise) for our money to get a comparable return?
Any observations / advices to the big picture?

Observations: to anticipate some questions – we have no kids, maybe we’ll have one in the next two years; we are not planning to go back to the US soon (maybe in 10-15 years) because we have family members we need to take care of here; we would not invest in the local stock market as there is a lot of inside trading going on.

[HsiaoChu]

Most people who retire early are at least 50 which means they have to deal with the vagaries of maybe 30 years of living outside of work. These are usually people who have had careers for at least 25-30 years, had their children, and know what they want out of life since they have already had much of life.

You are in a different category altogether. You have to provide for 50 years of income that you aren't making. Children are not an expense that you can plan for(believe me I have two on of which is your age). So you can do the planning with the planner software, but you need to have enough money in cash, not in rentals and stuff that is not cash, to be able to weather at long period of income with only 2.5 % interest. And you need enough money to be able to take vacations, go to college for grad work and do whatever you want. You need a living place that is mortgage or rent free. And you need probably $1,300,000 in cash to be drawing your 2.5 % interest off of.

While I have no idea what your life is, I would from the standpoint of living for the past 61 years, recommend you having careers, rather than retiring before you have really experienced much of what working has to offer.

Kind regards,

Z

[FreqFlyer]

Hi and welcome!

Thanks for sharing your story, an interesting and different one than most. You are in school so does that mean you would like to return to some sort of paid employment in the future or is this purely for a love of learning?

Its seems you have chosen rental real estate as your primary income source so I'd want to know a bit more about it to judge how long you can last. For instance, what is the economy and real estate market like in your city/country? If you are in a booming (or fomerly booming and recovering) market perhaps the value of your rentals and the rents paid will be increasing nicely in the next few years.

Bank CD yields are terribly low right now but that will change, hopefully, in the next 24 months or so. Don't chase after yield and take more risk than you are comfortable with (stocks). At least that's my advice. If you did okay with CD rates at 4.5% then maybe in a little while you'll be back where you feel you need to be in term of income.

Hopefully I'm not steering you to be too conservative but I'm of the mindset of better safe than sorry. Don't make a drastic move just because fixed income yields are abnormally low right now... continue to LBYM and see how the world pulls out of this financial tail-spin..

[smjsl]

Quote:

Originally Posted by edieseb My questions for you: Is it wrong to expect an annual growth for such stocks of 5% + average dividends of 2.5% (which are to be reinvested)?

Your 5+2.5=7.5% return on stocks is about average in US stock market over last 100 years and more. Actually, average is more like 9% I think for DOW. I think many people in their planning assume that much return for stocks. However...
(a) markets go up and go down for decades at a time... so while average over 100 years looks good, you should be prepared that it may not be there for long durations
(b) just because this was the average over last 100-200 years, does not mean that's what it will be going forward IMO. In fact, most likely it won't - past seems often to be different from future
(c) placing money into few stocks increases your risk. As an example, what used to be considered as "good companies paying good dividends" a few years ago have lost over 80% since then...
(d) you are assuming a certain inflation level which may or may not materialize. Having grown up in Eastern Europe, I am sure you know a lot about inflation sometimes coming in and destroying your cash. I am guessing that's why you have so much in property there... but property values are also not guaranteed to always just go up as some countries have learned recently

Quote:

Taking into account that we are really risk aversive (worked hard for the money so we don’t like to gamble), do you see a better vehicle (risk-wise) for our money to get a comparable return?

Stock market in the past offered better returns than other kinds of investments... at least in US and perhaps everywhere else in the world. But it has also provided these returns at higher risk. Usually, higher returns are achieved with higher risk of losing a lot...

Overall, if you can turn your schooling into more income later on, you should be doing well. But to me it looks like you are somewhat low on your investments to retire now...

Good luck and keep us posted!

[edieseb]

Well, first of all thank you for your thoughtful replies.

To help those interested and/or curious in what we did and why we did it, to follow our process of thought, I’ll say that:
As you can imagine, retiring before 30 was something motivational when we were 23. This was our plan and 30 was a round number. We never wanted needed flashy cars, designer clothes or really big houses. We just wanted a quiet, simple life, of course taking advantage of what modernity now has to offer, some gadgets or house items which are not a luxury anymore, but necessities. We used to work in a company that had us relocate (travel) every 2-3 months. While not having ties in the US, this was a lot of fun, allowing us to see most States, but we also learned to live half the time in hotel rooms and not need the big houses with big yards that some people can’t live without. The 3 bedroom apartment of around 1000 sq ft that we, ourselves renovated seems more than we will ever need, even with a baby.
Anyway, this is to say that we didn’t plan to save anything like 2-3 million, first of all because it was unthinkable and unrealistic for us at that age, then because we didn’t want to be rich. Money were just numbers for us and we were interesting in adding those numbers as long as they would give us options as to what we want to do with our lives and not what we had to do (you have to go to work, you have to get the paycheck, because you have to pay the bills and so on). I don’t dislike work. My wife actually loves it. It’s just that we don’t like to depend on a job or on somebody.

Why real estate? Smjsl anticipated very well the inflation factor. This is what we are most afraid of. Two years with hyperinflation of 10-15% or 10 years with inflation of 3-4% means that 30-40% or our nest egg is lost without ever going back (like real estate, stocks etc). It is not the 30-40% in itself that we are scared off, but the 30-40% in lost income forever. So, to have the same spending power always, we planned to add to the nest egg the rate of inflation every year. This is especially important for our cash investments. Last year, with low inflation (1.4% in EU) and CDs at 4.5% would yield 3.1% to be spent. This year, CDs at 3.5% and hard to believe that inflation will be any lower, would cut our income to around 2%. If the inflation rises to 4%, I’m pretty sure that CDs will go to 6%, but that’s not any better in terms of income after inflation.
Real estate seemed to us a good vehicle to weather inflation. We don’t really care that the prices for real-estate go up or down 20-30-40%. I guess, long term, even if the properties do not appreciate in value, at least they should keep up with inflation. That should mean, in theory that the income from rent is real income (not having to set aside corresponding money for the inflation rate). So 4% after taxes and various expenses is almost double the return from cash investments. Then, statistically in Europe, rent on a 2-3 bedroom apartment is around 30% of an average household’s income. Even if prices go up or down on properties, rent seems to more into that area. Our reasoning was that owning 4 such apartments would assure an income similar to that of an average family. Plus, we don’t have a mortgage or rent to pay so this income would go further for us than for the average family.

This was a while back. Now, after renovating 2 apartments out of 4, after dealing almost on a daily basis with something breaking up (the apartments are usually rented furnished here) and needing time and money, the 4% return we are left with doesn’t seem that much anymore as this is like a PT job, but feels like a FT job.

So, now you see why we feel that there is something that maybe we don’t see. On one hand, the cash investments, pretty low risk and no energy spent except the few hours to check the best rates when renewing the CDs, give only 2% real return and I don’t expect to be any better in the future (considering inflation). Hope I’m wrong. On the other hand, real estate investments give a steady income, a decent return (in %), but with a lot of time and energy spent. Considering this, the US stock market seemed interesting for investing. Doing my homework with the numbers I found for the inflation and returns of the stocks, I have from 1975 to 2009 (this is all the numbers I could find): 1.0842 (or 8.42%) annual return for DOW, 1.0829 for S&P 500 and 1.1095 for Nasdaq. Inflation for the same period was 1.043, so that would take the real returns to 1.0412 for DOW, 1.0399 for S&P and 1.0665 for Nasdaq, not taking into account fees and dividends. Comparing the 4.12% from DOW to the work I have to do for 4% in rentals is tempting. It’s tempting but we’re not convinced.

We feel that we are very good at making money and saving money, but we are not very good at managing money. We feel that it’s very difficult to have money and not be able to do the most with them. That’s why we decided to finally write on this forum. Maybe you’ll be able to see where we do things wrong (if anything) or what our approach should be, or get reassured that we are doing ok.

[edieseb]

Why back in school?

After 7 years living in the US we fell in love in America and with the Americans. We had to move back to our country because we were needed by our families (health and stuff). Even if it’s not going to be soon, we want to go back to the States when we’ll be able to do that (10-15 years we believe). Of course our nest egg of $632k doesn’t go as far as it goes in our country. The lifestyle we have with annual spending of 13k here would cost us at least 30k in the US (with no mortgage or rent to pay). So we either need to make our money grow in the next 10 years (difficult to do as you can see from the previous post), get jobs when we are in the US or both.

But what to do in the meantime? Apart from managing our nest egg we took one of Suze Orman’s (which I know is not very highly regarded on this board, but she was available on national television when we started thinking about saving/investing, so very convenient to get tips from) advices. About 5 years ago she said something very interesting. The best investment one could make is in his/her education. You never know what future may bring you. You could lose everything, but nobody can take away your education, so in case of a needed fresh start education can give you the upper hand. Although we are not pessimistic, we feel the need for security. We like to have control (as much as one can have) over our lives.

Wages in our country are around $1,000-$1,200 / mo, of which only half are take-home money, the rest being income tax, health system tax, social services tax and so on. Because this is low, especially comparing to the money we used to make in the US, the only incentive for us to work here is doing something that we really like, something that we would enjoy. Do it more as a hobby. Because of this we are studying for a degree which would allow us such a job: my wife is studying interior design, I’m studying to become a teacher (I always liked the idea). We are both actually studying to get 2 degrees. Apart from the ones that we like, we chose to get a degree in something that could help us making more money if/when we needed and something related to our jobs in the US: Business Administration. School fees were paid in full for two degrees (18000), for the other two we have money set apart (around the same amount), so this wouldn’t come out of our nest egg.

With studying for two degrees at the same time (in part for “love of learning” as FreqFlyer calls it, in part seen as an investment in ourselves), with working on our rentals and with taking care of our families, there is not much time left for something else.