New research released Thursday by real estate website Trulia shows homes in the San Jose, Oakland and San Francisco metro areas have more than doubled

How many million do you need in order to quit your job, if you live in a small town and don’t care for huge luxuries?

Coming from an engineering + fund management background, I see a lot of generic answers in this thread, so I can’t help to chip in. I am not going to regurgitate the obvious because if I am the one who asked this, no offence but I’d go – “Tell me something I don’t know or get the f*ck out of here”

For consistency, I’d say, quit your job = retire.

First of all, if you have graduated beyond being a beginner in retirement planning, you should know that the size of your nest egg or net worth (aka ‘how many millions) is of the least importance compared to hard-cold cash flows.

The 4% rule is touted as the ‘fail-safe’ rule of thumb for retirement withdrawal, but in a volatile economy/market today, nothing is absolutely safe. Black swan events can hit you anytime (proof: Trump and Brexit in 2016). Even bonds are not safe – you can have bond price fluctuate like stocks. Only applying the 4% rule without any other consideration is just a lazy man’s way of doing proper retirement planning/management.

Now, forget about a fixed or complicated equation. It is all about cash flow.The idea is to have your assets/nest egg throwing off perpetual cash flows sufficient to cover your retirement expenses, without touching the principal itself. And this cash flows should grow y.o.y., beating inflation rate in your country of domicile. Note that this broad term of inflation could be lower or higher than the nominal inflation rate reported in your country of domicile. Why?

  • It could be lower because not every expenses will inflate. For example if you quit your job/retire, and you still have mortgage to service, then the repayment is an expense you need to factor in, but it does not inflate over the years. Your average inflation rate then, will be a weighted factor of the expenses that do inflate, divided by total expenses
  • It could be higher due to your lifestyle, aka – personal inflation rate. I am referring to lifestyle expenses like fine dining, golfing, etc which are normally not necessity but luxuries

If you want to be conservative, you add in a few bps, like someone said, to get a certain margin of safety.

How to structure a retirement fund throwing off perpetual cash flow with high certainty of growth

Nonetheless, I recommend do a quick & practical financial modelling on your retirement funding (whether you currently in a shortfall/surplus position) using this Retirement Calculator.

Anyway, I agree with David Dean when he mentioned rental income generated from real estate properties. But depending on which state/country you are staying, you may or may not be able to execute this strategy. Say you are staying in Spokane, Washington, where land is aplenty and it does not make sense to rent (it makes more sense to build your own residence) – you can’t execute this strategy.

Or if you are in the Bay area or Manhattan, you might not be able to even afford to acquire the real estate in the first place. Or maybe you can afford, but the rental could not cover your mortgage repayments. And in case you are thinking you want to buy in cash, that’s a folly move when it comes to real estate investment.

Or perhaps you found one with great rental yield, say in, Miami but you live across the country – CA, it again does not make sense.

The fact very few people know when it comes to cash-flow retirement planning is that there is an asset class called Real Estate Investment Trusts (REITs). It is listed on stocks exchange and hence trades like your normal stocks, but the underlying assets of any REITs are yield-accretive commercial real estate.

That means there are absolute certainty in growing annual/semi-annual/quarterly dividends/distributions which comes from its rental income. It saves you a lot of trouble of managing a brick & mortar real estate property. Another plus point is that it is liquid just like stocks.

The only thing is that you can’t use leverage (except if you use a margin brokerage account), but it isn’t necessarily a bad thing because you don’t want to take a huge mortgage when you are about to quit your job/retire. If you’ve quit and don’t have evidence of steady income, then you are not likely to get approved for mortgages anyway.

Go to investopedia and search for REIT. This is one asset class which has remained relatively resilient vs others for the past 15 years – it has weathered the Dot Com crash in the early 2000, the 2008 financial crisis, the US Black Monday in 2011 & the China Stock Market crash in 2015.

I’ve seen some so-called sophisticated investors (men especially!) who balk at REIT because it is deemed boring asset class for old man.

But I beg to differ and I can tell you simplicity is the ultimate sophistication. Investing is not about having the highest IQ or excitement or ego. It is about what works, without much complication, ideally.

A lot of people are finance whiz but they score zero when it comes to behavioural finance.

Let me explain how this relate to REIT

Investors who think they can beat the market (read: better than anyone else/overconfident) frequently make Type 2 cognitive error.

What is Type 2 cognitive error, you ask?

Assume you live beside the river and one fine morning, you notice a rustle in the grass. If you believe it is just the wind, and it turns out it’s an alligator, you’re lunch.

On the contrary, if you believe it’s an alligator lurking around, and it turns out it’s just the wind, you’ve just made a Type 1 cognitive error – a false positive. There’s no harm, you just move away.

A REIT investor is usually a Type 1 person, where she believes the market is more volatile than it actually is. That’s the reason she usually heavily invests in REIT compared to speculating in Emerging markets, high yield bonds, etc. This approach actually works in her favor in long term. Why? Because Mr Market can always deceive you and turn the other way, like how Trump becomes PoTUS. And if you are betting on a high-risk sector, you could profit big, but it is also just a matter of time before your bets are wrong. Remember this a 50% loss requires a 100% gain in order to break-even.

Look no further than the book – The Greatest Trade Ever. It details the story how John Paulson made the largest killing in Wall Street History betting on subprime crisis in 2008. It is also a story of 1 time hero. Fast forward 2008, go a Google search and you’ll see how poorly his hedge fund performed since then.

For REITs, however, you may not make huge profit compared to when a hedge fund which bet correctly on the rise of gold price. You will probably make a reasonable gain, regardless, the regular dividends will still come in.

The real test comes in a worst case scenario – a REIT investor, is unlikely to lose as much money in say, an economic downturn. The fact is you don’t need to bet on the direction of the market. After all, what are you trying to prove if you are not a hedge fund manager?

Now that you know about REIT, it’s time to take care of the other 3 major destroyers of wealth – namely fees, taxes and medical bills.

Medical bills – no brainer, get covered when you are still healthy, and before quitting your job/retire.

Taxes, well consult your tax accountants….and…

With regard to note that REIT is disadvantaged in terms of tax vs real estate properties because you don’t benefit from depreciation, since REITs are in the form of stocks which holds real estate assets, you don’t own the real estate properties directly.

Fees, well, who else go to banks for proper financial advice nowadays? All they are interested in are selling you products. Just google Wells Fargo John Stumpf saga with Congress in Sept ‘16.

If you really looking for advice, seek for a fiduciary, aka independent financial advisor, who advocates for you, not bound by any sales quota. Don’t just look any financial advisor/planner because a fiduary is legally obligated to act in your best interest, NOT only obligated to give you “suitable” advice.

It seems like a silly question, but here’s a quick example to demonstrate. When you walk into a butcher shop, you are always encouraged to buy meat. Ask a butcher what’s for dinner, and the answer is always “Meat!” But a dietitian, on the other hand, will advise you to eat what’s best for your health. She has no interest in selling you meat if fish is better for you. Brokers are butchers, while fiduciaries are dietitians.

A fiduciary is legally required to put YOUR needs above their own – so they give you “conflict-free” advice. As Registered Investment Advisors (RIA), fiduciaries have a very special license – with that license comes responsibility. If you tell them to do something and it is not in your best interest, they MUST tell you – even if it would have made them more money. They look out for you and they will give you transparent advice and investment solutions to protect you from marketing “noise.”

Gupta Wealth Mgmt comes to mind if you are in US, seems like Anthony Robbins is one of their publicly known clients. The minimum amount that one can invest with GWM is $1 million, for a maximum fee of 1%.

Note: I am not affiliated with the firm or Tony Robbins.

After retirement/quitting job – need: Financial Modelling

The normal retirement calculator you find online just don’t cut it (I have not encounter any, or any financial planner, for that matter) if you need a robust system to do various financial modelling scenarios, for example:

  1. What if my asset base increased significantly in a given year due to a very bull market? I don’t want to be restricted to following the 4% rule; I want to splurge a bit – perhaps getting a few Patek Philippe for X’mas…..but at the same time I want to ensure this 1 time spending does not affect the sustainability of my retirement fund 10-20-30 years from now…
  2. My post-retirement/quitting-a-job spending will not increase indefinitely….sure I may have mortgages to service or that extra globe trotting expenses in the early years, but in the latter years, this will vanish. How to model these limited-duration expenses?
  3. You cannot assume you’ll spend to 0 at your life expectancy, you may want to model scenario whereby you want to leave a certain amount of legacy at your end of life – how to model that?
  4. I have incidental incomes here and there – online business, one off coaching fees, speaking fees, etc – this cannot be inputted into retirement calculator, but I can incorporate this in my financial modelling
  5. Similarly, contingency expenses may crop up – financial assistance to family members, your children’s marriage, home downpayment etc. ad hoc, 1 time financial needs….I want to consider this how much I can extend the financial assistance w/o jeopardizing my financial security
  6. Downsizing to a smaller home like David said, worst case scenario….anyone can do a reverse mortgage depending whether such option is available in your country…Another popular consideration is to spend a portion of your retirement years in lower cost countries like Panama, Costa Rica, Nicaragua, Malaysia etc

Hope that helps, and I really like Henk’s comments on “Zero millions. Your true worth is in your skills, competencies and attitude.

Update 11 Dec 2016: Looks like you guys found value in my answer, so I figure to add in more examples.

Anyway to illustrate Henk’s point succinctly, I know a friend, an ex software consultant who retired comfortably and then shit hits the fan.

He got himself involved with a mistress from China, and he got ‘carried away’, so to speak. That’s one example how your ‘post-retirement’ expenses skyrocket.

The worst was not over yet, as his wife then decided to divorce him. And he got his net worth cut into half, which was not much by now because he really splurged on his affair (long story short, he also got ‘cheated’, financially by the mistress). Broke, over 60…that’s the worse that could happen to you post retirement age right?

Nope. He was brilliant guy, I’ll give him that. Getting involved with the mistress was the biggest mistake of his life, he admitted. But’s he’s a fighter and quickly got back on his feet. He used whatever financial resources left to start up a B2B SaaS (Software as a Service) and hustled. For those not familar, SaaS refers to subscription-based web app where users pay a monthly fee, say, 30 bucks or something. The beauty of this business model, esp in the B2B space, is the recurring nature of the revenue, and predictability if you have a rockstar product which the market needs, and control the attrition rate. Took him around a year to identify a pain in a niche market, conceptualize the ideas, develop the MVP and launch it. The amazing thing is he got his prospects to fund the development. Now, he’s doing more than just fine, I think he kind of ‘recovered’ from his financial mishap (and wiser too not to think with the ‘head’ between his legs) and leading quite a comfortable life now.

On the contrary, I’ve seen retirees with millions in the bank and not reinvesting that amount, generating less than 1% every year. They seem to be gripped by the fear of running out of money too soon before running out of life. It’s a psychological thing called poverty consciousness, where you are not actually poor but because you see that your nest egg dwindles y.o.y, you become paranoia to spend. This is extremely true for people who retired relatively early (40’s) – even when you are invested in index funds, a recession hitting your portfolio will make you have sleepless nights.

Why I am telling you this? Besides using a real life examples to illustrate Henk’s point, it also proves consistent & predictable Cash Flow is more critical than Millions of Net worth in the bank when you have more than 20 years to go after quitting your job.

And lastly, for anyone reading this, here’s an infographics which I found from a personal finance website. This is very useful no matter what age you think to retire/quit your job.