Author Topic: Case Study - FIRE in emerging market  (Read 1463 times)

Saretire

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Case Study - FIRE in emerging market
« on: January 23, 2018, 04:57:19 AM »
Hi All,
First time poster, but long time lurker and reader!

I'd be keen to get the communities view on expenses as well as FIRE readiness?

Age: 37 (spouse 36) no kids.

I've converted all figures to US$ at the current exchange rate in our country.

Gross Income: $98k per annum + $82.5k bonus. Spouse $11k, total $191.5k
Tax: $51.8k
Net Income post tax: $128k for me, $10k for Spouse, total $138k

Retirement funding deduction: $26.5k for retirement funding (401k equivalent in our country).
Net of deductions: $111.5k

Dividends earned (net of 20% dividend tax in our country): $10.5k
Interest earned: $5.3k

Income + investment income: $127.3k
Total savings: (incl. retirement funding, dividends, interest): $153.8k

Expenses - annual
ATM withdrawals: $573
Clothing: $166
Eating out: $1770
Entertainment: $48
Gifts: $1352
Groceries: $9157
Holidays: $1960
House & Garden: $412
Hobbies: $576
Cleaner: $1496
Gym and fitness: $1809
Pets: $1050
Fuel and car costs: $2189
Bank fees: $431
Cellular :$233
Health insurance: $5074
Utilities and HOA: $4620
Life insurance, car and home insurance: $4334
Internet: $717
Total: $37.9k

Net income after tax (salaries plus bonus only, as above): $138k
Savings rate (Net income after tax vs expenses) : approx. 72%
 
Assets
Equities: $716k mostly index trackers (global and local exposure)
Retirement fund: $116k accessible at age 60
Property: $45k investment property and $150k home
Cash/CDs and loans made: $81k
Total assets: $1.1m incl. home, $958k liquid assets

Liabilities
None - only minor credit card debt that is settled every month.

We have got a $93k line of credit that we can use for emergencies from our home that is paid off.

So it looks to me we'd be in the 4% rule for the liquid assets in order to FIRE.

Of concern is that we pay 20% dividend tax and capital gains taxes on selling equity, but its offset that we are able to earn a decent amount of interest and income from REITs before we'd pay any tax. Also, the plan is to have 2 years worth of liquid cash like investments before pulling the trigger, currently a bit below this because of cash instruments placed in 4-year CDs, but we'd get there in 6 months or so carrying on as we have been.

Would appreciate any thoughts or advice looking at the expenses above, as well as thoughts on FIRE?

Also, been thinking whether to stop contributions to the retirement funds, pay extra $10k in tax, but get out $16.5k in cash (as opposed to the $26.5k contribution at the moment), since I think we're good enough on the equities and long term investments side?


Thanks






« Last Edit: January 29, 2018, 06:19:12 AM by Saretire »

Saretire

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Re: Case Study - FIRE in emerging market
« Reply #1 on: January 29, 2018, 01:22:40 AM »
polite /bump
Would love some thoughts particularly expenses.
In our country we also have no state pension or state healthcare benefits so everything would be self-funded. Although healthcare is still relatively affordable relative to the US, but is creeping up.

Linda_Norway

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Re: Case Study - FIRE in emerging market
« Reply #2 on: January 29, 2018, 05:10:11 AM »

Expenses - annual
ATM withdrawals: $573
Clothing: $166
Eating out: $1770
Entertainment: $48
Gifts: $1352
Groceries: $9157
Holidays: $1960
House & Garden: $412
Hobbies: $576
Cleaner: $1496
Gym and fitness: $1809
Pets: $1050
Fuel and car costs: $2189
Bank fees: $431
Cellular :$233
Health insurance: $5074
Utilities and HOA: $4620
Life insurance, car and home insurance: $4334
Internet: $717
Total: $37.9k

Total savings: (incl. retirement funding, dividends, interest): $153.8k
Savings rate (incl. retirement funding, dividends, interest) : approx. 76%
 

Your savings rate is impressive, so you are doing many things right. It would be interesting to know in what country you are living.

Now for  my impression of your expenses:

Groceries: $9157 - > That is almost twice as much as what I spend on 1 adults and I live in one of the most expensive countries in the world.
Eating out: $1770 -> This is quite a lot. It is easy to reduce it by better planning, bringing your own lunch to work and going out less often. Or try to eat at home before going out.
Bank fees: $431 -> What are these fees for? Does you country not have cheaper banks that don't calculate fees? Switch banks if that helps. Many people don't do that because they feel married to their bank. You are not. My fee-free internet-only bank is working very well.
Gifts: $1352 -> This is a bit high. Are your GF and you still giving each other expensive presents to show your love to each other? Make sure you don't buy unnecessary gifts to someone who has everything already. And think about used alternatives.
Gym and fitness: $1809 -> You could start running or cycling outside for your condition. And perhaps get a fitness mat and some weights to to more strength training at home. You could also look around for sports clubs. Maybe there is a club that offers trainings with their own trainer, included in the club fees. That can be a much cheaper alternative.

jeroly

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Re: Case Study - FIRE in emerging market
« Reply #3 on: January 29, 2018, 05:37:08 AM »
Congratulations on saving as much as you do!
I've traveled in Norway and know how expensive things are there, so your spending level is truly remarkably low. 
I remember finding the cheapest meal I could find, a pizza (that cost maybe $10 total here in the US), and having two people each pay $30... granted that was with one beer each, but still... just crazy prices (supermarket prices were similarly crazy).  That was 10 years ago so I imagine it's even crazier now.

A few observations:

1.  Generally when calculating savings rate (at least to compare to those shown in the charts here) one should consider just current income and expenses, not dividends and interest.  If you don't you could get to a situation where you're actually spending more than your income (negative savings rate) but due to your current investment returns it looks like you're saving a lot.

2.  If you plan to have kids you need to allocate resources for their upbringing.

3.  You don't really have much of a cushion, and once you FIRE you're probably going to start traveling considerably more... maybe an extra $15K/yr?  When you add in taxes at 20% that brings you to a needed income level of around $65K/yr or about $1.6MM total assuming a 4% SWR, which given the likelihood that you get some well-funded state 'social security' benefit down the road seems like a pretty safe level.  On the bright side, you're saving $90K/yr or so, and combined with a 5% ROR on your investments, you should be there in about 4 years, assuming no kids or reallocating current spending to take those expenses into account.  If you wound up maintaining current spending levels in retirement, you'd still need about $1.2MM so figure 2 more years.

Saretire

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Re: Case Study - FIRE in emerging market
« Reply #4 on: January 29, 2018, 06:43:31 AM »

Your savings rate is impressive, so you are doing many things right. It would be interesting to know in what country you are living.

Now for  my impression of your expenses:

Groceries: $9157 - > That is almost twice as much as what I spend on 1 adults and I live in one of the most expensive countries in the world.
Agreed - I think we're buying at retailers that charge a lot for high quality meat and are packaged in a way that is aesthetically pleasing - rather than shopping at a bulk warehouse-type of store. I'm not sure if I trust our Costco/Walmart equivalent for meat because they got caught out previously for injecting saline solution into chickens to bulk them up. I think the issue is more psychological than anything. We eat almost no convenience food and the majority of meals are at home, so I think the high cost relates primarily to meat, and things like berries/cherries.

Ultimately, I must just go and do a proper audit and see where the $'s go and then make suitable adjustments. It feels like it should be less, because it works out to $760 per month for us 2, or $380 per adult per month. Thats $12.50 per day, or roughly $4 for every meal. I know our daily breakfast and the lunches we bring to work is less than that, so will need to see where the cost comes from...

Eating out: $1770 -> This is quite a lot. It is easy to reduce it by better planning, bringing your own lunch to work and going out less often. Or try to eat at home before going out.
Always bring own lunch to work. We eat out 1-2 times per month, so not often, and the monthly average isn't too high. It shoots up quite a bit for those times when we sponsor the dinner/lunch for all the family for our birthdays (12 people). We've started making it that each couple pays for themselves rather, to reduce the impact.

Bank fees: $431 -> What are these fees for? Does you country not have cheaper banks that don't calculate fees? Switch banks if that helps. Many people don't do that because they feel married to their bank. You are not. My fee-free internet-only bank is working very well.
Little loyalty, but in our country banks charge monthly account fees. The build up for the $431 per annum is: $36 per month as follows: we have fees on each bank account for my spouse and I ($5 per month each), share accounts ($6 per month each), mortgage account ($5 per month), retirement account ($4 each per month), credit card fee account ($10 per month - offset by high cash back percentage, so it's a better deal than the free credit card accounts available).
I'm looking at the cheapest available share accounts that charge a lower fee of $2 per month. Can't do anything on the mortgage account due to the credit line and the huge cost when obtaining a new mortgage provider in our country - approx. $2k application and legal fees. 
At least I have significant offshore investments in US brokerage accounts that charge me nothing, so there is some small consolation.

 
Gifts: $1352 -> This is a bit high. Are your GF and you still giving each other expensive presents to show your love to each other? Make sure you don't buy unnecessary gifts to someone who has everything already. And think about used alternatives.
We've been married many years, we personally don't want gifts for each other as we already have enough stuff and clutter. It's much more for our parents, family members and kids and close friends, generally spend around $30 a gift for birthday, mothers day and Christmas, so it adds up - I'll look into used alternatives. Also, need to break the bad habit of purchasing based on the $30 gift guideline we have in our head as opposed to what's a useful gift to give. We've also started just giving the gift as a cash-gift as opposed to an object, because then the person can decide for themselves what would be useful rather than clutter.

Gym and fitness: $1809 -> You could start running or cycling outside for your condition. And perhaps get a fitness mat and some weights to to more strength training at home. You could also look around for sports clubs. Maybe there is a club that offers trainings with their own trainer, included in the club fees. That can be a much cheaper alternative.
Agreed. I'm paying an instructor money for exercises that I could easily do myself.

Thanks for your responses!
« Last Edit: January 29, 2018, 07:08:10 AM by Saretire »

Saretire

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Re: Case Study - FIRE in emerging market
« Reply #5 on: January 29, 2018, 07:02:01 AM »
Congratulations on saving as much as you do!
I've traveled in Norway and know how expensive things are there, so your spending level is truly remarkably low. 
I remember finding the cheapest meal I could find, a pizza (that cost maybe $10 total here in the US), and having two people each pay $30... granted that was with one beer each, but still... just crazy prices (supermarket prices were similarly crazy).  That was 10 years ago so I imagine it's even crazier now.

A few observations:

1.  Generally when calculating savings rate (at least to compare to those shown in the charts here) one should consider just current income and expenses, not dividends and interest.  If you don't you could get to a situation where you're actually spending more than your income (negative savings rate) but due to your current investment returns it looks like you're saving a lot.
Thanks, I've made the edit to only use our after tax income as the income portion and excluded dividends and interest - we're at 72.5% under that scenario

2.  If you plan to have kids you need to allocate resources for their upbringing.
Yes - big factor to consider particularly as schooling and university are getting more expensive as the state no longer provides good quality schooling and private seems to be more likely. The cost here could be up to $4k per annum in additional expenses, so would need at least an extra $100k investments if that were to ever happen.


3.  You don't really have much of a cushion, and once you FIRE you're probably going to start traveling considerably more... maybe an extra $15K/yr?  When you add in taxes at 20% that brings you to a needed income level of around $65K/yr or about $1.6MM total assuming a 4% SWR, which given the likelihood that you get some well-funded state 'social security' benefit down the road seems like a pretty safe level.  On the bright side, you're saving $90K/yr or so, and combined with a 5% ROR on your investments, you should be there in about 4 years, assuming no kids or reallocating current spending to take those expenses into account.  If you wound up maintaining current spending levels in retirement, you'd still need about $1.2MM so figure 2 more years.
yeah, no social security for me in this country, so all investments will need to cover it. I think social security is a rich-world thing, emerging markets don't offer that kind of luxury. I have considered switching countries and using my EU citizenship, but it would be leaving family and friends, so I'd rather just amass more investments to cover it and self-fund.

I've been thinking on the expenses side also that I probably will cut the $4k of life insurance, home insurance and vehicle insurance close to zero when we FIRE. No real dependents, and although our vehicles are still worth something, eventually I'll just take the risk and self-insure.

Also since we spend $2k/year on holidays already, which at this stage has been enough for two 3-week trips annually, I reckon that $15k/year would be above our spending threshold? Even when we did two overseas trips to Europe in a year, we were closer to $5k than $10k, so $15k scares me a little lol. I think we'll target current spending for FIRE, and then I'll do some part-time consulting when the mood takes me.. I reckon that will give me a good buffer for the increased travel. 

Agreed on the $1.2MM because of the 20% taxes. I've been in discussions with some tax advisors whereby if I structure payments cleverly I can reduce this, because of the fact that my income tax rate would be slightly lower thereby improving my capital gains tax rate, as well as the lower rate on rental and interest income versus dividend income. Plus I have my spouse to help out so we can spread the thresholds.

Thanks for the advice!

jeroly

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Re: Case Study - FIRE in emerging market
« Reply #6 on: January 29, 2018, 11:11:49 AM »
Oops, sorry... I somehow got user names mixed up and thought that you were living in Norway!

Saretire

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Re: Case Study - FIRE in emerging market
« Reply #7 on: January 30, 2018, 07:48:24 AM »
Oops, sorry... I somehow got user names mixed up and thought that you were living in Norway!

No worries - I sometimes think it would be great to live in a developed market where you get state support. I read a lot of the comments on these forums and am amazed at the level of social welfare in the US, nevermind Europe, and am amazed that people feel that their is little support.

Here we pay everything twice because you pay taxes for very little return and then you pay your own way for schooling, medical and retirement and a few other sectors. At least we know we need to provide for these ourselves, as opposed to assuming/hoping the state will do so and the resulting anxiety/anger if they don't or cut benefits.

So although no social support, we have other benefits that offset these like housing that costs a fraction of the price so it balances out somewhat in the end.


jeroly

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Re: Case Study - FIRE in emerging market
« Reply #8 on: January 30, 2018, 11:16:29 AM »
Another thing to consider in your planning is the likelihood that as your country's economy grows, you'll experience faster price inflation than in the developed markets.  So perhaps use a 3.5% inflation assumption and maybe a 3% SWR? Bringing your number up to 1.55MM...

Saretire

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Re: Case Study - FIRE in emerging market
« Reply #9 on: January 31, 2018, 04:16:14 AM »
Another thing to consider in your planning is the likelihood that as your country's economy grows, you'll experience faster price inflation than in the developed markets.  So perhaps use a 3.5% inflation assumption and maybe a 3% SWR? Bringing your number up to 1.55MM...

Interesting, our inflation rate runs closer to 6%-8% per annum, although our currency then similarly devalues by the inflation differential against the US dollar over the long term to compensate.

The common thinking is to therefore utilise investments that are globally linked in order to compensate (with a degree of currency volatility being required of course), and thereby you keep your USD base in line. THere are challenges, but effectively you then get compensated for any larger amount of inflation over the long term. The nuance is that in a single year you might have a bit more or a bit less capital relative to your expenses as a portion of your investments are in USD but your expenses are in local currency.

Doing the alternate of having all investments in local currency is not suitable, since your local stock exchange may not compensate you adequately for currency or inflation spikes, so diversification is key.


Saretire

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Re: Case Study - FIRE in emerging market
« Reply #10 on: January 31, 2018, 04:17:34 AM »
Your savings rate is impressive, so you are doing many things right. It would be interesting to know in what country you are living.

Missed this. We're based in South Africa.

jeroly

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Re: Case Study - FIRE in emerging market
« Reply #11 on: January 31, 2018, 04:47:46 AM »
Another thing to consider in your planning is the likelihood that as your country's economy grows, you'll experience faster price inflation than in the developed markets.  So perhaps use a 3.5% inflation assumption and maybe a 3% SWR? Bringing your number up to 1.55MM...

Interesting, our inflation rate runs closer to 6%-8% per annum, although our currency then similarly devalues by the inflation differential against the US dollar over the long term to compensate.

The common thinking is to therefore utilise investments that are globally linked in order to compensate (with a degree of currency volatility being required of course), and thereby you keep your USD base in line. THere are challenges, but effectively you then get compensated for any larger amount of inflation over the long term. The nuance is that in a single year you might have a bit more or a bit less capital relative to your expenses as a portion of your investments are in USD but your expenses are in local currency.

Doing the alternate of having all investments in local currency is not suitable, since your local stock exchange may not compensate you adequately for currency or inflation spikes, so diversification is key.

My point was more about the exchange rate adjusted costs.  Inflation may be 6% but perhaps over time the currency will only deflate by about 4.5% as the economy strengthens.

However, you are not exactly in an emerging market - SA has a fairly developed economy, albeit at a level where there's lots of room for improvement (high unemployment etc.).  So I don't know if that kind of adjustment is as appropriate as for, say, India where prices are way below levels seen in developed nations.