Case Study - International newbie wants to start FIRE prep [Europe - Portugal]

[LuisM]

Hello all,

While a bit different from the norm I've been reading here, I would like to expose some points in my near short term life to get to know some ideas for a FIRE preparation.

Life Situation: 23 year old, Master student with job offering for start in September 2017, living with my 6 year girlfriend of 23 years (for 3 years now), who is currently employed. Currently we are living with relatives and are estimating moving out on our own in April-June 2018 (time where my work will became "permanent" contract). My idea is to prepare a defined plan in order to FIRE in 32 year max (near 55 years old). All values are regarding the September onward framework. All stock values (debt and wealth) are expected values at September 2018. Expenses will be shown for the two periods, when we are still at our relatives and when we move out. Currently I have a personal 5 person new car, which my parents payed for, and will continue to pay extra expenses ( insurance and taxes) until I move out. Our jobs will be in the same way, meaning that we can commute jointly, and probably will do that, meaning something like 40km per day driven.

Country Specific information: Portugal is a small country in Europe, part of the European Union, with the EUR currency. Average wage in the country is 850€ x 14 months (11 900€), real estate is relatively cheap (300-400€ rent for a 2-3 bedroom and 90k -150k selling price), average income tax is near 40% for the median wages, but there is also 11% compulsory SS discount (for public pension, accessible at 65 years old on our case), regarding capital gains, these are taxed at 27.5% as is interest. On the other hand, healthcare is cheap and public (5€ public doctor appointment). Fuel costs are rather high at 1,5€/liter of gasoline (means ~70€ for gas tank for 700km)

Gross Salary; 26 300€/year

Tax Income (after deductions, etc): ~7 500€

Liquid Income: 18 800€/year ;1340€ x 14 months (in Portugal there are 2 extra paychecks in July and December)

Total Assets: 5 000€

Total Liabilities: 0€

Expected monthly Expenses September 2017 - Moving out date (Phase A):
Telecommunications = 2*10€ = 20€ (not reduceable)
Gasoline = 100€ (very dificult to reduce)
Gym = 90€ (reduceable to 60€ - but not very willingly)
Clothing = 20€
Cosmetics = 10€
Health (medications, etc) = 20€ (not reduceable)
Grocery: 200€
Entertainment: 100€
Misc - 40€
TOTAL= 600€

Expected monthly Expenses after Moving out date (Phase B):
Telecom = 50€ (not reduceable)
Energy = 50€
Water = 30€
Gasoline = 100€
Gym = 60€
Clothing = 20€
Cosmetics = 10€
Health (medications, etc) = 20€ (not reduceable)
Grocery: 350€
Entertainment: 100€
Misc 50€
Total Fixed=840€

Total with rent: 1240€
Total with mortgage:1100€

Specific Questions:
1) The first is regarding housing, from conversations with my girlfriend, the optimum would be a 2 bedroom apartment, which means a rent of 300-400€ or a price of 90-120k €. As such, and given that the probable duration of my job will be 2-4 years, after which there is some possibility of changing to another part of the country, I am highly devided if we should buy a modest house/flat or rent. From one side, rent keeps us more mobile in case I change jobs, on the other hand the 7200€-14400€ spent in rents give me some doubts about this being the best choice.
Currently and for the near future, it seems that the house market will start to increase prices and there is a high demand for rentals, which is why I was think of buying and afterwards renting the house (I have family in the area that can help in day to day management of that rental if needed).
In case of purchase, I was thinking of buying house property of a bank (because of the Great Recession, most banks have many houses for sale), since for this, banks tipically loan between 80-100% of the house value for 30-40 years for rates between 1,5%-4%.

2) Second is related to investment, when we move, I'm thinking that we will probably have almost 10 000€ in assets (from savings in phase A), but from my perspective, it seems difficult to invest in ETFs or tracker funds, that cover the S&P 500 from Portugal, and the European Stock market doesn't have so much return (portuguese one is a no-no). I was thinking of maybe putting in the short term 40% in a tracker of the US stocks (even if there are some higher comissions), 40% in bonds (between 2-5% return) and the last 20% leave them in a savings account (0% interest), for some necessity.

3) The last question is a bit related to house location and commutte in Phase B. Not existing public transportation that serves both jobs, and since it will be difficult to share our vehicle, we have to solutions: a) choose an affordable house, as talked in 1), and buy another car, used; b) choose a house closer to one of our jobs, but pay higher than 400€ for rent or a more expensive house (nearer the top valuation of 120-150k€ with interest of 4-5%). What would be more prudent?

This points to a final situation where Phase B onwards, savings potential won't be very high (by cutting some expenses, maybe 20% of our monthly income, and then adjusting and saving 50% of those two extra paychecks). My goal would be to have circa 1500€/month when retired, between 55-65 years old, and from then on, have that money plus the pension from SS. ASsuming a 40 year life after FIRE, I am calculating that the stock needed would be 720 000€, what seems like a lot to me, and don't know if it is possible to get to that target.

From this point on, all advices are welcome, and I thank everyone for the time that you spent reading this!

[Maschinist]

Thanks for your perspective from Portugal.
Im a German citizen, living with my family in the US since a few years.

If we are working with your current numbers I would absolutely cut the gym and work out in your house (1080 Euro/year for a gym membership is insane when your total salary is ~18.000 net/year. In the stock market with 5% after tax yield those 1080Euro/year would grow to ~75.000Euro after 30 years / 10% of your goal).
You could buy low cost European Vanguard ETF Funds (domiciled in Ireland) with fees below 0.3%/year. In your age and situation you don't need bonds or much in saving accounts, you need world wide stocks. European government bonds are much to risky for the current yield they offer.
If your salary numbers are already combined income with your partner then your savings rate would be not that high.
Net income ~19tsd/year and expenses ~14tsd/year means you would invest 5.000/year. That would give you ~350.000 Euro after 30 years if you invest everything in stock ETF with 5% net yield after tax and after inflation. Not really sufficient for your plans.

But I have another suggestion:
- You will soon have a master degree
- You seem to be able to communicate in English and
- you are in your best age without kids
Have you ever thought about (temporary) moving to another (European) country with much higher salaries to accelerate your progress and reach your goal much, much more early?

For example in Germany or Great Britain with a technical Master degree like engineering you earn easily ~50.000 Euro gross (and more) after a few years in the private sector. If you and your girlfriend would work for 10 years there you could be more than halfway into financial independence and also get another perspective.

German automotive-, pharma- or science sector is paying well. Nearly no unemployment which gives you a lot of negotiating power and your cost of living besides housing would be not much higher than in Portugal. You could travel home via low cost aviation a few times per year.
I know the weather in Northern Europe is hard to swallow in winter and the people are initially not as warm as in your country but you would gain a lot if you would make the move.

For example if you would earn ~50.000 Euro gross and your girlfriend ~30.000 you would have 80.000 gross, that's ~52.000 Euro net /year in Germany (Healthcare and Social security contributions included). After 10 years your then maybe wife will make a child break but you could bring ~80.000 Euro gross on your own then.
You could live on 50% of this net income and save/invest the other ~26.000 Euro/year in low cost stock ETF.
After 20 years with ~5% after tax and after inflation yield you are @900.000 Euro in stock ETF.
This either would give you ~36.000/year gross for min 30 years (4%) or 27.000 Euro/year gross (3%) eternally.
If you then don't like the 27% tax on capital income in Portugal, you could move to Spain where it is only ~20% and the first ~11.000/year are tax free (personal exemption). Or you could move to another country where you could easily get residency and the income would be completely tax free (Malaysia, Panama, Uruguay.....)
Or you could add a few years of work after year 20 and you could retire in Portugal in your own paid with cash Algarve finca near the ocean before you are 50. (25 years with 26.000 Euro invested per year @5% after tax+after inflation yield is 1.3M Euro)

In between all that you will gain another perspective, you will make new friends, get new ideas, new possibilities.
The situation in the US for unmarried people without kids would be even better for you, because salaries are even higher and taxes are much lower (but you would need a work visa).

I did the same. After university I moved to a less desirable location in Germany because the salaries where very high and the cost of living low and a few years ago we got the possibility to move to the US East Cost with even higher salaries, new friends, new perspective, new ideas. We are FI but I still like my work and maybe in a few years we are moving to South Spain when we want a calmer life and the kids are on their own.

All the best!

[LuisM]

Thanks for your perspective from Portugal.
Im a German citizen, living with my family in the US since a few years.

If we are working with your current numbers I would absolutely cut the gym and work out in your house (1080 Euro/year for a gym membership is insane when your total salary is ~18.000 net/year. In the stock market with 5% after tax yield those 1080Euro/year would grow to ~75.000Euro after 30 years / 10% of your goal).
You could buy low cost European Vanguard ETF Funds (domiciled in Ireland) with fees below 0.3%/year. In your age and situation you don't need bonds or much in saving accounts, you need world wide stocks. European government bonds are much to risky for the current yield they offer.
If your salary numbers are already combined income with your partner then your savings rate would be not that high.
Net income ~19tsd/year and expenses ~14tsd/year means you would invest 5.000/year. That would give you ~350.000 Euro after 30 years if you invest everything in stock ETF with 5% net yield after tax and after inflation. Not really sufficient for your plans.

But I have another suggestion:
- You will soon have a master degree
- You seem to be able to communicate in English and
- you are in your best age without kids
Have you ever thought about (temporary) moving to another (European) country with much higher salaries to accelerate your progress and reach your goal much, much more early?

For example in Germany or Great Britain with a technical Master degree like engineering you earn easily ~50.000 Euro gross (and more) after a few years in the private sector. If you and your girlfriend would work for 10 years there you could be more than halfway into financial independence and also get another perspective.

German automotive-, pharma- or science sector is paying well. Nearly no unemployment which gives you a lot of negotiating power and your cost of living besides housing would be not much higher than in Portugal. You could travel home via low cost aviation a few times per year.
I know the weather in Northern Europe is hard to swallow in winter and the people are initially not as warm as in your country but you would gain a lot if you would make the move.

For example if you would earn ~50.000 Euro gross and your girlfriend ~30.000 you would have 80.000 gross, that's ~52.000 Euro net /year in Germany (Healthcare and Social security contributions included). After 10 years your then maybe wife will make a child break but you could bring ~80.000 Euro gross on your own then.
You could live on 50% of this net income and save/invest the other ~26.000 Euro/year in low cost stock ETF.
After 20 years with ~5% after tax and after inflation yield you are @900.000 Euro in stock ETF.
This either would give you ~36.000/year gross for min 30 years (4%) or 27.000 Euro/year gross (3%) eternally.
If you then don't like the 27% tax on capital income in Portugal, you could move to Spain where it is only ~20% and the first ~11.000/year are tax free (personal exemption). Or you could move to another country where you could easily get residency and the income would be completely tax free (Malaysia, Panama, Uruguay.....)
Or you could add a few years of work after year 20 and you could retire in Portugal in your own paid with cash Algarve finca near the ocean before you are 50. (25 years with 26.000 Euro invested per year @5% after tax+after inflation yield is 1.3M Euro)

In between all that you will gain another perspective, you will make new friends, get new ideas, new possibilities.
The situation in the US for unmarried people without kids would be even better for you, because salaries are even higher and taxes are much lower (but you would need a work visa).

I did the same. After university I moved to a less desirable location in Germany because the salaries where very high and the cost of living low and a few years ago we got the possibility to move to the US East Cost with even higher salaries, new friends, new perspective, new ideas. We are FI but I still like my work and maybe in a few years we are moving to South Spain when we want a calmer life and the kids are on their own.

All the best!

Thank you very much for your post!
Regarding the first part, I know that the 5000/year savings won't be enough to reach my objective, that is one of the reasons I've started this thread. I must agree, the total cost of gym is a bit to much in percentage of total income, will have to see this. The main barrier was that my girlfriend has been itching to start dancing classes (that's 60€/month for both of us) and it seems a bit difficult to demove her from those. I think that maybe I'll switch my main gym (30€/month) and buy some weights to at least minimize this expense to the minimum.

Regarding the second part, I've thinked of it but there are some barriers:
1) I'm finishing the first year of my Master (in Economics with specializations in Quantitative Methods) and will start working in September at a big four firm in Transfer Pricing. This means that I've to submit my Master Thesis until June 2018, which means that at least for 1 year, I can't move from my current city.
2) While I speak fluent English, and would have no problem moving, my girlfriend doesn't, and that will be our most intensive investment (we are still seeing prices) so that she starts learning the language in order for us to possibly move to another country in 2/3 years.
3) From experience of colleagues of mine, I think that it is probable to have for the following 2 years a 2-5% real increase in wage each year, and then in the following 2years, have a rather high (almost 20%) wage increase in my case, in hers the 3%/per year is more certain.
4) Investing in Ireland and UK based firms/ETFs is a major risk at the time since because of Brexit, it still isn't known what will happen to income flows and taxes between european countries and UK.

But I thank you for your perspective, it makes me think that in the medium term a solid move can be to work abroad, and it is a challenge that would be interesting and rewarding I think.

In this moment, due to these conditional barriers, I'm more "worried" with the short term decisions I have to make. If possible I would like very much to have your opinion on them.

Thank you!

[Sydneystache]

If you are comfortable in buying that flat, buy it. You are young and will be ahead of the curve when it comes to property. The fact that you have family (whom you can trust?) to manage the flat if you live and work overseas when it is rented means you will have another source of cash flow and income coming in.

As for point 3, any possibility of using a bicycle instead of buying another car? If you live in a hilly part of Portugal - ebike?