Financial Independence Day Thoughts

Since I spent July 4th trying to build my own cornhole board (until the batteries in my drill ran out), hanging out with family members sharing their opinions on every girl baby name in the world, happily eating hot dogs with beer, and watching fireworks that didn’t last just 15 seconds, I didn’t spend much time on the computer today.

Instead, since a certain bank already used this holiday to refer to financial independence, I found myself thinking about how my view of financial independence and “early retirement” has changed over the years. Just my opinions. I apologize in advance for the rambling.

  • Early retirement. I believe it’s just as possible as ever. However, you’ll have to be different than most people. You’ll have to either earn more than others, or spend less than others. Preferably both. But most people don’t want to be different than most people. It’s hard, you stick out, you get called cheap a lot, and you tend to just keep quiet so you don’t stick out as much.

    Very few people will retire early. Many of them don’t even think of it as an option. Some will consider it, and just come to realize they’d rather just spend more and work more. I don’t necessarily see anything wrong with that.

  • Post-retirement jobs. (Oxymoron?) If you’re good at saving money, you may be afraid of being broke. (I am.) But that also means that you may still worry about “what if I run out of money” no matter how much money you have. (I do.) However, if you’re disciplined and motivated enough to retire early, you’ll probably be able to find some sort of work that will pay you decent money for a flexible 5-20 hours a week, 3-9 months a year. Keep your eye out for that kind of job, it will help you retire earlier and with less stress.
  • Investing. I have come around to believing that some people can invest wisely and beat the return of the general market. I believe it’s a skill, but with so much noise that separating skill and luck is hard. It’s very easy to fool yourself into thinking you’re beating the market if you’re not keeping score carefully. Low-cost passive investments guarantee you above-average results, and for most people that’s the best bet to take.

    Old fashioned retirement is mostly about saving a big chunk of money, and then spending a big chunk of money without running out. Early retirement is more about living off of dividend and bond interest income almost indefinitely, but remember that even dividends can drop by 30% in any given year. As long as you don’t reach for yield too much, you should be able to design a portfolio whose dividends should rise with inflation. I don’t pay attention to mainstream retirement calculators anymore (Monte Carlo simulations) by Fidelity, Vanguard, ING, etc. I don’t feel they approximate real-life reactions to a dropping portfolio.

  • Rental property. More people I know actually retired early with rental property than by stock market returns. Fixed rate mortgages come with fixed payments, while rental income rises with inflation. This doesn’t necessarily mean that rental property is better stocks and bonds, but perhaps there is something special about this asset class. I’m seriously considering rental property again, but don’t know if I want to deal with it while raising young kids.
  • Home ownership. If you’re geographically stable, I highly recommend homeownership with a 15-year mortgage. It doesn’t cost double a 30-year mortgage. Paying extra towards my mortgage feels much more warm and fuzzy than placing money in the stock market. It allows you to see the effect of compound interest. Simply putting an extra $100 a month towards principal regularly will shave years off a typical mortgage. See prepayment calculator.

    I expect to pay off our mortgage within the next 5 years, before our portfolio is ready to support full financial independence but the lowered stress levels due to the huge drop in monthly spending will be awesome. I see the appeal of borrowing money for 30 years at 3.XX%, but for my primary home I’d be happier owning it free and clear. I’ll take the low interest rate on rental property, though.


  1. This post is a little more personal than the norm, but I enjoyed hearing your thoughts. Thanks for posting this.
    If you don’t mind, I’d like you to expand on the statement, “I don’t put much stock in Monte Carlo simulations anymore, I don’t feel they approximate real-life reactions to a dropping portfolio.” I’m not sure I follow. Thanks.

  2. Margaret says:

    What absolute common sense. Wish I could get my adult kids to follow the logic here. Nice read.

  3. @Justin – Thanks for reading! Well, Monte Carlo simulators which are used by most retirement calculators just run your portfolio and a fixed withdrawal schedule through historical patterns. Most of them would assume if your portfolio dropped 40% in year 2, you’d still withdraw the same amount in year 3 (+inflation). Well, I’d probably either cut my expenses temporarily, or go back to work part-time for money, or both, to cover the gap until the portfolio rebounds.

    Also, if you look at the results of some simulators, you’re deemed successful as long as you finish the simulation period (15-30 years) without running out of money. Would you really feel successful if you had only 10%-20% of your original portfolio left after 25 years and still unknown years to live?

  4. Jonathan,
    In your first paragraph (early retirement) you make me feel I am not alone. I too tend to keep quiet and to myself because friends family and others will tend to call me cheap and look at me like I am crazy! when you are not acting like them spending more and and saving less. I guess I will have the last laugh in the future when they have no choice but to work till they dead and can’t enjoy life. Keep up the good work.

  5. I don’t mean to make light of an excellent post, but… Building your own cornhole? Somewhere, Beavis is laughing. 🙂

  6. I would definitely recommend looking into rental properties again. The main pro, as you already noted, the mortgage remains the same while rents go up with inflation. Of course, the property you purchase must make sense int term of income vs. costs.

    I recently acquired some rental properties with 25% down that generates positive cash flow, albeit small. I figure by the time I retire, the loans will be paid off and after expenses the income it would be sufficient for me to maintain my lifestyle. Baring any major catastrophes, things should work out nicely. Knock on wood though.

  7. Jonathan,
    I’m wondering what compromises (if any) you and your wife do to accommodate each other’s financial views. Are you both on the same page of spending much less then the average family and strive for early retirement? do you/your wife rather work a few extra years to live a “higher” standard of living compared to the other spouse?

    In my case I strive to have the ability to retire early and live off my income based portfolio (60% long term bond/20% US stock, 20% int. stock all in adm. shares @ vanguard). My wife however likes to have a few luxuries in life – nicer car, brand name shoes.

    I have asked her (hypothetically) if she’d be able to retire x months/years earlier would she accept driving a non luxury car. But she does not mind working the extra time and would not trade 20 years of work for that benefit (maybe she’s just trying to push my buttons by saying 20 yrs). She also believes maintaining a higher end image would land her a better pay – which seem to be working for her, she’s about to zoom by my pay grade 3 yrs out of college where I’ve been working for nearly 7.

    Over the years (I guess we’ve only been married <2 yrs) I've started getting nicer things which I came to agree with her point of nicer things are higher quality so you'd get to use them for longer while enjoying the higher end product more so than lower end one. She began opening credit cards for their sign up bonus.

    We've kept our finances separated and all purchases we make are from our separate account. When we go to Costco we split the bill based on who wants the product more. For common things we share the cost – I buy dog food and she gets their treats. I've purchased the house in full so we don't have any real large shared expenses – we don't have kids yet.

  8. Love it bro, as always – big fan of the more personal stuff 🙂 And trying to get my mortgage paid in full a lot faster too! Start out a 10 year goal last year, and thinking I may be able to shave off a couple more years and try for 7. We’ll see… word on the street is that babies tend to steal a little bit of money 😉

  9. Jenna, Adaptu Community Manager says:

    I’m definitely a fan of the rental property / post-retirement job plan. I want to stay both physically and mentally active. “Working” in retirement should be fun!

  10. I think the key for “post retirement job” is to find your calling — I actually believe retirement shouldn’t be the goal. The real goal is to have complete control over my time and work. I plan to work forever, but only work on things that I truly enjoy doing.

    If you look at the really successful and happy people, they tend to work well beyond their retirement age. One of my role model is Walter Scholoss, the legendary value investor who worked until in his early 90’s. He enjoyed his work while having a well balanced life.

    Regarding rental income, one friend had advised me against it — there are certain headache associated with dealing with renters. Also, between HOA, property tax, maintenance cost, and 1-2 month vacancy per year, it’s actually not easy to make money until you pay off the entire mortgage on the rental property.

  11. @Dan – I had the same initial reaction, but I’ve seen the name so many times I’ve gotten used to it. The game is fun. 🙂 There’s an official American Cornhole Association (ACA) and everything. I won’t admit to being part of the generation that voluntarily watched Beavis and Butthead either…

    @Ace – We have definitely had some compromises. Mostly, it involves spending more money, ha. Our savings pace is slower than it could be, and I’ve made peace with it. We spend more but we have more luxuries. Sometimes I spend more myself in reaction, it’s not right but it happens.

    For now, I kind of view it as we’re both still saving for the early retirement just at a slower pace. When the time comes and we have enough saved for the basics but not for the luxuries, then we can talk and I might downshift and she can decide if she wants to keep on working to pay for the luxuries. Perhaps when the time comes, she’ll change her mind and decide working isn’t worth it.

    @J. Money – You want to share some group cello lessons? I was hoping that the lack of ability to travel would save me money (it has so far) but I’m getting pretty antsy so now we’re figuring out how to travel with kids.

  12. Sunil from The Extra Money Blog says:

    I was hoping to see where the “make extra money” part would fit in…but I was left hanging. Why not part of the broader picture here?

    Agreed with rental properties. This is one thing I never stopped. Despite how much internet income grew, I kept taking excess profits and buying more property. The cash flow from rentals, although not as high as my web properties, are adding up to a healthy amount. Not to mention the equity gains over time.

  13. I think the past two years have been AMAZING for rental properties. After setting aside 8.5% of gross income for major upgrades, paying for monthly maintenance, and paying for property mgmt (I dont want to be bugged with day2day stuff) we are cash flowing >15% and that is in year one for our latest property. When you add in that our loan is being paid for by our tennants and we are making around 27% ROI for our first year. Now, I am having difficulty finding this same oppty again. We were able to do this because the price was a little low AND we knew rents were way too low on the place (we still have not maximized income). Choose your fcousregion carefully! Some regions are rediculous bargainsand other places (like where I live) I still kind places that will cash flow positive in year 1, let alone at 15%. However, I see quite few places that will yield 8% cash flow (so ROI ~20% when taking into account mortgage paydown – which still ignores potential property appreciation and tax advantages!!). The downside is it is not a “diversified” holding and it is reasonably illiquid. If I can duplicate a couple more of these, I will shave a ton of time off of my time to retirement. Just factor in a manager’s cost and ignore small properties where you have competitive buyerswho dont factor their sweat equity into their actual returns. It is about making money on an investment not losing time with family to fix toilets…… Their out there….you just have to find them. I love the stock market, but the Real Estate market, in certain regions, is FAR less efficient!!! Good luck!

  14. Glad to see that Cornhole is catching on out west! I thought it was just a Midwest thing. As for name for the baby girl – how about Cornholio??? Don’t you just love everyone’s suggestions? We have a 4 month old and the key to happiness is keeping the name to yourselves and then just revealing it after she’s born.

    Good luck with the expenses after the baby’s born. We haven’t done too bad – my wife’s still breastfeeding and we’ve just had to buy formula to send as backup for daycare. The diapers and wipes get a bit expensive though. We’ve looked into reusable diapers, but daycare doesn’t work with those so we’ve stuck with disposable. Speaking of care, what are you guys doing with the little one after she’s born?

  15. I’ve thrown rental property back at you as an option in other posts, Jonathan, as an option to consider. One other thing I feel that is overlooked as to rental property is the ability for the average consumer to leverage up on their capital and increase their returns. There are very few investment alternatives that allow Joe Sixpack the opportunity to (relatively) safely borrow funds and invest.

    As for seasonal job opportunities, they’re out there. My dad retired from the Federal government, and after spinning his wheels trying to teach for a few years, went back and became licensed as an insurance adjuster. Now, he maybe works 3-4 months a year and grosses $30-40k.

    For cornhole, I’ve heard there are parts of the country that simply call it ‘bags’.

  16. Yeah dude, we’re going crazy over here waiting for the little guy to pop out too… 4 days late now and doing our best to distract ourselves but getting harder every day! At least we get a nice present at the end for all our patience 😉

  17. More than a game, it would seem. They even sanction tournaments:

    And they sell combination scoreboard/beverage holders on the site (I guess for those players who don’t use the beverage in their non-throwing hand for balance).

  18. I couldn’t agree more with the real estate comments. Everyone should have some real estate in their portfolio. However, while there is money to be made in residential real estate there are downsides. Management headaches, no economies of scale, lack of access to the best property managers, etc. We use a company that invests in large multifamily projects in the best markets in the country. We get nice cash flow and double digit IRRs when you add in principal pay down, appreciation, and tax benefits. Better money than I ever got with residential property and none of the headaches. Not right for everyone, but you may want to check them out.

  19. Jonathan says:

    You said in your post that you thought that is was possible to generate better returns being actively managed retirement account (skill vs luck) but do you have suggestions on how to develop that skill or management funds that seem to have a long term track record?

  20. Why not just own REITS instead of rental properties so you get the diversification benefits too?

  21. Hi John,
    The short answer is there are trade-offs: advantages and disadvantages

    The great thing is it does not have to be an either/or decision. Personally, I do both. Around 2009 i started allocating more of my investments into REIT ETFs, as I didnt have the time to really dig into the details of a select few REITs and even though I thought I was buying on the cheap, due to market conditions, it still felt a little risky and I wanted the diversification.

    Right now, I just happen to see some large inefficiences in secondary and namely tertiary markets and I believe the returns are much better, in certain regions, for the little guy who is willing to put some effort in.

    I was surprised there werent better write-ups on REITs vs Direct Ownership (oppty Jonathan!!), but this one, though a little dated, is OK – though I think his view on costs is not 100% accurate and I think anytime you talk about direct ownership you need to expand upon the tax advantages as well as advantages in forming your own LLC (or company), Real Estate Professional status, etc.

    I hope this helps!

  22. Don’t wait to buy real estate, buy real estate and wait. Most proven wealth creator. I don’t know many people who have retired wealthy by investing in stock market (especially young), but many have done it with real estate.

  23. JonPaul says:

    That 15 second fireworks display is a once in a lifetime experience.

  24. Unfortunately public REITs are just real estate flavored stock. As such they more closely follow the economic cycles, whereas direct ownership whether whole or fractional follows the population cycles.

    Also public REITs get taxed at capital gains rate and you have to sell to get your gain. In other words you have to lose your investment. With ownership, I can get tax free cash flow through depreciation and accelerated depreciation. I can also refinance the property (which is tax free) after the property appreciates. I can get my original capital investment back through the refinance, keep my performing asset and go out and buy a second performing asset. These are the principles of leverage and velocity of money that can allow one to make money faster, safer, and more reliably than the stock market……..However, I would caution against residential properties and managing properties yourself. These are both mistakes I made early on.

  25. @Dbeth – So do you mean you should concentrate on commercial properties or residential + property management company? I’d be interested in learning more about investing in commercial real estate.

  26. @Dbeth –

    Regarding your comment: “I would caution against residential properties and managing properties yourself. These are both mistakes I made early on”, I’d appreciate if you could share your experience in this. Thanks.

  27. Jonathan…4 units or fewer is considered residential real estate. In the apartment world, anything over 4 units is commercial. Having said that, you really cannot get great economies of scale until you get around 80 units or so. I looked into several companies before picking the one I use. I did a lot of due diligence and they have performed very well for me. Thats not to say the other companies might have been great too….I just didn’t put any money in with them. I’ll attach a couple of links to help you get the flavor of what they do. If it looks like something that might work in your portfolio, you may want to give them a call. Real knowledgeable and easy going guys.

    Thuy….I’d be happy to share my story. My wife and I purchased seven 4plexes and one triplex in Albq., NM over a 4 year period. Initially, we made a small monthly cash flow. Unfortunately, when the economy tanked, our vacancy rate went up. One vacancy in a 4plex is a 25% vacancy rate. Our cash-flow went negative and we started having to come out of pocket each month to pay the mortgages. Because they are residential properties, they are appraised on the comparison (comp) model. As such, our properties have gone down in value making it very difficult for us to sell. So we’ve been trapped with negative cash flow properties that we cannot easily sell without taking a loss. Commercial apartments are appraised based on NOI (net operating income). In markets with high employment and population growth, we can leverage our asset and property managers experience and ability to raise rents, lower expenses and increase retention. We’ve done so much better investing this way. Thats not to say that you can’t make money in residential. Plenty of people are. Its just not for me.

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