What is “Retirement”

For most people, to retire means to stop working. It means that at the age of somewhere around 65 and working for all of your life, there is this certain point that marks that you have contributed an amount to society that allows you to say “it’s enough”. From there on, social security is taking over and you receive a monthly payment that reflects your contributions over the years.

It is calculated by a formula that no one truly understands. All we know is that it’s based on your education, your social security contributions over the years, inflation, government subsidies and support, and many many other factors. To put it short, until receiving your first notification of what you will actually be entitled to, you have probably no idea what your number will be. In fact, I am not sure about the US but in Germany, it is highly recommended that you spend a week or two to double-check every single number in this first statement as there are frequently mistakes in it that can mount up to significantly different amounts.

I don’t believe in this system. And I don’t recommend it.

By this, I don’t mean that I don’t believe in its existence. Obviously, it’s there and plenty of folks are being taken care of by it. What I don’t believe in is it’s efficiency, reliability and future prospects of it.

It would be too much of a topic to discuss the purpose of social security systems, but when speaking about retirement, it is obvious that being risk-averse and trying to cater to all equally on a non-personalized scheme, social security is poised to deliver the absolute minimum of what’s possible to its participants. Furthermore, with an ever-increasing population, rising costs, inflation and stagnant wages, the system is by far less secure that our governments want us to believe. As a result, some countries are pulling up the retirement age to 67 or 69 years, freeze raises and plenty of other tricks to adjust the calculations in order to reduce total payments.

So, while social security is by nature designed to barely be able to support a very basic lifestyle, relying completely on social security and calling everything off on the official day of retirement may have even much more dramatic effects.

Working is a good thing.

Let me start off by saying that working is not a bad thing but to put it a little more into perspective: Working in a regular job, happy or unhappy doesn’t really matter, gives you much more than just a mood and a salary.

Brain activity, actual social interactions (meaning in real life and in person with real physical contacts and conversations), planned-out time throughout the day and among the most important ones, having less time to spend money, are seriously underestimated benefits of a workplace. It’s a fact that without activities we get… well, weird. Our brains and bodies basically degrade, we get socially detached and we tend to spend more money to “do stuff”.

Consider never to retire but embrace change

Talking about escaping the rat race and early retirement comes almost hand-in-hand so defining retirement and early retirement is important. As for my idea, retirement should be nothing else but a change, and early retirement an “early” change.

I never intend to truly stop working in the sense of being active. Retiring for me means to stop being active in order to have to make a living. Instead, the goal should be to embrace activity as a mean to create, develop and improve ourselves or our surrounding without having the financial pressure in the back to be required to do so in order to get through the day.

As Confucius once said: “Do what you truly love and you will never work again”. Unfortunately, most of us require to do things that generate cash in order to ensure our families are fed, we have a roof over our heads and our children can visit schools to become the next generation that we all hope for. At the same time, some jobs may offer much lower benefits than others, thus restricting our choices. Financial independence can lift those restrictions. This is what for me freedom is and what early retirement is all about.

Enter The Rat Race

My blog is all about getting out of the rat race and I believe if anybody finds his way to this website, he or she will already have a pretty clear idea of what the rat race is, but I will give it a shot anyway and try to dig a little deeper into this term and especially how one gets into the rat race in the first place.

How you get into the Rat Race

This is probably the biggest drag of all and let me start by saying that unless you are born into a wealthy family, there is simply no way around it. Sooner or later you will have to become a part of this never-ending, spinning, hamster wheel that we call work & life. It’s very hard to pinpoint exactly how and when you get into it, but it’s basically the moment when you are required to earn money to make a living and get pushed into the workforce.

For some people, this may be right after high school. For others, even earlier or much later. But when the time comes that you want to or have to stand on your own feet and take control over your life, this is when the cage opens, you get pushed in and the rat race starts.

It’s kind of ironic. For me, I was trying to get out of my parents’ place as soon as possible with the aim to finally be in charge and get full control over my life. Staying with my family, I always felt as if I would be in a cage with so many restrictions on what I could and could not do.

As it turns out, leaving the warm and cozy cage which I was living in with my family resulted only in moving on to another, larger cage. I had the false belief that I would gain some kind of freedom and in the beginning, it certainly felt that way. I had to start from scratch and my new room was much less comfortable compared to my former family apartment. But I could bring friends over whenever I wanted, I could party and go out as I pleased. I also could decorate it the way I wanted, the fridge was empty for most parts but the things that were in it were the things I liked. It felt like I could do “my thing”.

There was only this small but very annoying detail. Suddenly, I needed money for everything. And getting money to do all the things I wanted to do took up a lot of time and effort, so much, that suddenly I had no time to actually do all the things that I wanted to do. Does this make sense?

Probably the worst part of getting into the rat race is that it takes some time to realize that you are trapped. Funny enough, especially when you think that you get on the right track, pour time and money into your education and start a career, a family… all you really do is actually shrinking the cage and getting trapped even tighter. Day by day, penny by penny. Because the more money you spend, the more your daily expenses go up, the more money you borrow to fulfill what you consider to be your needs, the more money you got to earn to keep up with all of it.

And there are you are. Spending the vast majority of your time to earn money, which again you spend mostly to cover your costs & expenses. Welcome to the rat race.

Finding the Exit

The big question is of course, how can you get out of it? There are many points to consider, but the single, major point is to become financially independent. Why is that? Because it has an effect on the single most crucial element that is the true reflection of what freedom is all about: To be able to use your time the way you want to use it.

As I mentioned before, time is your biggest asset, and if you spend the majority of it for work and worries, then it means that you still got that chain around your neck and the cage all around you and that you got to keep this hamster mill spinning just to get by.

Finding the exit is what this blog is all about.

Time is your biggest asset

Traders and investors are a large minority. It doesn’t really matter which country we talk about, but overall, based on the total world population, investors are a rare breed.

With my German background, I can say, that among my friends and colleagues there are only few who are active on any stock exchange and the majority still believes that the best investments one could do would be to buy a house or a condo. Or insurance.

I consider these ideas to be very flawed, but it’s hard to blame or to dispute them completely. At the end of the day, unless we have acquired the investor mindset, the biggest concern for us on what to do with our hard-earned money is to ensure it that it stays with us. It’s all about security.

People believe what they understand

Stocks are going up and down on a daily basis and therefore they don’t come across as a solid investment. A piece of land on the other hand, or a house, bricks, mortar, cement. Yep, this feels solid. Or is it?

I would attribute this bias mostly to the idea that people place their hopes in things they understand. Stocks and shares represent companies, and as an investor, we seldom really know what is going on inside a company. We have also limited influence on what the company does. A piece of land, a house or a condo is so much easier to see through and to understand what it does.

And yet, hardly anyone would dispute that stock investors are regularly among the richest people on the planet. So where is the connection? How come that those who try to play what is considered safe end up poor or at least not among the wealthy? My point of view: Because what most people consider to be safe is false.

Time is an asset

I am following a website called “Seeking Alpha” (SA) now for a while, which is an investment forum with the majority of its users being retired income investors. Income investors are people who invest in order to generate sustainable profits to secure their retirements. Many of them put their money in stocks that generate either high yield dividends or that pay out dividends on a frequent and reliable basis.

Since many of them are old and experienced, I like to read their comments. There are plenty of things to learn from the mistakes they made during their investment lives. Among their ideas, comments and yes, sometimes regrets, there is one constant note that comes up over and over again. The significance of time.

Warren Buffet said once that time is the investors single biggest asset. And he is absolutely right. No matter where we put our money in, a house, insurance or stocks, our expectation is that they either appreciate over time or generate profits. Time is the basis for every investment calculation and investment decision.

Time can be your friend, or it can be your enemy

For a house owner or condo owner, time can be tricky. Over time your property will need repairs, improvements. It will require you to add additional funds to it in order to keep it in good shape and to serve its purpose. This part is inevitable. On the other hand, over time your property can increase in value and hopefully this increase will over-compensate the need for your additional investments.

For an investor in the stock market, time becomes your friend the more you have of it.

I am not an investment advisor (yet), but I probably wouldn’t recommend a retiree without any prior stock market investments to move his/her assets into the stock market. The few years that this person may have left are simply not enough and uncertain to truly utilize time to its benefits. But if I meet a person in their 30s or 40s and they are not invested, then I believe they miss out on probably one of the best friends they may have out there.

History is shifting odds towards stock investors

Historically, any person who would be invested in the stock market for longer than 20 years would have ALWAYS benefitted from it. It doesn’t even matter when one would have invested the money. Even if one would put all his cash into one of the larger US or German Index funds and it would crash by 50% or 60% the next day – 20 years later the investment would have most probably not just paid off, it would have doubled or tripled.

With an average return on investment of 8% year on year, the value of stock investments is doubling every 7 years. So just think about it. Let’s say you are 37 years old and plan to retire at 65. Meaning you have another 28 years to go.

If you could now put 30.000 EUR into an Exchange Traded Fund (ETF) on any major stock index, and the historical trend would continue, then the development of your account could look something like the following:

2018 = 30.000 EUR (first investment)
2025 = 60.000 EUR (after 7 years)
2032 = 120.000 EUR (after 14 years)
2039 = 240.000 EUR (after 21 years)
2046 = 480.000 EUR (after 28 years)

I know, 2046 feels very far away, but if you are 37 now then chances are very high that you will get there. This 8% does not mean only the increase in stock value. It’s the whole package: Higher valuation, dividend payouts, dividend increases, etc. Now, what would happen if you don’t put 30, but 40.000 EUR in? Let’s take a look:

2018 = 40.000 EUR (first investment)
2025 = 80.000 EUR (after 7 years)
2032 = 160.000 EUR (after 14 years)
2039 = 320.000 EUR (after 21 years)
2046 = 640.000 EUR (after 28 years)

Only 10.000 EUR more for the initial investment will add another 160.000 EUR for your target date. This is ridiculous, isn’t it? And yet, this is how it works.

History doesn’t guarantee the future – but the trend is your friend

So yes, time is your friend and the sooner one starts to invest, the higher are the chances for a worry-free retirement.

A place is a place, people are people

I had recently an interesting conversation regarding my daughter. She is only 2,5 years old but due to the nature of my job, she already moved 3 times together with our little family and at the age of 3, she will have moved 4 times as I am going to have to move again latest by April next year. Working as a hotel manager requires flexibility and the conversation narrowed down on the topic of traveling and raising children. The common perception is that once you have children, things become more complicated and difficult and that you should settle down somewhere to offer your children a stable and safe surrounding to learn, grow and to develop.

Here is the thing: I don’t agree. At all.

First of all, children are much more flexible and can adapt to new surroundings in a way that most adults can’t even remotely keep up with. I notice it every single time. While my wife always needs two to three months to get around in a new area, my daughter is up and running from day one as soon as we unpack those few bags. She will quickly figure out all the rooms of the new apartment or house, discover the garden and sleeps perfectly fine the next day forward. She also finds new friends quickly and frankly, I believe she rather helps my wife to get accustomed to a new area rather than the other way round.

Secondly, kid’s come without prejudice. If we move to another country, another language area, another cultural surrounding, she just accepts it and quickly figures out how to appreciate it. I would say most adults have much bigger problems with this and in fact, most adults never really overcome the once setup prejudice which remains in their heads since childhood.

If you ask an adult about his or her nationality, what will they say? They got their mind made up and they have mostly a clear answer to your question. There are of course exceptions, such as myself with a double-nationality or specific mindset, but for the majority, there is a clear distinction.

Kid’s don’t have it. They don’t know anything about the concept of nationalities. For kid’s, a place is a place, and people are people. No matter where. No matter who. It is us who destroy this open mind by our teachings of countries, languages, nationalities, and barriers that we consider important to keep up our world order.

I am not saying that it doesn’t make sense, but I am saying that this coin has 2 sides. There is no question that putting things in place and order is important to ensure progress and economic development, but it comes at a high price of differentiating and separating people from each other. This breeds conflict, as we can now see everywhere around the globe. Conflict of economics, conflict of cultures, conflict of religions.

So, for my point of view, someone growing up in different places, experiencing different cultures, languages, mindsets, laws, rituals, and world-views is a huge advantage. A gift, that offers the opportunity to keep an open mind for as long as possible. It surely is not a guarantee and it has its downsides. But that applies to everything, doesn’t it, and at least it offers the chance to see and to learn more along the way.

Why is this important for this blog?

Well, I really just wanted to write about this. But to give a small connection to this blogs main purpose: Reaching financial independence becomes much easier if you free yourself from your prejudice and open up your mind to move out from your comfort zone.

Don’t nail me on the exact statistics but if I remember correctly, the average American household spends 30% of his/her income on housing or rent. The average German household even up to 50% and I believe for Scandinavians it was beyond that. The tax may eat up 25-40% of the total household income and social security deductions that come on top of that.

At the end of the day, people are left with a paycheck that is just enough to keep anything between 0-10% percent of household income for savings and investments. This explains that most EU or US citizens don’t have retirement savings at all and those who do have something stacked up, have by far not enough.

It’s a scary thought, so naturally, people tend to brush thoughts about this away and instead rely on the idea that social security will take care of them once retired at 65. Or 67. Or 69. Depending on where the government will shift this over the next years.

Well, does this really sound like a promising scenario? Working until your health deteriorates and relying on your government to take care of you, even though we all know that social security systems will have to collapse at some point?

When I moved to China as a trainee, my salary was only 500$ a month which was 350EUR at that time (2009). In Germany, I was expecting to get approx. 1,800 EUR a month before tax. And yet, after working 1 year in China, I saved up much more money that I could ever have in Berlin. Because the housing was offered for free, the food was included, there were no taxes to be paid and even the cost for a private insurance was much lower compared to what I would have to pay in Europe for my basic social security.

So what would happen, if you could eliminate or reduce your housing, basic living expenses, and taxes from that total of anything between 50-70 % down to let’s say 10-20% of your total monthly income?

Well, suddenly saving and investing 30-40% of your monthly income doesn’t sound unrealistic at all and retiring with 50 or 55 without dragging any government into this is also becoming a realistic, if not even a desirable target.

If you want to escape the rat race, you should consider getting out of that labyrinth that you got put in.

I know it is not an easy decision, but consider moving to an area that will make these things possible. It may be another state, another country, another continent. Why not? What is it really that binds you to a place? Your neighbors? Family? Friends? Or is it just the comfort to stay at a place that you know with things that are convenient? This is something that really should be thought through and put into consideration.

Conscious Spending Habits

It can’t probably be repeated often enough so let me say it just once more: Being in control of your income and expenses is a crucial discipline that needs to be mastered in order to reach financial independence. Today, I would like to give some advice on the expenses side.

Let me start by saying that personally, I truly hate shopping. I like small grocery shops, fresh markets. I hate shopping malls. Not for their value and convenience of having everything you might need in life in one, central location. Yes, I admit I also spend time in shopping malls occasionally. What I hate is the fact that the constant competition that drives markets is intentionally pushing us into very unhealthy spending habits and encourages us to be constantly spending money.

I am amazed and terrified every single time when I enter a shopping mall, to see how many hundreds, thousands of people daily stroll from shop to shop and swipe one credit card after another to carry home as many bags as possible with them. The consequence of this is an empty account at best and credit card debt at worst.

Sales bargains and saving money

There is really only one definition of saving money: Not spending it. The one most intentionally false statement that you can see everywhere is the sales pitch of “saving on sales”. Buy 1 get 2, save 30%, and all other kinds of promotions have nothing to do with saving money. It is such a tricky way of manipulating our brains that I am really appalled by it. It addresses our desire to spend not more than necessary by stimulating one of the humans most primal and dominant instincts: Greed.

If you see a 2 for 1 promotion on toothpaste, chances are high that you will jump on it. The promoted retail price seems to indicate of really doing nothing wrong on this bargain and we immediately recognize that for paying what we normally pay for 1 pack, we receive the double value. Sounds great, right? Well, not in my opinion.

Toothpaste is a product that we use every single day and a pack might be finished within a month or 2, depending on size and frequency of use. Buying the promotion will reduce the time required to repeat the purchase within the regular usage-timeframe and also half the cost of it. There is nothing wrong with that, in fact, for a super-frugal living, it might be even recommended. However, it might quickly lead you to copy this into all other products purchases which may result in an overall negative effect on your spending and consumer habits. You see, when we have more of something, we also tend to use more of it simply because we lose the feeling for the value of the product.

For the case of the toothpaste, I remember as a student there was a time when I was really short of cash and needed to save on every single penny. When my toothpaste was about to run out, I would squeeze the tube until getting the last drop of it and even when I could not squeeze out anything anymore, I would cut it open and scratch out the last tiny rests to ensure I fully utilized the product. Chances are high that I wouldn’t do it if there was a second pack of toothpaste in my bathroom. I would most probably not go through the effort and just open the new pack.

Quality over quantity

In my opinion, simple living means to buy things that we need and to enjoy and fully utilize the things that we have. We don’t need to compromise on quality and purpose, but we should be conscious about why we buy something and for what reason as well as how we use what we have once we have it.

If you need a shirt, buy a shirt. You don’t need two of them. You don’t need to spend hours looking for the best promotion in the entire shopping mall. Just establish a budget and buy the shirt within this frame, that you like and that gives you the feeling of having bought what you wanted and what you came to the shop for. Buy it, wear it, keep it in good condition and enjoy it for as long as possible.

The more expensive the product or purchase, the tighter should be your criteria and the less should be your willingness to compromise on quality. Value is obviously always a factor, but the value is a tricky metric because especially for expensive products like laptops or cars it stretches over a long period of use. It may involve some points which you are not aware off, which may turn out after months or years and therefore you could or would not consider at the time of purchase.

To give an example: You might get a great deal on a diesel car right now, but a hybrid or an electric car might turn out to be the better deal, even at 50% higher cost, considering how technology and markets might develop within the next 5-10 years.

For a laptop, you might wonder why anyone would spend the double price on a MacBook compared to regular Laptops or Tablets, but you might change your opinion once you require a laptop for work and consider your requirements on a robust and reliable supportive equipment for your profession.

Have a budget in place

What I would like to make clear is that the combination of a minimalistic living approach with consciousness on quality and purpose can give us not only great satisfaction, but it will have a positive effect on our spending habits. You will quickly realize that the idea is not about reducing all your spendings but that it’s more important to enjoy and appreciate every single purchase that you do.

One important step that I did not write about yet is to have a plan in place. A budget. I will follow up on this with more detail soon but in the meantime, this is too important not to emphasize it: No matter how good the bargain is, if you don’t have the money, don’t spend it.

I want to be perfectly clear on this. If your account balance does not allow a purchase of a product, then you should not buy it. There may be certain very specific situations in which you may have an advantage by buying something through borrowing money or utilizing your credit card, but this should be a seriously special occasion and request a very realistic evaluation whether there is no other way around it or whether it can be postponed. Borrowing money, credit card debts, these are serious matters that push you in the wrong direction. No matter how good a deal may sound, if you can’t afford it, then don’t buy it.

Shopping is a formula to keep your account empty

At the end of the day, what is important is that you keep your main target on the horizon. To reach financial independence we need to focus on purchasing products that keep generating additional value. As explained in my previous article, The Investor Mindset, most of our daily purchases lose value the moment we take them in our hands.

Therefore, normal regular shopping should not be a daily activity and not a habit. It’s a sure formula to keep your account empty.