Note: I’m publishing this article a few days after writing it. Since I wrote this article, it seems the USD/JPY pair has staged a minor comeback which has improved the situation slightly. Let’s see if it holds after NFP on Friday.
Well, things have not changed so much since the last time I did a status update, a bit more than a month ago. As a matter of fact, I was at 83% of my “semi FI” goal back then, and I’m still at the same point.
So what the heck happened? Well, simply put, my wealth in USD improved by about 2% since the end of August, but the USD/JPY pair lost about 2% as well (falling from about 103 to 101) over the same amount of time. And since I intend to move back to Japan for my RE goals, the value of the Yen against my investments is what matters to me.
At this point we’re doing everything we can to save more and get more income. I honestly think there is no wiggle room for improvements here on either aspects of the problem, unless we decided to do a dramatic change which could have adverse effects. I’m not switching careers now, not when I’ve been “one year away from FI” for about a year. Yes, the target keep evading me, but at this point there’s only one thing that needs to happen: Team Japan need to get their sh#t together.
The Japanese yen has strengthened by about 20% over the past 10 months. At this point I’m not even expecting it to come back to its 2015 levels anytime soon, but if it could stay stable around the 100 line for a while, that would give us a chance to actually see our wealth increase in JPY terms. It’s been frustrating to say the least, that my retirement date is now entirely in the hands of a few fellows, namely the Fed on the US side, and the BoJ on the Japanese side.
There are a few benefits to the situation though: First, it simply means we’re building a bigger nest than we initially planned for, in USD valuation. This increases our future options if we decided that after all Japan is not for us in the long term, and it also means I will rely less on the active part of my RE income: my side gig (which for the purpose of my plans I’ve decided would be a fixed value in USD).
Assuming no change whatsoever in the USD/YEN pair, and if the current bull market doesn’t fail us too soon, we’re still roughly one year away from FI at this point.
What’s my plan?
My plan is to quit my corporate job as early as possible, and provide income for my family through 1) investments in index funds and 2) my side “business” (a website which started as a hobby and ended up being a significant source of income for my family).
I make the assumption that my website will bring us a constant amount of money in the years to come, adjusted for inflation. In practice, my website has been generating more than my target since May 2015 (and the number keeps going up faster than inflation so far), so I believe my target there is fairly conservative.
I removethe amount that my site generates yearly, from my target expenses in retirement, to reach the number that I would need my passive investments to provide. Then, with the 4% rule, I compute my target. I assume 0.25% of expenses on my investments, which here again is pretty conservative so far (I’m at 0.05% of expenses with Schwab so far). This brings the 4% rule to 3.75%.
In other words, my target is: Website Revenue + (3.75% * investments) = yearly expenses.
What are my risks?
My plan has several risks that need to be taken into account:
The 4% rule has been criticized lately for not being accurate (although I think it’s fairly safe), so my investments might generate less money than I think. The Side gig counterbalances this risk by providing a significant chunk of the income.
My side gig might end up not making as much money as I think it will, and could ultimately crash. It is also not passive at all and heavily dependent on me driving the business. I’m mitigating this risk with a fairly conservative estimate of how much it generates. I think it would take several bad years in a row for my site to fall below the target at this point.
I might have miscalculated how much money we’ll need in retirement. We currently have 2 kids, a third one on the way, and it’s likely I vastly underestimated how much they will cost us in their teens. My mitigation for that is that I have intentionally increased some of our expected expenses such as taxes, which I think will actually be much more lower. Bottom line, I expect to spend much less than planned in the first 5 years of early retirement, which would let our wealth grow, and spend more as the kids grow up. Our plan also implies living in a big and expensive city (Tokyo) and we will have the flexibility to move to cheaper areas if things become too expensive.
Last but not least, the biggest risk in my plan is that most of my investments/income is technically in dollars, while we plan to retire in Japan. In the graph below, you’ll see my wealth in purple, and my target in green. The target keeps moving because we have a static target in Japanese Yen, but the graph is represented in US dollars. In 2016, the Japanese yen has soared by 20%, and as such, so has my target. Currently, my date for Financial Independence relies much more on the evolution of the USD/JPY pair than our savings rate, or even more than the stock market. Nowadays, a 1% change in the Yen takes me 2 months closer to, or further from Financial independence.
Our wealth in US (purple) is going up, but our target (green line) keeps increasing as the value in USD fluctuates
The same graph in Japanese Yen. The target is the blue line, and is constant in Yen. In purple, the money we can expect to generate yearly from our ETF investments, and in green the money expected to be generated from my side gig. I’ll consider myself FI once the sum of these two crosses the blue line.
Recently, looking at this graph has been frustrating, as our wealth in USD is increasing at a very good pace, but the Japanese Yen has soared as well, and our target moves further away. Note how back in November last year, I was pretty much 96% there, and how I would be financially independent now if the Yen went back to its 2015 levels.
We’re currently at 83% of our target. At the current pace (but that’s wishful thinking: past performance is no guarantee of future results), it will take us roughly 12 months to reach Financial Independence. Of course the markets could go sideways, or conversely the Japanese yet could decide to go back to numbers more favorable to us.