Saving money: the 4 percent rule allows couples to take early retirement at their early 30s

Never having to work in your early 30s because you’ve saved enough money? One couple did it with a simple strategy: that’s behind their so-called “4 percent rule”.

Finally quitting, never having to work again and only doing what you feel like doing because you have financially enough money – for many, such fantasies are pure mind games. But for Kristy Shen (38) and Bryce Leung (38) that is exactly the reality. At the age of 31 and 32, respectively, the two Canadians have already left the regular working world.

Since then, they have been living their dream of early “retirement” and have left their well-paying “9-to-5 jobs” behind them. Today, as Kristy Shen describes it somewhat pathetically, they would only work on projects that feed their soul and not their wallet. But how did you do it?

Save money with the FIRE movement

Originally, the two former computer engineers from Canada only saved their income with the aim of buying a house in their adopted home of Toronto at some point. But the two soon discovered that real estate prices were rising faster than they could amass their savings.

In 2012, when they had set aside 500,000 Canadian dollars after seven years of saving, they began to question their previous savings goal. “I had a kind of awakening and thought, ‘You know what? Maybe the path our parents mapped out for us all these years doesn’t make sense anymore, “” says Kristy Shen. “Going to school, studying, buying a house: these old beliefs no longer count today.”

Shen and her husband became aware of the so-called FIRE principle (Financial Independence, Retire Early) through a blog and decided to join the movement. People who live according to the FIRE philosophy of life save intensively in order to accumulate a lot of money with investments. At a certain point, they then live solely on their passive income, i.e. the returns from their investments.

With the 4 percent rule to the goal – that’s behind it

After some calculation, the couple realized that they had already saved up a large part of what they would need for an early retirement.

In doing so, they counted on the so-called 4 percent rule, the foundation of the FIRE movement. This rule states that a retiree can use 4 percent of his savings annually for life without running into long-term financial difficulties. This is made possible by a steady inflow of interest and dividends, which can largely cover the annual withdrawal of funds.

To find out how much money they would need to provide for the rest of their lives, they calculated their total annual expenses. In a second step, they multiplied this by 25, as the 4 percent rule dictates.

For example, Kristy Shen and Bryce Leung came to an annual expenditure of around 40,000 Canadian dollars (around 27,000 euros) to a sum of one million Canadian dollars (around 678,000 euros). As a result, the couple decided to focus on saving the remaining amount – and learning how to invest their money properly.

This is what their ETF portfolio looks like

On their blog and in their 2019 book “Quit like a Millionaire” they list exactly what their investment activity looks like, how their portfolio is weighted and in which funds they have invested.

Accordingly, your portfolio is made up of five items :

  • An ETF that invests in Canadian government bonds has a 40 percent share.
  • 20 percent is accounted for by an ETF that tracks large and medium-sized Canadian companies.
  • An equally large proportion of the money you invest (20 percent) is in an ETF that covers the entire US stock market.
  • 16 percent are invested in an ETF that comprises 1,500 companies in Europe, Asia and Australia.
  • With the remaining four percent, the couple is betting on an ETF for stocks from emerging markets.

To keep this ratio constant, Kristy Shen and Bryce Leung regularly rebalance their portfolio to minimize risk. However, they have only marginally adjusted the basic structure of their portfolio over the years.

“The meaning of life is to take the plunge”

With their ETF portfolio strategy, the couple had their one million Canadian dollars (around 678,000 euros) together in 2014, which they had set as a savings goal. In 2015 they finally quit their jobs. At first they had to get used to their new financial freedom, the couple say today.

So they had to overcome their fear, which allegedly many “early retirees” feel at some point: the worry of ending up with empty hands. “Fear is necessary for survival,” the couple sums up. “But the point of life is not to hide under the bed and not take risks. The point of life is to take the plunge but take a parachute with you – just in case.”

Shen and Leung therefore recommend that you always have some kind of nest egg ready in the form of a reserve fund. Investors should be able to access this in bad times – such as in the pandemic year 2020, when things went downhill at times in almost all asset classes because of the virus.

Shen and Leung went back to Canada during Corona

Shen and Leung’s portfolio was also not spared during this period. It initially crashed by a good 100,000 Canadian dollars. But at the end of the year, the two were able to achieve a plus of 16 percent compared to 2019.

Kristy Shen and Bryce Leung spent the past year mainly in their old home in Toronto because of the corona crisis. But actually, since their early retirement, they have almost always been out and about, traveling around the world. “The trick is to balance expensive places like the UK, Iceland, Switzerland and Denmark with cheap places like Thailand, Mexico, Poland, Portugal and Eastern Europe,” Shen says. According to them, travel has been instrumental in helping them keep growing their wealth. After all, that was how they could have avoided inflation.

Despite further income: the pension experiment should continue in real life

In the meantime, the early retirees have become successful bloggers and their digital business generates a lot of additional income. Your pension experiment should still run in real life. All additional income that has arisen after retirement is therefore put into a new deposit – your so-called Portfolio B. “We do not touch Portfolio B for living expenses, but only for business expenses, donations, gifts for family and friends or external expenses such as online Courses or educational tools, “said Shen.

In this way, the two want to prove that it is actually possible to finance retirement in your early 30s from an ETF portfolio, even if – unlike themselves – you don’t earn a single cent in retirement.