Is it possible to retire at 35 just by being frugal?

Okay guys, I know my regular readers are rolling their eyes as I go into total Amazing Race Geek mode (but they are giving us an unprecedented two episodes a week) but I am going to post something different today and I was shown a video on Youtube about a young Canadian couple Stephanie and Celestian (Cel) who aimed to retire by 35 by being frugal. I watched the video and sure enough, I am cynical about what I saw. So in a nutshell, this couple are quite average earners bringing in about C$80,000 a year (that's about £47,000, S$82,6000 or US$61,000).  That's not a lot of money by any standards when you have to consider that this is for two people trying to retire by 35. Now the video was poorly put together, there was a lot of footage about Stefanie cooking and buying food - like yeah I get it, she bakes her cakes rather than buys it from the supermarket and thus she saves money but they hardly talked about how their investments were managed; so the focus of the video was totally wrong. But then when you look a the hard numbers behind their financial situation, you start to wonder if it all adds up. They claim to save about 65% of their annual income, so that means C$52,000 a year and according to the video, they have been doing that for 7 years, creating for them a nest egg of about C$364,000 - by the time they reach 35, they should have a nest egg of about half a million Canadian dollars. So I was challenged to take a look at the numbers and see if they add up and I shall show you what I have found.

Being frugal isn't new, it is what poor people do by default anyway. 

I was very cynical when I first read the description of the Youtube video - this couple are described as "extreme frugal minimalists" as if it is such a revolutionary or new concept. Duh.  I have news for you - poor people are frugal all the time because they don't have enough money to make ends meet. They have to say no to so many things that they want, they don't get to eat the food they like, they don't get to wear the clothes they want or buy that nice new pair of shoes they saw in the shop. They don't do this out of choice but because they have to make what little income they have left till the next pay check and unfortunately, there's little I can say to dress it up to make it sound like it is a lifestyle choice. Poor people don't have a lot of nice stuff because they can't afford those expensive things - not because they were inspired by Marie Kondo to become minimalist. So I get this, this couple are being careful with their money, that's a good thing - I wish more young people would make more sensible choices when it comes to managing their own finances. However, this is hardly unusual or new for crying out aloud and it is not just poor people who need to manage their finances more carefully: it is more a personality trait that cuts across society and some people are simply better organized than others.

They still rent rather than own their apartment, that makes no sense. 

Now this is the first flaw in their argument - they are renters. This means that a huge part of their retirement income would have to be spent on rent and since they live in Vancouver, that is not going to be cheap. Sure some neighbourhoods in Vancouver are nicer and thus more expensive than others, but whilst they are still young and able to work, they really should be aiming to buy their own property before thinking about retirement. Would it be such a bad thing if they worked say for another ten years and retired at 45 rather than 35, if that meant that they could get on the property ladder? The fact is they are Canadians, they are lucky in that they have a choice: property prices in downtown Vancouver are very high, but they only need to move about an 100 km away from Vancouver to the town with the wacky name Chilliwack for property prices to drop dramatically. A decent condo in the downtown Vancouver area for a couple (1 bed, 1 bathroom) would come in at around C$500,000 and nicer, bigger condo units can easily go for 2 or 3 million Canadian dollars - oh yeah, it is not a cheap city. The equivalent decent looking condo in a town like Chilliwack is far more modestly priced at about C$125,000 and if you venture even further inland into more rural parts of Canada, prices will far even further. So I am wondering why they haven't left Vancouver to buy a home in a much cheaper location, given how it would really help make their retirement a lot more comfortable given that they won't have to pay a lot of money on rent every month. You wanna retire early, you can't rent in Vancouver for the rest of your lives - that's a flawed strategy as rent prices will rise in the long run, wearing down your nest egg, leaving you with insufficient funds after 10 to 20 years.

Change your relationship with money 

Stephanie is a reception and Cel is a freelance editor - they don't earn a lot of money, yet they're trying to make their money go further by being frugal (eating at home instead of at a fancy restaurant). In the short run, that is probably an easy way to save more but in the long run, you need to fundamentally change your relationship with money. Let me share a little story about milk with you to illustrate this point: when I was last in Singapore, my father got into an argument with my sister about buying milk at a convenience store - his argument was that the same milk at the convenient store costs more than at the supermarket, where it is about 10 cents cheaper, so my sister was wasting money by buying the milk from a more expensive store when he thought she should have walked about 15 minutes to the supermarket to buy milk there. My sister responded that it would be a 30 minute round trip to save about 10 cents, but she earns so much money and thus time is money for her: in saving herself that 30 minutes by buying the more expensive milk, that 30 minutes could either be spent on work (where she is being paid a truckload of money) or even just getting to bed 30 minutes earlier that night, which would enable her to get more rest, in order to make far more money the next day. My sister is (how can I put this delicately) stinking rich - she earns more than me, what she doesn't have however is a lot of time given how hard she works, so saving time is more important to her than saving money. If she can save herself 30 minutes by getting her milk at the convenience store, than that extra 10 cents is a price worth paying. But my father doesn't understand as he is only comparing the price of the milk in the convenience store vs the supermarket without taking into account the context of my sister's situation; being frugal for the sake of being frugal doesn't make any sense.

A - B = C but should you focus on A or B?

Yes, you can be the kind of person who would make a 20 minute round trip just to pay a little less for your groceries and no doubt you may save a small amount of money in that process, but that only makes sense if you have a lot of time and not a lot of money. My father is retired, he has all the time in the world, so yes he would make that 20 minute round trip just to pay a little less for one item at the supermarket. But if your aim is to accumulate enough money in order to retire by a certain age, then it would make far more sense to find a way to earn more money. How fast you accumulate wealth is simply a function of how much you can save: so you start with your earnings after tax (A), you deduct your expenditure (B) and what you're left with is your savings (C). So that formula would look like this A - B = C. What Stephanie and Cel are trying to do is to increase the value of C by minimizing B, but there are limits to this - at what point do you draw the line then? Would you start compromising on nutrition if you're trying to save on your food budget? Would meal times be as pleasant and enjoyable if the menu is determined by budget rather than flavours? What else must you deny yourself? The alternative I propose is to increase the value of A: find a job that pays a lot more, so that when you factor a much bigger A into the equation A - B = C, the value of C is a lot bigger. Yes I'm careful with money but I wouldn't use the word frugal to describe my habits. The reason why I can afford to retire quite comfortably has far more to do with the amount I have earned over the years, rather than how careful I have been with money. The fact is if you earn a lot more money, then you don't need to be that frugal in order to still be able to put away a pretty decent amount of savings each month.

The video seemed to focus on Stephanie's groceries 

Good grief. Seriously? Don't get me wrong, it is good to be careful with your money but if you think that you're going to be able to retire purely based on the choices you make when it comes to your grocery shopping, then you're dreaming. Buying the odd frozen meal isn't going to break the bank, especially if you are someone like my sister who earns a lot of money and doesn't have much time to cook a big meal for her family from scratch. So what my sister would do would simply to organize a take-away meal or take her family to a restaurant for dinner - is that a silly waste of money? No, because that saves my sister some valuable time in order to give her money time to focus on the activities that generate income. As a receptionist, Stephanie has a lot of time on her hands but has little money - thus she can afford to spend two hours baking a cake or preparing a dinner whilst my sister doesn't have that luxury of time, instead she has a lot of money to spend to pay someone else to do it all for her. So instead of spending so much time to prepare her own food from scratch, wouldn't it make sense to perhaps get a second job in order to generate more income? She clearly likes cooking and is good at it, how about starting a small business, cooking for someone like my sister who would gladly hire someone like Stephanie to cook for her family? Stephanie doesn't seem like a stupid person, she is rather articulate on camera - so why isn't she trying to push herself a bit harder to try to get a job that pays a bit more than what a receptionist would earn? After all, if you want to retire at 35, then surely your priority is to earn as much money as you can for your retirement rather than focus on these penny pinching antics to save a few cents here or a few dollars there.

Not having a car: how much is your time worth? 

They make a big deal about not having a car - again, this is something we have to look at in a bit more detail. Neither of them earn a lot of money, as in the case with the groceries above, they clearly have a lot of time on their hands and not much money, so if they could save a dollar or two by walking a distance instead of taking the bus or train, then it would do make sense for them to do that. Let's contrast that to my sister who actually has a car (in Singapore, of all places - one of the most expensive countries to own a car). She spends a lot on transport, she would either drive or use Grab (the local equivalent of Uber), she wouldn't normally use public transport, much less walk for a simple reason: time is money for her, she has plenty of money but not much time. If getting a taxi can save her 20 minutes which she can then spend on work, then that 20 minutes is worth so much more than whatever she has spent on paying that taxi driver. Thus I need to point out that how much your time is worth really depends on how much money you can earn with your time. In Stephanie's case, a receptionist is only required during office hours, so it is not as if she can earn extra money if she stays late in the office after the office is shut. As suggested before, she could change her relationship with money by getting a second job in her evenings and weekends, but she chooses instead to maintain this status quo whereby she has a lot of time and not that much money - this is a choice of course, but in my opinion, not the most rational one if you are trying to accumulate enough wealth to retire on by 35. Having a lot of time and not much money is more like the kind of choice a young mother who wishes to spend more time with her kids would make - which brings me to my next point.

They're never ever going to have children. 

Perhaps I am stating the obvious here, but if you look at their financial situation, they will never be able to afford to have children if they wish to retire early. That's the most sensible and obvious choice they have made in order to afford early retirement yet somehow that was totally omitted from the video? If you have children, then they will be dependent on you financially for everything until they start working and become financially independent - that could take anything from 18 to 25 years depending on how much education they wish to have. I tried to look up how much it would cost to raise a child in Canada these days, estimates vary as a lot would depend on how frugal the parents are: do you buy new clothes for your growing child knowing that the clothes would be too small in a year or two, or would you simply get second-hand clothing in this case? But there are some things like school fees which you simply cannot dodge, the number cited in Globalnews.ca is C$257,364 to raise a child born today until the age of 18 and that's only the point where they say, "dad, mom, I want to go to university for the next three years to get a degree but as I will be a full time student, you need to support me till I graduate so that means paying for my rent, food, clothing etc. So can I have another C$50,000 please? I promise to be frugal!" Yeah, having only one child would mean that Stephanie and Cel would never be able to retire until that child starts working as they would be spending so much money on that child every year. Being child-free means you can spend all your earnings on yourself or in this case, save and invest all that money which parents would otherwise have to spend on their children. That's the most important factor in Stephanie and Cel's plan but yet somehow, it is the white elephant in the room that no one dares to mention? Don't have kids: they are so bloody expensive. There, I said it. 

Investing in index funds - does it work?

According to Stephanie, there's nothing that sophisticated in her investment strategy - they just put their savings into index funds and she seems convinced that it will deliver a return enough to cover them for their retirement. So, let's do the mathematics. Their combined income is C$80,000 of which they are able to save about 65%, which is C$52,000. They have been doing this for 7 years and plan to do it for another 3 years, so let's say that they manage to create a next egg of approximately C$520,000 - typically most people would use that to get on the property ladder but is it enough to retire on by investing in index funds? No doubt, index funds are a pretty safe bet since they will generate a good return as long as the markets are doing well. So if their index funds generates a 10% return, then that easily gives them an income of C$52,000 a year to live on (making it C$26,000 each) - that sounds pretty respectable, right? Actually no, that real figure is going to be smaller for the following reasons: firstly, these companies handling your investments in index funds would charge a fee and the funds themselves will have an AMC (annual management charge), added together, that would typically eat away anything from 2.5 to 5% of your return. So that would reduce that number to something more like C$50,000 which is still a respectable sum - but don't forget, that is still subject to income tax in Canada. Oh yeah, just because you declare yourself 'retired' doesn't make you exempt from income tax on profits made from your investments. Let's say Stephanie and Cel spread the income to reduce their income tax liabilities, according to the current Canadian income tax laws, they will still pay 15% on that C$50,000 income, reducing it to C$42,500 after tax. You may think, that's still a decent figure to live off for their retirement, right? Wrong. Sorry guys, I have a lot more bad news.

Don't let inflation ruin your retirement.

There's something you need to factor into the equation: inflation. Now that isn't that much of a problem in Canada given that annual inflation hovers between 1 to 4% depending on economic circumstances, but it does mean that your C$42,500 is going to buy you a lot less in 2030 than it would in 2020. Furthermore, Stephanie and Cel are renting, so they will either have to pay more and more rent every year or relocate further and further to more remote, rural locations in order to save money. You may think, fine, they can get a log cabin in the beautiful Canadian Rockies, they're retired so they don't need to be near the city, right? But people who live in such remote locations cannot depend on public transport in sparsely populated rural Canada, they definitely need a car to be able to do a lot of their basic activities like going to the supermarket or seeing a doctor - furthermore, grocery shopping in a bit city can be cheaper if there are several supermarkets and stores in the same vicinity competing with each other, driving prices down. In the neighbourhood where I live in London, I have six supermarkets (four chain, two independent) within a 5-minute radius competing with each other. But in remote, rural supermarkets, they have far less competition and you have to contend with higher transport costs to get the food to that location: so the attitude of those rural supermarkets are quite simply, "yeah it's $5 for that small packet of nuts, if you're not happy - the next nearest supermarket is a 30 minute drive away but they will charge you the same for the nuts. You must go to the big city if you want cheaper prices." But if Stephanie and Cel want to avoid that by staying in the city, then they will have to contend with rising rent prices - hence they can't win either way.

Is there any help from the government? 

Considering that the average life span for your average Canadian is 82.3 years, so if this couple retire at 35, then they need to make their retirement fund last 47 years. If they stop working at 35, then that nest egg is never going to be topped up, it will be eroded for two reasons: firstly, inflation would mean that they have to dip into their savings more as time goes by (or seriously compromise in their living standards) and secondly, as we get older, our health deteriorates and there are many things that we are no longer able to do. Whilst she is young, Stephanie has the energy and ability to walk everywhere and do all her cooking and housework - what about when she is much older and she is no longer able to do all that because of her age, she would then have to hire someone to do many of these tasks for her. The sad fact of life is that the older we get, the more help we need and the more money we need to spend getting that help. The older we get, the more money we need to spend - unfortunately, for Stephanie and Cel, their retirement model is pretty much dependent on them staying healthy and fit indefinitely. There is the Canadian Pension Plan (CPP) which is a form of national state pension - although one can claim a CPP pension at age 60 rather than the typical retirement age of 65, as of 2016, those who claim it at 60 have their pension reduced by 36%. There is also the Old Age Security (OAS) which is another form of benefit that they would be entitled to but again, as the name suggests, this is available to citizens of Canada who have reached their 65th birthday. Some spouses and survivors of OAS recipients are eligible to receive an allowance while they are aged 60 to 64. So there is some help available when they turn 60, but that is a good 25 years after they aim to retire at 35 and for those 25 years, they will get no help from the government who really expects them to support themselves, by working if necessary. But don't expect the CPP and OAS to take care of all your needs, it is meant as a only supplement to avoid the elderly slipping into poverty and starving or freezing to death in the cold winters.

What might happen then to these two? 

I imagine that they will stick to their plan and retire at 35, then for the next eight or ten years or so, they will be okay - they will enjoy retirement, they will have a lot of fun, then the party will come to a halt at some stage when inflation starts to reduce their standard of living. That is when they will realize that they are not going to have enough money to enjoy their retirement - one thing that they did clearly enjoy is traveling and having nice holidays to see the world, well I'm afraid when inflation reduces their standard of living, something has got to go and they end up sacrificing a lot of their holidays in order to pay the bills. Sure they may laugh at their friends who are still working hard to put their children through school, they may be getting a lot more sleep than their peers but their nest egg unfortunately isn't big enough even if they are prepared to lead a very frugal existence for the rest of their lives. I suspect that if they don't change their plans, there would come a time in their 50s when they realize that they are going to run out of money at some stage and would have to start working again. And after having taken a long break from working, they may only be able to get their hands on relatively lowly paid work and that is hardly going to help their financial situation. Besides, what if we hit another major recession and the stock markets take a dive, a black Monday style major crash in the stock markets could wipe out the value of a lot of their investments since they have chose to put their faith in index funds - without a diversified portfolio, their retirement plans could just as easily be wiped out if and when a major crash happens. And let's say even if nothing bad happens, their retirement is not going to be as idyllic as they imagine - it'll be a frugal, meager existence as they scrape by like this. Are you going to be happy living like that, if you're going to spend decades struggling just to get by?

Do you have an alternative for them? 

Totally. I think that they are fixated on early retirement because they don't enjoy working. I hate to be a bitch but Stephanie is only a receptionist, that's a pretty lousy job. Look, I have a good friend (let's call her Kate, not her real name) who is a receptionist - she was an actor, a rather successful one. Kate had a major role in one of the UK's most popular comedies that ran for nine seasons over a period of 12 years but that show eventually came to an end some years back and I doubt it is going to be revived since the two main characters have gone their separate ways. I remember that at the peak of her career, she was so popular she would be recognized by strangers just walking down the street. Her acting career came to an abrupt end after that show finished and she has been working as a receptionist to make ends meet whilst still trying to get her acting career back on track - she hates her job so much. After all, it was meant to be something temporary whilst she was trying to find another big role, but after a few years, it kinda just became her life and she is miserable. I'm afraid there's nothing that exciting or fun about working as a receptionist but if you had a fun job that you truly enjoyed, then working wouldn't seem like such a chore. If Kate had a choice between early retirement or working as a receptionist for the next twenty years, she would definitely choose retirement. But if you offered Kate the chance to go back to acting even into her 70s or 80s, then she would gladly do it as she absolutely loves acting. Now if Stephanie and Cel actually had careers they actually enjoyed, then perhaps they would have a totally different attitude towards working life and retirement. They both still seem young enough to make a career change anyway, they can retrain in a new industry or even start a business together - find something they actually will like and enjoy to do for a living. Stephanie clearly enjoys cooking - so why not find a job within the catering industry instead then?

How about a compromise? 

Furthermore, there is the concept of semi-retirement or working for yourself on your own terms. I work about 20 to 30 hours a week but I travel for about 12 weeks a year. I don't consider myself semi-retired since I am still actively working but I am certainly not working as hard as a lot of my peers. Some days I have to put in long hours but being self-employed, I can have the liberty of taking long holidays if I wish - such as when I went to South America for a whole month earlier this year. More to the point, if I were to fully, completely retire now, I do wonder what the heck I would do with all my free time? I don't think I would be that productive, I like my work - I enjoy being good at what I do and I am realistic enough to realize that the nice things in life that I enjoy all cost a lot of money. I don't need to retire, I just don't want to work crazy long hours and have a poor work-life balance: I want to have enough time to enjoy sports, have a social life, to take loads of nice holidays and get enough sleep. I don't know why people seem to see this issue in terms of black & white: either you work full time or you retire - well, how about a compromise between the two extremes? Perhaps it isn't possible for a receptionist to work part time - so in that case, I refer you to the point I made earlier: Stephanie ought to find a job that she hates less, that could allow her to work part time whilst she explores other options.

My final conclusion is that they could do it but it is perhaps premature to aim to retire at 35 on their very modest incomes. Working another ten years to buy their first property somewhere cheap would probably make a lot more sense. The alternative would be for them to move to a much cheaper country like Cambodia or Sri Lanka and retire there, where their nest egg would go a lot further than in Canada. Is that the happy ending they're looking for? Well, here's a dose of reality: I know of this retired British teacher, let's call him Michael (not his real name). He decided to do just that, he took his pension and moved to Northern Thailand, in a village about an hour from Chiang Mai and bought a nice house in the countryside. Then after a few years, he got increasingly bored and since he barely spoke any Thai, there was very little he could do in terms of integrating with the local community there and he wasn't even in a big city like Bangkok where he would have more things to do with his free time. That's the thing about retirement - you need something to do with your time and at first Michael thought he would enjoy doing the simple pleasures like walking in the countryside and tending to his garden, but even then, the repetitive nature of those tasks left him quite bored and he now spends his days surfing the internet, counting the days before his next trip back to London to see his family here and how he kinda splits his time between Thailand and London. Well, Michael is single but who knows, maybe if Stephanie and Cel retire somewhere like that together, they could have a lot of fun together in Thailand or Fiji, it could work out much better than it did for Michael.

Ultimately, my main gripe is with the video producer rather than Stephanie and Cel. The producer put them on a pedestal as if they have all the answers when they clearly don't - I see two people who have a plan and are willing to try their best to make things work out, but they have no guarantee that it would work. Therefore, the producer really should have challenged them with hard questions like, "what if inflation and rising rents wreck your retirement plans? What if you decide to have a baby? What if you run out of money before you turn 55?", rather than just go on and on about Stephanie's grocery shopping when that will simply make the viewers like me extremely cynical about their plans. So that's it from me on this topic: what do you think about Stephanie and Cel's plans? Is it possible to retire at 35? At what age do you plan to retire? How do you intend to fund your retirement? Would you choose not to have children in order to save up for your retirement? Let me know what you think please, leave a comment below and many thanks for reading.