Before writing many more posts on this site I think it would be helpful if we sat down and defined what it takes to be able to declare financial independence. I have to be honest and tell you that we have not actually done this thoroughly enough. Writing this post will be exactly what we need to define our financial end goal in more detail.
To be able to know how much you need to save to retire, you first need to know how much money you will need every month. Almost all financial advisers would tell you that your retirement earnings should be a percentage of your current income. I don’t find that particularly helpful. I think it’s much more helpful to calculate based on how much you actually need (or want) per month. With that in mind let’s jump right into a monthly “needs” calculation:
- Food: $750 / 95,000 ISK
- Utilities: $190 / 24,000 ISK
- Property taxes: $390 / 50,000 ISK
- Maintenance: $395 / 50,000 ISK
- Insurance: $160 / 10,000 ISK
- Transportation: $155 / 20,000 ISK
- Hobbies and life: $700 / 90,000 ISK
- The unexpected aka the buffer: $400 / 50,000 ISK
Sum per month: $3,140 / 398,309 ISK
That’s a bit more than I thought it would be but I’m also being rather cautious. We currently spend maybe 1/2 to 2/3 this much every month. I’d rather be safe than sorry though.
Lets break the needed income into revenue from savings or rental property. Our current plan is to buy or build real estate to rent out. We currently have 2 properties, planning for the 3rd one:
- Gross: Apartment in Reykjavik rent: $1,060 / 135,000 ISK
- Gross: Guesthouse in Reykjavik rent: $630 / 80,000 ISK
For each rental property we have to pay 17% tax and then there’s always some maintenance. It’s very difficult to plan maintenance but a good rule of thumb is that you should estimate maintenance as 1% of the purchasing price of your property annually. Since these are rental properties the number should be a bit higher. In our case it turns out to be 22% of the rent so taken together with taxes it comes to 39%, so after taxes our rental income looks like this:
- Net: Apartment in Reykjavik rent: $647 / 82,350 ISK
- Net: Guesthouse in Reykjavik rent: $383 / 48,800 ISK
For a total sum of $1,030 / 131,150 ISK, so we still have $2,110 / 268,772 ISK to go! That’s 3 more small apartments. Some more effort is needed to make this work. We only have two options: settle with less money monthly or increase the time range. Buying 3 more small apartments is going to take 9 years of monthly $3,900 / 500,000 ISK payments. By that time we will be slightly older than 40 (43). Not that far off though. It’s quite a generous monthly retirement paycheck if you ask me, way more than we currently spend even in December which is our most expensive month.
Looking at the numbers I realize that the rent is generating a very comfortable 5.5% return on investment after taxes. That’s much more than we would ever see on a savings accounts. It’s also considerably more than I can see on any of the investment fund options available here, at least the ones that are relatively safe. We will not invest in risky investment options, period. I can still remember relatives and friends loosing all their savings during the financial crisis, only because they had invested their savings in stock, index or money market funds. The domestic stock market did not just take a little dive like in the US, it was wiped out!
Lets see if we figure something out or realize an error in our calculations in the coming posts that will enable us to reach our financial freedom goal earlier than by 43.