Sebastien Aguilar of SimplyFI.org explains the journey UAE residents need to take to reach the ultimate money goal
How to achieve financial independence
Achieving financial independence is the dream of many adults who yearn to never work again.
It is no longer the realm of big money inheritors, hedge fund stars or dot-com billionaires.
Growing numbers of “regular” people are pursuing a path to financial independence – or FI – and early retirement through savvy-saving lifestyle and strategic investment.
Many UAE residents are planning, and already achieving, a self-sufficient scenario.
Working towards the FI goal is Belgian Sebastien Aguilar, a Dubai resident who heads the non-profit community SimplyFI.org, which encourages investors to follow the investment principles established by Jack Bogle, the founder of Vanguard.
Here, Mr Aguilar shares his guide on how to achieve FI for yourself.
What is financial independence?
Definitions can depend on individual goals or circumstances, but generally it means when non-job ongoing passive income covers or exceeds your expenses – be that from an investment portfolio, letting property or a generous pension.
“One simple definition is you can shape your life without taking money into consideration,” says Mr Aguilar. “The freedom, once you reach FI, to not be bossed around by what we earn.”
He says it is not so much about retiring early, but about having the choice to pursue dreams and ambitions.
“You’re already working on this, and for most it’s just a matter of pushing it even further,” he says.
Why become financially independent?
“More people want to drive their own future financial prosperity,” says Mr Aguilar.
Some, he says, want this status so they can simply live according to their own rules, not those dictated by an employer, or to quit day jobs they don’t enjoy.
“We’ve been taught to study hard, get the grades, the job, never quit the job, get married before 25, have kids and work until 65, and then retire,” he says.
“We should trust the system and do like everyone else, especially our parents and grandparents. Back in the day it was crucial to just fit. These days people are more realistic and can make choices.”
How to become FI?
Central to SimplyFI’s outlook on financial independence is a portfolio with forecast average gains covering the expenses you expect during retirement. The objective is for the portfolio to generate more than needed so that it covers all future expenses and potentially outlives the investor.
The Bogleheads approach, based on the financial principles of Jack Bogle, typically recommends a balanced portfolio – with 60 to 80 per cent stocks and 20 to 40 per cent bonds – and total charges under 0.5 per cent.
Based on extensive studies and the work of many early retirement researchers, the advice is to build a portfolio that is 25 to 30 times estimated annual expenses.
“The Bogleheads style is a simple approach; a balanced portfolio of stocks and bonds so you get both, the return from the stocks and some risk mitigation from the bonds,” says Mr Aguilar.
“Low cost is very important. Diversify to manage risk the best you can – and choose passively-managed funds as they have been proven to beat actively-managed funds over the long term. We recommend working with index mutual funds or index exchange-traded funds that basically combine all those points.”
If you build a good Bogleheads portfolio, the rule of thumb is you can withdraw 3.5 to 4 per cent annually – without depleting portfolio growth – to cover living expenses.
“And to reach FI you need to increase income and reduce expenses. You can work on one or the other to reach FI – or both to be more effective,” says Mr Aguilar.
“It’s important to know how to invest wisely and simply without having to pay high fees for financial advice, that most of the time isn’t required.”
What are the obstacles?
Accommodation, lifestyle and schooling costs, alongside potential health problems and unexpected emergency expenses present speed bumps on the journey, says Mr Aguilar.
Critics would also point to the foibles of world stock markets rocking the FI boat ride.
Other hurdles include salary freezes, sudden job loss and the location you settle in – living somewhere like Manhattan in New York costs substantially more than Phuket, Thailand. One essential buffer for the above is an “emergency fund”, which holds recommended savings of up to six months salary.
Frugal versus the dream life
Is it true FI if you have to compromise your lifestyle beyond the economy drive that got you there?
Certainly some achieve it sooner by living on the bare essentials to minimise costs.So set a template of how you are going to live that defines your view of FI.
If you’re single with no dependents, your target should be more attainable than with children. Not everyone seeks financial independence for early retirement, rather a sustainable retirement – if the timescale is longer, lifestyle adjustments right now might not be severe.
Keeping up with the Joneses could dent investment potency, however.
Is a flashy new car really worth delaying your financially independent state?
“It’s important to understand the real value of money,” says Mr Aguilar.
“Up your saving and FI can be attainable earlier – one year could make a difference in a life.”
Why not to retire early?
Some fear boredom and may feel they are defined by their job. Many would say that is a risk worth taking and variety of options exist, from reading extensively to painting or travelling, voluntary work and more time with loved ones.
“Financial independence doesn’t necessarily mean you quit your job. You can be FI and successful at work, enjoy the comfort and safety that brings,” says Mr Aguilar.
“But what if tomorrow wasn’t just an extra day off, but the rest of your life.”
Wise words to follow
There are several inspiring financial independence authors and bloggers out there.
“Some claim you can reach FI in 10 years if you really focus,” says Mr Aguilar.
Recommended reads include:
The Shockingly Simple Maths Behind Early Retirement by Mr Money Moustache
The Simple Path to Wealth by JL Collins
The Bogleheads Guide to Investing by Taylor Larimor, Mel Lindauer, Michael LeBooeuf
Millionaire Expat: How To Build Wealth Living Overseas by Andrew Hallam
Tales from the FI frontline
Alan, 33, who did not want to reveal his name, lives in The Greens. The Briton works in the events industry, earning about Dh477,500 annually.
“My job takes me around the globe and I have a good lifestyle,” he says. “I want to look at how I could sustain that into retirement, and at stability when work dries up or there are periods between roles.
“I want to be FI but also have options. I’m recently married, so there’s potential for starting a family.”
Alan has learned to save more as he’s matured.
“Looking at my parents and other family members…it’s not that far away, " he says. "I’ve got investments, some bonds set up previously. I’m looking to move to the more passive side of things, the ETFs."
Alan says he studies his finances - where the expenses are, how much his income is and what he can do to make that balance even better.
“It’s easy to see the shiny new cars here and every Friday at brunch," he says. "I’m pretty good at resisting, but you’ve got to have a few luxuries. I wanted a nice car while here; it’s perfectly within my budget, but I could happily go back to something more economical.”
Meanwhile UAE expat, Lucy, who did not want to reveal her name has already achieved financial independence. Originally from South East Asia, she was an engineer in Abu Dhabi until she recently “retired”. She’s 36.
Lucy earned well, but lived a single life of sensible investing, eschewing the luxurious UAE lifestyle.
Now she’s swapping Dubai for Germany with plans for further education, travel and a business.
Although investing in mutual funds at home, she didn’t have a plan to become FI - or realise she was nearly there - until last year when she met SimplyFI.
“I was looking for a way to buy international stocks,” says Lucy, who at 17 was inspired by the book, The Millionaire Next Door: The Surprising Secrets of America’s Wealthy, by Thomas J Stanley.
She started her UAE job in 2014, initially with student loan and mortgage commitments at home.
“I strived to save, put limits on myself. I knew I needed three to six months of emergency funds," she says. “I wanted to save enough so I could study in Germany, tuition-free education, and support myself for two years. I was putting aside 70 per cent of my salary and rarely spent my bonuses."
Lucy says she was fortunate as she never enjoyed shopping sprees, preferring the outdoors and camping instead.
“You adjust yourself to a level where you feel ‘I need this much to survive’, but actually we need so much less," she says. “The trick to saving was to ‘hide’ money from myself. The moment my salary came in I left enough for my room, bills, money to survive for four weeks. The rest I sent home.”
The UAE wage combined with a restrained lifestyle boosted Lucy’s FI possibilities.
“I didn’t really set a target because I didn’t think I could retire in my 30s. Being here helped considerably, but only because I didn’t fall for the expat traps," she says.
“I put everything on a spread sheet and then realised I had enough to stop working. My company offered me another contract for three years, basically the same, no more benefits, so I said ‘no thanks’.”
Lucy sees few downsides. “In the beginning it was like ‘now what’. How do you define yourself when you meet someone? “But it gives you freedom to choose what work to do. I still want to be employed as an engineer, but now I’ll get to pick and choose if I don’t like the offer," she says.
“Also, family and friends are more a source of financial security than actual financial assets. I’ll never end up on the street; somebody will take me in if I lose my investments. That is a huge source of wealth.”