If you struck up a midweek conversation with Billy and Akaisha Kaderli, you might peg them as early retirees. And you would be right. The energetic 61-year-olds share the glow of a couple freed from the rat race. But a few things make them different. For starters, they have been retired for 23 years. They also travel the globe.
Previously, the American couple owned a restaurant. Akaisha ran it. Billy worked at an investment firm. But in the late 1980s, Billy grew increasingly uncomfortable at work.
"I understood how beneficial index investing was. But as a broker, I couldn't really sell them. They don't pay high commissions. I was doing a disservice to clients [by selling actively managed products] so it was time to leave." With $500,000 in index funds, the couple retired in 1991.
While most of their friends were acquiring large houses, new cars and filling their homes with fine furnishing, the Kaderlis downsized. "We sold most of our possessions," says Akaisha, "including our house and our car." For nearly a quarter of a century, they've lived off their portfolio.
Since 1991, the S&P 500 index has averaged 9.8 per cent. Knowing their retirement could exceed half a century, the Kaderlis invested everything in stock indexes. Today, their portfolio is worth a lot more than when they retired.
To stretch their money, they did something few would expect. They sought low cost countries. Their favourite hubs include Chiang Mai, Thailand; Lake Chapala, Mexico; and Guatemala. They find long-term rentals, often spending months at a time in a single location. Enjoying some upscale house-sitting, they spent four luxurious months overlooking Lake Chapala last year – without paying rent.
"We have a great deal of fun," Akaisha says, "living on $30,000 a year." In 2013, they spent roughly $3,900 on housing, $5,400 on transportation, $6,600 on food and entertainment, $6,900 on medical and $3,300 on miscellaneous costs. If they invested like most Canadians (in actively managed mutual funds) their annual fund costs would exceed their living expenses.
Actively managed fund costs average nearly 2.5 per cent per year. Investors with $1-million invested would pay $25,000 in annual fees. "We purchase low cost ETFs," says Billy. "Instead of being one of our highest expenditures, investment costs are among our lowest."
Low taxes are another reason the Kaderlis' invest with indexes. Many people aspiring to retire early are prolific savers. As such, their savings often exceed the annual contribution room allowable for tax-sheltered accounts, such as RRSPs. The Kaderlis, when saving for their own retirement, were no exception. Much of their money went into taxable accounts.
Actively managed funds generate turnover as managers buy and sell holdings within the fund. In a taxable account, such trading generates unnecessary taxes when the investments generate profits. Reporting a 15-year study of after-tax performances, Yale University's endowment fund manager, David Swensen, suggests that just 4 per cent of U.S. actively managed funds beat the U.S. index after taxes. "The 96 per cent of funds that fail to meet or beat the Vanguard 500 Index Fund lose by a wealth-destroying margin of 4.8 per cent per annum."
Fifteen years after they retired, the Kaderlis wrote their first book, The Adventurer's Guide to Early Retirement. They've since written seven others and maintain a helpful website. "It supplements our income a bit," laughs Billy, "but it's not enough to live on."
When asked how much money people need for retirement, Billy has a simple answer. Multiply your expected expenditures by 25. Those spending $30,000 per year would need roughly $750,000.
Studies show that investors withdrawing 4 per cent from their portfolio each year shouldn't run out of money. For example, someone withdrawing $30,000 from their index portfolio in their first year of retirement might withdraw $30,900 the second year. The extra $900 allows for a 3 per cent increase in the cost of living. While their living costs vary, Billy and Akaisha spend roughly 3.5 per cent of their portfolio each year.
So far, the strategy has worked well for them. As early index investors, they were pioneers – with their money, and their lifestyle.