Book Review: Quit Like A Millionaire
I’ve been following Kristy Shen and Bryce Leung on their blog, Millenial Revolution, for a while now. In 2019, they published a book called Quit Like a Millionaire. During the Christmas weekend, I devoured it. The book is very personal, drawing from Kristy’s life growing up in poverty. It uses these experiences and her upbringing to explain how she turned into the person she is today and ties these life stories to financial lessons. As a first-generation immigrant, I find her stories very relatable. They retired in their early thirties. The purpose of the book is to show how you don’t need to come from privilege, inherit generational wealth, or work in high-tech to retire early.
While there were a lot of things in the book that I already knew from years of investment research, I learned many new things. The most important thing that I learned was the Cash Cushion and Yield Shield that the authors mention on their blog. With proper asset allocation, this strategy ensures that you never run out of money in retirement.
A Discussion On Debt
The first financial lesson is the familiar Rule of 72. Divide 72 by a rate of return to calculate how long it will take for the principal to double. The rule of 72 works for both investment returns as well as debt. The authors use this to explain that you should pay off high-interest consumer debt as quickly as possible. Next, pay off education loans because student debt cannot be forgiven when declaring bankruptcy – it lives with you forever. The authors explain that mortgage debt is low-interest because it uses the house/apartment/condo as collateral, versus high-interest consumer debt where there is no collateral. The authors suggest that once consumer and student loan debts are paid off, then you can start to consider investing even if you have a mortgage because the average market return is higher than most mortgage rates. Note that they wrote this during low-interest rate environments.
Return on Educational Investment
The author is very practical. Although she dreamed of becoming a writer ever since she was an adolescent, she realized that the average pay for a writer is low compared to the amount of money and time that she would have to invest in school. So when she attended university, she pursued engineering. She suggests delaying the desire to follow your dreams until later in life. After all, she eventually became a writer.
I’m torn on the moral of this story. While I understand the author’s point and have seen alumni blame my alma mater for not preparing them for their (low-paying) futures, I know of alumni who made a career switch later in life. I think students should make an informed decision about their futures. After all, not everyone is cut out for careers in STEM. One of the messages that the book discusses is that it doesn’t matter what happened in the past, what matters is what you do going forward. Someone who is neck-deep in debt or working a low-paying job can take intentional steps to improve their situation. I say this with the understanding that it’s easier for some than others based on socio-economic factors.
A Discussion On Spending
The author describes how immigrants who come into the middle class start to buy nice things. I second that. The author had an unhealthy addiction to handbags. There was a huge dopamine high from the first purchase, but as she bought more and more expensive handbags, the novelty died quickly. The author ties this back to a study showing that the brain acclimates itself to new levels of happiness. The same phenomenon occurs in drug addicts. The same can be said about salaries – as long as all your needs are met, there are dwindling levels of happiness as salaries increase. The author says that as you collect material things, it forces you to think about them, protect them, etc. This is different from experiences, as each experience is different leading to a different type of happiness. And at the end of the experience, there is nothing to collect except photos and memories.
As I read the section on spending, all I could think to myself was that the author is the Marie Kondo of spending. You should only spend on things that bring joy and happiness. Not all spending is created equal. Similarly, not all spending cuts are created equal. Some cuts hurt while other types of spending cuts are unnoticeable. The author suggests poring over your monthly expenses in detail to identify what can be cut without affecting your quality of life. An example is eliminating a streaming service. Next, cut things that might bring some discomfort but one that you may get used to. An example is cooking at home. Finally, reduce expensive things that you own that cost money to maintain. An example is a car – either reduce car use or get rid of it altogether. Doing so will reduce spending on gas, maintenance, and insurance.
A House Is Not An Investment
I’ve heard this many times and it’s true. We’re lured into home ownership because we’ve been brainwashed into believing that a house’s value will always go up. This led people to take on dangerous levels of debt that led to the Great Recession. A house is first and foremost a place to live. The vast majority of people are not house flippers who buy and sell houses as easily as they buy and sell stocks. A house is not a liquid investment.
Someone who enters home ownership after renting all of their lives doesn’t realize how much work and money is required to maintain a house. There are additional costs associated with home ownership: mortgage payments, maintenance, property tax, etc. No one ever talks about that and these additional costs eat into any gains you make from selling the house down the line. The author introduces the Rule of 150. Multiply monthly mortgage payments by 150% and compare it to monthly rent to decide which is better. The 150 number takes into account 50% interest payments for the first years of home ownership.
Modern Portfolio Theory
The author relays the story of a bank employee trying to convince her to invest in actively managed funds. I have the exact same story when an employee at Washington Mutual tried to get me to invest in their funds. I was prepared for that meeting because I knew about index investing. I was not swayed and thankfully so because that company no longer exists. The author states that actively managed funds charge high fees and it’s even higher in Canada. Only 15% of active managers beat the index. That means that index investing beats 85% of active managers.
The author goes into modern portfolio theory and while I knew a lot about this subject, I learned new things. I highly recommend reading this section of the book as I cannot do it justice. The author goes into asset allocation of equities to fixed income, global diversification of equities, annual rebalancing, etc. Modern portfolio theory only works when there is a fixed income portion of the portfolio. Fixed income provides a safety net as it’s less volatile and performs well when equities decline. If you have a portfolio that consists of all equities, the portfolio will decline during a financial crisis and there will be no way to rebalance. Rebalancing provides a built-in buy low, sell high strategy. Rebalancing a 100% equity portfolio during a downturn means selling low. In addition, modern portfolio theory only works on indexes and doesn’t work on individual stocks. The reason is that the price of an index can’t go to zero, but the price of a stock can.
Side note: Cue 2022. In an economic downturn with rising interest rates, both equities and fixed income declined. I need to read up on what modern portfolio theory recommends in this situation.
Tax Efficiency
Like the author, in the past, I was intrigued by tax reduction strategies. In this section, the author goes into the various types of investment accounts and their tax treatments. The author goes into the various ways in which different types of investments pay out dividends or distributions, how they are taxed, and walks the reader through how to allocate those investments into different accounts to optimize tax efficiency. While the authors are Canadian, the primary focus of the book was US accounts with a mention of Canadian accounts afterward. I guess that’s one way to expand the audience for their book.
The most interesting thing that I learned from this section is a strategy called capital gains harvesting. We’re familiar with tax loss harvesting where we sell our losers at the end of the year to offset any capital gains. Capital gains harvesting is a slightly different beast. Instead of paying a huge tax bill when selling your big winners in the future, the point of capital gains harvesting is to sell your winners in a low-tax environment and buy them back so that you pay low-to-no tax on the capital gain while maintaining the same portfolio and increasing the cost basis. An example of a low-tax environment is when you’re retired and making income below the basic personal amount (or standard deduction in the US). This is pure genius.
The Problem With The 4% Rule
The goal of retiring early is to invest your money so that it generates more money continuously without ever depleting the principal. For those who are not familiar, the 4% rule states that you can safely withdraw 4% of your portfolio every year and almost guarantee that you will not run out of money before you leave the Earth. This was based on a study that included simulations of various scenarios. The simulations concluded 95% of retirees never ran out of money.
The problem with the 4% rule is that it doesn’t work if there is an economic downturn right after you retire. Selling your stocks to fund retirement when the value of your portfolio declines is the worst time to sell. The 5% of retirees who run out of money do so because they sell their stocks in a declining market in the first 5 years of retirement.
Cash Cushion And Yield Shield
The idea behind the cash cushion and the yield shield is so simple that it’s genius. First, you have to estimate how much you’ll need to fund retirement in the next 5 years. Calculate how much you expect to receive in dividends that are easily accessible next year and multiply by 5 years. This is the yield shield and its purpose is to reduce the amount of cash you need available for the next 5 years. Subtracting the amount of dividends from the annual spend gives you the amount you need sitting in a high-interest savings account. This is the cash cushion.
Each year, you harvest the dividends from your accounts and transfer them into your spending account. Then you transfer the remaining amount needed for spending from the cash cushion account. In a normal year, you sell some investments (remember, buy low and sell high) to replenish the cash cushion account. However, in a down year, you don’t sell until the market has recovered. Once the market has recovered, you sell enough to cover the years when the cash cushion wasn’t replenished. The money in the cash cushion provides the flexibility to avoid being forced to sell low. The idea of using 5 years is based on the time for markets to recover. The median recovery period is 2 years and the worst was 5 years.
Conclusion
I loved this book – it’s well-written. I didn’t expect to learn much, but I did gain useful information. There’s more to the book than what I described here and I can’t do it justice. The authors talk about their experience traveling the world while keeping their expenses the same as if they were living in Canada by using geographic arbitrage. So if you want to read more, pick up the book today!