Y’all probably heard about Kristy Shen and Bryce Leung, the 30-something couple that turned the Canadian PF world all atwitter when the CBC profiled them and their $1 million portfolio.
In case you didn’t read the story, here’s the
one two paragraph summary. The couple got rich and then retired at 30 or some other ridiculous age. They’re currently doing the same thing many others in their shoes do–travel and start a blog profiling how great their lives are. They’re convinced avoiding home ownership was the key to amassing such a large portfolio.
Instead, the couple put their cash at work investing with noted housing bear Garth Turner, putting their $500,000 nest egg into a 60/40 stock/bond allocation back in 2010. By late-2014, the portfolio had doubled to $1 million. So they quit their stressful (and high-paying) tech jobs, preferring to, I dunno, watch the sunset. Or whatever it is people do who don’t have jobs. Yell at teens, maybe.
Anyhoo, it turns out the couple is very wrong. Avoiding home ownership didn’t make them richer. If anything, it made them poorer.
A deeper analysis
Let’s review what we know about the couple their own financial advisor called “tireless self-promoters and reasonably irritating juvenile 1%-ers.”
- They saved up $500,000 by 2010
- They continued to save large amounts from their well-paying jobs up until the end of 2014
- They had a reasonably conservative portfolio
Let’s use a compound interest calculator to make a reasonable assumption of their portfolio. I used a $500,000 starting balance, a $50,000 additional contribution, five years of growth, and 8% annual return. Here are the results:
Remember, Turner even remarked just how well the two saved, so I think I’m being a little generous on the return. I’d suspect their actual rate of return was much lower and it was supplemented by a higher savings rate.
Now let’s make another assumption. Say they bought an average Toronto house in 2010. Instead of putting their $500,000 down on the house, they put down a measly $250,000, investing the rest.
First, let’s figure out the return on the house. The median price on a property in Toronto was $367,750 in June, 2010. The same property could have been sold for $587,505 back in November, 2014.
Thus, the couple could have turned $250,000 into a gross profit of $219,755. We’ll round that down to $200,000 for expenses like paying a Realtor to sell the place, taxes, and so on. Other costs like the mortgage would have been quite low, since they would only have borrowed just over $100,000. And knowing them, they probably would have done something smart like renting the basement.
We’re up to $450,000 in capital, a good start. But what about the other $250,000, plus the $50,000 added to the pile each year?
Glad you asked. Here’s the results of that:
Add the two together and we get a nest egg of $1.13 million, a full $80,000 more. Or, if you want to look at it another way, they would have ended up approximately 8% richer had they bought a house and then sold it a couple of years ago. They’d be even richer if they had held on until today.
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This is why they’re rich
As the story gained traction, an important detail began to emerge. Back when they worked, Shen and Leung worked really hard. They did the stereotypical tech thing of basically sleeping at their desks. Additionally, they were both in jobs that paid a lot of money. Both made over $100,000 per year for their whole working lives.
Unlike many of their peers, they were smart about it. After realizing they didn’t spend much time at home, they got the cheapest accommodations possible. Why splurge when you’re never there? They were similarly cheap in other aspects of their lives too.
This story sounds familiar, because it’s literally the story of every early retiree. They all worked hard (usually in tech), lived cheaply, had a spouse on board with the plan, and eventually saved up enough cash to say sayonara to working, maybe forever.
The key to their success doesn’t come from investing. It doesn’t come from cashing out stock options. And it especially doesn’t come from avoiding home ownership. It’s all about saving. A high savings rate is 99% of the reason why these people are rich, Shen and Leung included.
There is a simple sauce for retiring early, and it has very little to do with homeownership. As long as you can save aggressively and not shoot yourself in the foot, you’ll make it there.