Low Cost Playgrounds

Some favorable playgrounds which have lower cost of living are:
1) Thailand
2) China
3) Malaysia
4) Indonesia
5) India
6) Philippines
7) Vietnam
8) Cambodia
9) Laos
10) South and Central American countries

If you leave the #10 out, the rest are:
a) big enough for you to explore a lifetime
b) near to one another so not costly to travel from another

If you like this group of countries (#1 to 9), then you could survive on US$10,000/y as of 2009. With 9 countries to choose from, you can plan your time in a calendar year to easily to fit into the VISA rules' constraints. Averagely, you need only a 1-month VISA from each country ONCE each year if you plan to visit each ONCE only. But you could visit many of these countries more than once each year, after some months away. So, theoretically, with these 9 countries to choose from, you should always be able to get a VISA from one of these at any time in a year.

Even better for nomads is this region also has the best of everything the West can offer. If you want world-class financial services, HK and Singapore have it. If you want state-of-the-art medical services, India, Malaysia, Thailand and Singapore have it. So, you could conveniently do your banking, investment, annual health screening, vaccination, and medical treatment in one of these countries.

Choosing Your Regular Playgrounds

As explained above, it's important to work in a place which allows you to save a higher absolute figure for your Monthly/Regular Savings amount. Usually this means a large city in a developed country.

But the ideal playground---where you spend your time when you retire and spend your retirement income---should be the opposite: low costs. From the financial angle, these should be in developing countries. Of course, if you prefer developed countries like Western Europe or Japan, then you need a larger retirement fund.

So, the logic behind why some people can afford to retire much earlier is: there is a economic gap between where they accumulate their savings and where they spend your savings.

Most people can, with enough willpower, save up US$1,000 or more every month by working in a big city in a developed country. Younger people might take a second part-time job to attain this level of savings. If this (US$12k/y) is invested in a balanced fund (stocks and bonds) and earns a compounding rate of 7% per year, it take 12 yrs to reach a savings of US$215k. This assumes that the savings rate doesn't increase over the years when the person's salary should have increased as a result of higher mastery of the habit of saving and his professional skills through experience. If a person had started to do this at age 20 straight after university, then he could have attained the US$215k in his early 30s. If he had done this for 15y, the nest egg would have grown to US$302k. As illustrated, this could be sufficient to sustain the retirement of many young retirees who live within the budget of US$10k/y.

After illustrating with the figures, it's not difficult to understand why so many people had managed to retire young and become a global nomad. What you need are:
1) Start early, preferably in your 20s. Time will be on your side
2) Cut your expenses and save regularly
3) Invest regularly using Dollar-Cost Averaging. In simple words, a same amount every month, whether the market is up or down. When the market is down you buy more units of the fund. Over the long term, time is on your side, because when the market recovers, the additional units of fund will be worth more.
4) Invest in a balanced, diversified fund with 50-70% stocks and 30-50% bonds. Keep your investments simple. This money should be something you don't need and won't need in the future 15-20 years, and which you can set aside for long term investment.
5) Buy insurance while you are young and healthy.
6) If you have dependent parents, insure them. This safeguards you against the possibility of having to use your savings to pay for their healthcare if they become sick uninsured. Also, manage their retirement income in such a way that their savings can sustain their retirement (without having to mess with your savings).
7) Do your health screenings annually and treat any disease you discover as early as possible. Good health=less costs.
8) Minimize the number of dependents. If you are single, you have less dependents, so it's easier for your to save up as much as possible and to make the transition to nomadic lifestyle.

So, kick-start your US$1k/month regular savings plan asap.

Discretionary $ and Savings Rate: Crucial Factor in Determining your Assets

How should you choose where to work or what business to do when you are making the preparations for Financial Independence (FI)? You must pay attention to one figure: how much you are left with at the end of the month after paying off all your expenses, taxes and loans (ETL). So, if a person working in China earns US$300/m, spends only US$150 for ETL, and can save up 50% of US$150/m, then he is worse off than an American who can save up only 20% of his US$5,000/m salary.

If you are young and single, hence mobile, you should choose to work in a place---even overseas---where you can maximize your savings rate. This way, you can shorten the period of your financial accumulation period, and retire earlier.

As you can see, the % of your salary that you can save doesn't matter as much as the absolute figure itself: e.g. US$150 or US$1000.

For those who are keen to know more, perhaps they should read some books (meant for laymen) about the subject also. Some important topics include:
1) The habit of regular savings
2) Thrift and cutting back on discretionary spending
3) Invest the excess in income producing assets that generate a stream of passive income (income that will be generated without you having to actively manage the assets or business)
4) Insurance to safeguard against uncertainties
5) Calculating how much you need (monthly expenses), which varies according to WHERE you intend to live
6) From the above, ascertain when your passive income can exceed your expenses. When you passive income exceeds your expenses and you have some emergency fund (liquid cash), you are theoretically Financially Independent because you don’t have to work a day to survive.

A very simple model might be:
1) You have a job paying US$5,000 after-tax salary.
2) You pay off your debts asap. So the $5k can be used to pay for your expenses + savings
3) You reduce your expenses and set a target saving rate, say $3,000/m.
4) You invest your $36k/y in assets that generate passive income. For example, stocks, bonds or property.
5) You ascertain that you want to live in Southeast Asia most time, and that you need US$10,000/y.
6) To derive the $10k/y, you could, for example,
a) own a property costing $150k and rent it
b) keep a stock and bond mutual fund of $250K and withdraw 4% pa from it
c) purchase an annuity with a single consideration of $180K, for which the insurance company promises to pay you a guaranteed $10k/year for as long as you live, plus a variable bonus

Of course, the above 3 examples differ in their levels of effort and predictability. The first option may require some effort from you to find the tenants, collect the rental, fix the property, etc. unless you hire a friend or estate management firm to help you do these.

Option 2 requires less effort. You can park your mutual fund in an online brokerage and instructs it to remit the withdrawals of 4% electronically to your bank, and access the money with your debit/ATM card from any major town or city with an ATM machine. But the 4% is projected, not guaranteed, to be sustainable, based on historical data.

Option 3 is the most predictable because you are guaranteed the $10k every year plus some bonuses. But you may not be able to withdraw the fund for emergency use like you could if you had invested in a mutual fund instead. But it may also be its most important advantage since you do not want to play with your income source. If you could withdraw it, you may spend it away and lose the goose that lays the golden eggs.Similarly, you can instruct the insurance company to pay the annuity pay-outs to your card-linked bank account and withdraw that income wherever you are.

Having dealt with the income, you might, of course, want to save a little more which you can use for emergency. But if you want too much emergency fund, you may procrastinate the transition to nomadic lifestyle.

After reading the blogs of several nomads, it seems that it is quite manageable for them to live on US$10k/y, so the above examples may give you a clue as to how much you really need to become a nomad yourself. Perhaps $180k in an annuity plus some allowance in mutual funds and money market funds (cash-like investment) could work. Of course, knowing that the US$ is likely to depreciate due to the enormous debt the US is having, it’s more advisable to park your annuity in one or two countries whose governments are fiscally responsible and sound, and whose currencies are likely to appreciate over time. Good examples would be politically neutral & stable small states such as Switzerland & Singapore. With a Swiss or Singaporean annuity, some investments in a balanced and globally diversified mutual fund and some liquid assets like bank deposit, you could be assured of a steady stream of income for as long as your live, plus some allowance for emergencies. If you also have some insurance, you would have additional protection.

Many experts have suggested that the past decades of growth had been sustained with US debts, and that the coming years may see a depression to correct the irrational exuberance. This forecast is economically sound. So, I’d play safe by parking at least half if not all of my income producing fund into a low-risk investment like annuity in order to secure a guaranteed stream of income. If growth will be slow in the coming years, then my investment in mutual funds may not be sustainable if I withdraw 4-5% every year from it for years. It may shrink, and I may be forced out of retirement in this worst case scenario.

For those who are keen in full instead of semi-retirement, the above provides some insights into how to plan for that ultimate day when you can become theoretically Financially Independent.