Invest and Stop Working

After finding the book “Stop Working” from Derek Foster on Amazon, I feverishly read it from cover to cover in about 3 - 4 hours. To those of you who haven’t heard anything about the book before, it’s written by Derek Foster, who is touted to be Canada’s youngest retiree.

Apparently the author of this book was able to “punch out” of the workforce at the tender age of 34. He was able to do this by investing a fixed amount of money every month for a period of about 12 years. Initially he bought only mutual funds, and later focused exclusively on dividend paying stocks.

Personally I thought that the book was very inspirational, because it shows readers that they might not need as much as their financial advisors tell them to save for retirement.

It also tells (in a way) the story of a dividend investor; gives a couple of dividend stock picks; and explains how dividend income is a better source of income than earnings from one’s job. The book strongly focuses on cash flow, in particular cash flow from stable dividend companies with long history of dividend increases.

I also like how Foster compared taxable income from wages to taxable income from dividends. If you check out his “sample portfolio”, you will notice that it was yielding about 6% in 2004/5, which is not unachievable. He did mention, however, that you need to buy the stocks when they are trading at bargain prices. He also mentioned that had you bought the stocks in his sample portfolio at their bargain prices you would have paid about $100,000 for them, rather than $300,000 in 2004/5. And thus your yield on cost would have been 18%, rather than 6%.

The misleading part about this book is the fact that the author mentions how he saved $200/month plus his tax refunds in the stock market for 12 years. At the time of his retirement, however, Derek Foster had a portfolio worth about $300,000 - $400,000, a fully paid house, and a rental property. The numbers simply don’t add up for me. I have read in other sources that he made large leveraged directional bets in Altria in early 2000, which paid off well. Without this “gamble” I do not know whether he would have made it or not.

One cautionary thing to add is that he wrote the book right after he retired at 34. I would want to see how he has adapted to changing market conditions (elimination of the income trust structure in Canada in several years) in 2015, 2025, 2035. I hope he will still be able to be retired even when he is in his 60s. Another cautionary thing to add is that this strategy worked in Canada, where healthcare is practically free. If you lived in the US, however, you would need to save more simply for the rising healthcare costs.

Overall I considered the book to be very inspirational dividend book. If you keep saving a fixed amount of funds from your paycheck every month and you invest your money in quality companies which have a strong history of increasing dividends, you should be able to retire earlier than you thought possible.

Comments

[fatcat]

Spot on about healthcare..my cost average 8k a year and I'm healthy,but at my age that could change fast.Our medical care system is one the best,but also the most expensive.I don't have the facts,but I bet our retirement age is higher because of it...I couldn't retire on Dereks nestegg.

[Alpha Seeker]

I say never stop working. Who wants to stop working?
First off, chances of you investing well are small. So keep investing in yourself. Read wallastoninvestments.c.../ or read Soros, educate yourselves, but don't believe in easy money.

[bluesmoke]

In another post a few days ago, the author mentioned LVL and Realty Income (O), both monthly dividend plays. LVL is a new etf with light volume, but that could change. It has a lot going for it, paying over 9% on a monthly basis. Come tax time it could get a little tricky based on its wide swath of investments.

Realty Income is one I like and own. As more of us aim to retire, you would think companies with strong cash flows would be interested in attracting ownership by modifying their dividends to pay monthly. Factor in compounding, that can add upwards of 1%/year.

The bottom line is to get the fixed income in your portfolio tackled first, then put the remainder in growth stocks/vehicles to try stay ahead of inflation. It isn't easy.

[Stockguy456]

I suggest the rick dad /poor dad series. Much more realistic!

[bearfund]

The reasons most people can't retire at 34 has nothing to do with their investment strategy, the companies they choose, or the performance of the market. There are two main pitfalls. First, most people can't do so because they spend too much money. Even those who set aside a few hundred a month for investment are usually taking on debt elsewhere - a mortgage, a car loan or two, credit cards. Even the cheapest debt is going to cost more than any company pays in dividends (this is a tautology in a perfect market and only rarely violated in reality), so retiring on that income stream with debt is just not going to be possible.

Those with no debt and modest spending habits, however ("the wealthy", or what we used to call the middle class, when we had a middle class, as distinguished from "the rich" who have myriad ways of avoiding taxes altogether and are usually so leveraged that inflation works for rather than against them) face the second pitfall, the draining away of their wealth by the twin pillars of modern government finance: inflation and taxation. Favourable tax structures in Canada are under assault already, and soon Americans will have to contend with the expiration of the dividend tax break, higher cap gains rates, and most likely higher marginal rates on anyone earning enough to contemplate retiring (ever). And of course everyone knows about the perils of today's ultra-loose monetary policy. It's easy to poo-poo these drains on wealth when you're drawing a salary that grows by maybe 4% every year, but let's take an example: suppose you're 50 and plan to live until 90 on dividends, interest, and the occasional sale of stock. You have a modest lifestyle - small rent-controlled apartment, no car, minimal travel - and need only $30k a year in today's dollars to support it. At a 15% tax rate and 2% annual loss of purchasing power, your portfolio needs to generate a total before-tax stream of cash equal to $2.61m. Increase inflation from 2% to 5% and tax rates from 15% to 25% and that jumps to $5.46m. You've effectively lost 52% of your income. In theory, you will get some of it back as the dividends and market values grow with inflation, but inflation is also a killer of real growth so they are unlikely to entirely keep pace with it. And of course you'll never get the tax back.

I agree with your assessment that there must have been some large leveraged bets somewhere along the line. And $400k is simply too small a portfolio to last very long at current inflation and tax rates. The dividend stock approach definitely has advantages over the more widely recommended strategy using bonds, but it's really just not enough, even with free medical care, and you're at the mercy of the market. Still, most people won't even get to this point as they have no control or even understanding of their spending, much less an investment strategy. The ones who are "ahead of the curve" might be putting 200 bucks a month into a Vanguard index fund. They have no idea how tiny their nest egg really is or how little real income it will produce when they retire. The adjustment from a lifetime of wild spending on credit to barely scraping by at 67 years old is not going to be pleasant for them. Expect more raids on the Treasury, exacerbating the problem for those with better plans. Mr. Foster might do a bit better given Canada's brighter future, but I still expect to see him back at work in a decade or two - unless the books were a part of his financial strategy all along...

[bds231]

To bearfund's point, Foster's not really retired, he just switched to a career as an author.

[mpc78]

bds231 is right on point. if you think you can save a few hundred a month and "retire" at 34 with no additional income, you need more than a book, you need help. unless, of course, you don't have any debt, you don't have a house, you don't live in a major metro city where cost of living is high, you have no medical problems (and it stays that way), you don't have kids, or, maybe you just had a trust fund. sorry, there's no easy way to retirement and security other than through good old WORK and saving. and even if you could do this, why would you stop actively building your capital in your prime years if you had the fungible skills to keep earning? unless of course you quit to become a writer.

[buyitcheap]

The strategy is valid, though 12 years in an up trended market sounds a little bit more luck than skills. Nevertheless, the discipline is key. This works best, IMHO, if he mixed in opportunistic bond buys, which I suspect he will have in the next year. The other advantage: what appears to be NO OVERHEAD, yeah, I could retire too, if my total outlay was small mortgage or rent, no kids, I was healthy, etc. It is absolutelya great goal and great demonstration of how a disciplined long term strategy can deliver great viable results, I'd recommend this approach for a 2 income family that want to have kids and spouse stay home.

[dieuwer]

Nice novel, this book. Now I would like to see some proof that the story is actually true.
Dividend paying stock are so great you say? Well, financial stocks like Citi and BofA pay big dividends, so jump in! LOL
Canadian trusts also pay big dividends, so jump in! LOL

Gimme a break...

[techy]

i would like to know how are his stocks doing right now?

i am not sure dividend stocks multiplied his money ten fold that he does not invest in stocks anymore.

[techy]

i too want to retire early....and i just got the idea to cover half the cost of my retirement.

write a book about how i retired early using investing and savings :)

[User 228118]

What is this obsession with retiring early? I'm 68 and I just retired for 45 days this year and that was all I could take.. Now if you hate your job.. go find another one that you like. Working gives the brain something to due instead of watching some silly Oprah show, etc.
Work & play gives our life balance.

[CLH]

User--Right on. Playing golf all day or any other childs play is a real bore.

[zimmyzee]

I retired early and now I spend substantial parts of my day watching porn and drinking mint juleps.

[bill d]

Somebody has to do it.

[adan]

re: "...Another cautionary thing to add is that this strategy worked in Canada, where healthcare is practically free. If you lived in the US, however, you would need to save more simply for the rising healthcare costs."

and why is it again (to those opposed), that universal health care is such a bad thing? for me, as an individual?