So, what did I think of “Stop Working, Here’s How You Can!”? Will I be able to replicate Derek Foster’s experience and retire in 12 years time? Or is it just hype?
First of all, I have to admit that I read Derek’s second book “The Lazy Investor” first and bought “Stop Working, Here’s How You Can!” in an attempt to understand a little more about how his strategy worked and how he did it. And I do have a better sense of how the process worked now.
I also realize that there are very definite omissions. Let’s look at the basic ideas. Derek started putting away $200 per month in 1992 and retired in 2004, 12 years later. He started off investing in mutual funds, but switched to buying stocks and income trusts that paid regular dividends or distributions. He bought stocks in established companies he believed to be recession-proof, that had a long history of paying ever-increasing dividends. He reinvested the dividends and added additional funds from his GST rebate, tax refund, job bonus, etc. over the years.
This is all very solid advice, but what would that reasonably get you 12 years down the road? Well, $200 x 12 x 12 = $28,800. For the sake of argument, let’s say he also had another $2,000 per year from various sources to add, or another $24,000. That would give him $52,800 to invest. Remember compound interest doesn’t enter into this, because he’s buying the stocks each month and then holding them indefinitely. They’re generating dividends that are being reinvested, that’s true, but even if he were to have doubled the amount of shares by this reinvestment (highly unlikely in 12 years, I think) he would have $105,600.
It happens that the sample portfolio he lists in Chapter 20 would have cost $103,500 if it had been accumulated at various times between 1993 and 2000, when the prices of the individual stocks were each relatively low (even though he apparently didn’t accumulate cash and then buy large quantities of a single stock, but rather bought a few hundred dollars worth each month).
Anyway, the quantities listed of the sample stocks would pay (at the time of writing) about $18,845 per year in dividends and distributions and this income would be only minimally taxable. That doesn’t seem like a large income (frankly, I make more than that per year working just over half time) but the key point is that there would be little or no tax to pay once all the figuring was done, plus there would be no health care premiums and additional money in child tax credits for parents, etc.
As Derek pointed out in Chapter 19 when he looked at how much money a person really needs to retire, a couple with 2 kids and one wage earner making $60,000 gross per year could actually end up with less available income ($22,265) than the same family earning $18,845 in dividends (who would end up with a net income of just under $25,000 after child tax benefits, GST rebate, etc.).
Looks good on the surface, right? But key in that evaluation of the wage earner’s salary were a mortgage ($14,196 per year) and a car payment ($3,600 per year), expenses that don’t appear in the dividend earner's list because Derek says you should have all debt including house and car paid off before retiring. Now, you can pay a car off in 3 to 5 years, but a mortgage is generally a 25 year term. I shortened my period to just over 20 years by making payments weekly instead of monthly, but you still have to pay down chunks of the principal in order to pay your place off within this 12 year time frame.
The mortgage he shows for the wage earner is $175,000. Since you need a minimum down payment of 5%, this means the family has a place worth at least $185,000 and put down a minimum of about $10,000.
First of all, he could have bought the condo I sold last year for that kind of money in Vancouver, but not much more and certainly not a single family home. (One of the issues with owning a condo is the ongoing strata or maintenance fees. You may pay off your mortgage, but you’ll pay strata fees forever in a condo.) It may or may not have been realistic for Ontario (or perhaps small town Ontario) when it was written in 2005 but it certainly wouldn’t buy adequate shelter for 2 adults and 2 children in Vancouver in 2008. Right now single family homes in Vancouver start at around $500,000 for an old house on a small lot. That would be a minimum $25,000 down payment and a $475,000 mortgage, way out of our $60,000 wage earner’s budget.
All of this leads one to believe that Derek had financial help getting into his home. I mean, where would the down payment have come from at the very least? And how do you pay down the principal on your mortgage while you’re putting every windfall into adding to your investment portfolio? This is one area that really doesn’t bear up under scrutiny, especially as I’ve read elsewhere on the Net that Derek has a paid for home and an investment property! In addition, he now has 4 children, according to a post he made in September 2007.
Raise 4 kids, pay off your home early, have a rental property, plus invest a little over $100,000 in dividend paying stocks all in 12 years, while earning around $25,000 per year! That is really stretching the boundaries of believability.
Now, the other thing I’ve read on the net (and Derek didn’t dispute it) was that he made one or more highly leveraged deals that really paid off and that’s where a chunk of the money came from. All well and good, but not highly replicable.
Can I do it with my family? Well, we’d have to divert the money my husband currently puts into his RRSP and add about $150 that would be very hard to come up with at the moment. (I couldn’t divert my RRSP contributions, as I’m still required to repay the money I took out of my plan for the next 4 or 5 years.)
I could invest that $200 per month in dividend paying stocks, but I’d be paying more for them per share than he did early in the decade. We make too much money to get the GST rebate, our child benefit payment will probably be in the $50/month range and my husband actually owes a few hundred dollars in taxes every year, so there’s no refund or other money to increase the annual contributions. And since higher share prices mean I’d be able to purchase fewer shares, they’d pay less in dividends. That means I’d still be reinvesting my dividends but they’d be growing more slowly than Derek’s did.
All in all, I’d probably end up with about a quarter of what Derek did in a dozen years. That means only a quarter of the dividend income, maybe $5,000 per year. That’s better than nothing, but it’s not enough for us to live on, even at our rural home, although $18,000 to $20,000 in dividend income might very well be enough.
The bottom line is that there are significant gaps in the story of how he gathered enough money to retire and I don’t believe a person would be likely to replicate his achievement now in the same timeframe, given changes in the stock market, the economy, and the taxation rules.
Yes, the fact that the rules for income trusts will change in 2011 is significant and I think the best thing Derek could do right now is to revise his books based on current data. At the same time he could do some major editing to make his meaning clearer and he could provide some of the missing information.
I do think his strategy could pay off for a person who was just beginning to invest and who’s willing to wait 20 to 30 years to retire. I'm not sure it will work for someone like me who wants to retire within 10 to 15 years.