So when we transitioned to Flexi-FI, or semi-retirement, or just part time work… whatever you want to call it, we spent a few months travelling around the beautiful mediterranean to celebrate. Think of the coastlines of Italy, Greece, Portugal and Spain – some of which was done on a 52ft Bavaria sailing yacht. Epic experiences and memories that will last a lifetime. I like to think of this as the first of many mini-retirement periods that we’ll have ahead of us now. Hopefully many longer duration ones lie ahead too.
Anyway, I’ve given some thought to how to structure this financially to make it a stress free and repeatable process, even when your investments might not completely cover your expenses yet. Note this applies to any extended period without active income and while it appears simple, it seems to be a question that comes up time and time again.
Step 1: What’s it gonna cost?
Definitely not rocket science, but the most exciting part of a sabbatical might be figuring out what you want to do and where you want to go. Everything has a price though, so coming up with a total cost or at least a projected monthly cost plus entry and exit expenses (flights, insurances, visas etc.) will be a key success factor and help you to adjust the financial sails along the journey if needed.
Step 2: The cash cushion
I’ve found that a cash cushion or buffer is the critical key to a stress free break. That is, have your living and travel expenses available, in cash. For property owners this could be sitting in an offset, for others it could be readily available in a high interest savings account earning you a nice little return with today’s interest rates. We’ll use a simple example here.
Example – the one year sabbatical:
Say we wanted to take a sabbatical travelling throughout South East Asia or we wanted to rent a farmhouse in the French countryside for one year. In this scenario, we’re not interested in earning any active income but perhaps we’re a little concerned about all the doomsday news regarding a potential global recession or how interest rates might impact the sharemarket.
We’d simply ensure we have our projected expenses for one year …say $60k AUD for a couple travelling modestly and slowly (note Millennial Revolution and Nomad Numbers are examples of couples who travel well on much less than this!).
We’d then draw down our expenses as we go from this bucket, which would see it deplete over time.
Step 3: Dividend & Distribution Top Up
So it’s not going to be fun watching our bucket of hard earned cash dwindle as we sip mojitos on the beach. Thankfully we have our FI portfolio – in our case it is composed of LICs and ETFs that pay (mostly) fully franked dividends and distributions.
If we had a $700,000 portfolio that was paying a 5.5% yield, (ignoring tax implications for simplicity, which could also potentially be mitigated if timed and structured properly), then we’d have roughly $38,500 paid out to us over the course of our break.
This means, for our $60k budget we’re spending on average $5k a month from our cash account (most likely incurring our travel expenses on a credit card to earn points, then transferring to pay out the balance each month to avoid interest charges). However between two to four times throughout that year, we’re receiving a pay cheque from our investments, topping up the cash account each time (see Fig 1 below for a simple illustration).
Once we get to the end of our year of adventures, we’ll find that while we’ve spent $60k, we’ve also been paid $38.5k leaving us with a cash account balance when we arrive home that’s only just over a third less than what we started with.
If dividends and distributions surprise to the upside, as they often do, then we’d be home with more cash than expected. In the less likely, but not uncommon scenario that markets get smashed and dividends get cut slightly, then we might end up with slightly less (though we mitigate some of this unpredictability by investing in LICs with a strong track record of stable and growing dividends). However it certainly hasn’t impacted the year we had, provided we stay on budget.
Either way, at the end of our year off in this example scenario, our cash account is only around $21500 less than where we started.
Step 4: Replenish the reserves
So after a year long sabbatical, we’re feeling recharged and keen to pick up some paid work – maybe an interesting project with nice people, or maybe something simple and easy. Perhaps we’ve even come up with a business idea or found new opportunities while we’ve been unplugged from the matrix. Either way, now it’s time to consider building back up any gap in the cash reserves.
For our scenario above, it could mean saving $21.5k worth of cash over the next little while, saved from work income – or even using some of the coming years dividend or distribution income to top this back. Depending on your circumstances, the excess could even be reinvested growing the portfolio further and increasing the following years expected income to fund future adventures.
Step 5: Rinse and Repeat
Ok so by now, our cash reserves have been replenished and if we’re lucky, maybe our dividends have even slightly grown (hopefully outpacing inflation). Now might be the time to consider where to go for the next adventure?
This is obviously an extremely simplified scenario and should not be taken as any kind of advice as it’s completely fictional. If you’re focused on reaching ‘full FI’ you’d want to consider how this might impact your overall plan and timeline. I would caution though, that life is short and we’re only here for a minute anyway. While this is definitely not a Die With Zero approach, because we intend to rebuild our portfolio when returning from travelling, we must recognise that it is trading off experiences now for future investment growth.
I hope this article provides ideas to some of the considerations when planning a sabbatical, even if you’re not quite ‘fully FI’ on your journey. For my future extended trips, this is how I will ideally structure my finances.
Are you planning to take an extended trip, partially or fully funded by investments? Would you do things differently? Let me know in the comments below.