Is this a reasonable financial plan? - Spend all of your money every few years? [closed]

Question

Ok, the title is intentionally a bit facetious. But a bit about my current situation.

I live in Europe (a high cost of living country) and save around 10,000 Euros per year. I have been doing this for 2 years, so have around 20,000 in cash, but I also have just over 10k in equity in my house.

I have always disliked the 9 - 5 lifestyle, but do not have the mentality to become an entrepreneur. At the same time, I don't want a 'deferred life' plan, of building up a pension and waiting until I'm 70 to live what's left of my life.

So, I would like to ask if the below is a viable plan, if anyone else is doing something similar and if there are any obvious massive pitfalls?

• Work for 2 - 3 years at a time, save up 20 - 30k.
• Take 2 - 3 years off work, travel the world on a budget, stay in hostels, live frugally, learn new skills and just generally enjoy life, (all the while not working and spending most of the savings).
• Repeat steps 1 and 2 until graveyard time.

Pros that I can see:

• No 'deferred life', live 2 - 3 year bursts of retirement while still young (I am 30).
• A couple of years off work should not be enough to deter employers, when it comes time to look for employment again (I am a software dev).

Cons:

• No long-term savings or investments

Thanks in advance!

Answer 1

Some employers actually support a lifestyle similar to this in form of allowing "sabbaticals". It usually works like this:

1. Over a course of a few years, you either work extra hours or take a paycut.
2. Then you can take an extended period of paid leave, equivalent to the unpaid hours you've worked during those years (usually up to one year).
3. During that paid leave you do whatever you want.
4. When the paid leave is over, you can return to your previous position (or resign if you found something better to do... but don't tell your boss that I said that :))

The ratio between work years and free years is usually around 4:1, not 1:1 as in your plan. But the advantage of using such a sabbatical system over your proposed course of action is:

• You still receive your salary during your career break, so you don't need to worry about running out of money prematurely.
• You still enjoy all the employment benefits, like health insurance for example.
• You don't need to find a new job after your career break.
• You don't end up with gaps in your employment history which would otherwise make you look less employable
• You still accumulate retirement benefits and can retire as usual.

So if there is enough demand for people with your qualifications that you can choose between different employers, try to find one which offers this opportunity. But remember to read the fine-print. Some companies have very broad non-compete clauses in their contracts which do not get suspended while you are on sabbatical. This can greatly limit what you can do during them.

Answer 2

I can see several problems with your plan:

• Retirement exists for a reason. There are various things that may prevent you from working when you are older:
  • You may be less able to work, be it because of physical deterioration of your body or mental exhaustion. And that's just the normal process - if you are unlucky, you might become sick and completely unemployable.
  • You are "less valuable" to many employers (at least in their eyes), when you are older. So they might not hire you. Then what?
• People might not hire you when they see your CV, extrapolating that you are going to quit after 2-3 years. It's not the "time off" (that you mention) that deters employers, it's the permanent quitting.

If you are really able to save 1 year's worth of expenses in 1 year of work, just work 2 decades and retire then, with compounding working for you (which it doesn't, if you spend all your savings every couple of years), you may then retire for good.

Or try to find a job/work/occupation that gives you the freedom/adventure/satisfaction you need.

Answer 3

The very big risk I can see is that you don't plan to retire, ever:

Repeat steps 1 and 2 until graveyard time.

While that might sound feasible now, at a still fairly young age, can you honestly, really say that you'll still be willing (and even able) to work when you're 70? 80? 90?

Answer 4

You are missing out on a huge chunk of compound interest

Long-term investments enjoy the magic of compound interest, which requires that growth in savings stays invested so it can grow even more. Imagine a situation where you are able to save $1,000 every month. If you save for 3 years at 6.5% interest, you will have nearly $40k before you quit working and start to spend your nest egg, before doing it all over. Repeating this 10 times earns you around $400k total.

Now suppose you save $1,000 every month at 6.5% interest, and do so for 30 years straight. By the end of your working career, you will have $1.1 million, nearly 3 times the amount as if you had saved and spent in bursts.

These numbers don't even take into account how long it will take to spend the whole nest egg, during which time you're also accruing interest. The long term investment has the advantage there as well.

Long-term investment averages may not apply

My example uses a 6.5% interest rate, which is a reasonable long-term average return in the stock market. When saving in the long term, it's possible to ride out years of poor performance, because you have decades for short-term losses to be covered by long-term gains. If you always invest your money and actually need it 3 years later, the stock market becomes a riskier bet. If you happen to have a downturn as you finish a working stint, you might be in trouble. Long-term retirement savings plans tend to transition investments from high-risk, high-reward stocks to more stable, but lower return investments as retirement age nears. There's simply no time to do that when investing and withdrawing in cycles of 3 years.

Answer 5

No, generally your plan as stated is not reasonable. Unforeseen emergencies mean you are running the risk of finding yourself in a financial black hole by spending your money every few years. What happens if you get injured while travelling in a way that means you can't work and your savings run out getting you back home? You also miss out on the benefits of compound interest - you are obliterating the potential long term returns on your pension by taking year-long gaps every now and again.

However, as a software developer you have the opportunity of having the best of both worlds by working freelance. Many developers choose to travel and work while overseas because all you really need is a laptop and an internet connection to do your work. Being freelance also means you can choose when you work and for how long at a time, so you could for example work for 2 weeks then take 2 weeks off etc. This way you still have things to put on your CV and you still generate an income, but you're working on your own schedule and can work while also travelling the world.