Book Review:
Stop Working: Here's How You Can

This article was posted on May 1, 2005.

Canada's Youngest Retiree, 34-year-old Derek Foster, tells you how he did it in his autobiographical how-to manual Stop Working. His retirement plan combined disciplined saving and a modest lifestyle with an investment approach that focused on buying stock in large, well-run, dividend-paying companies.

Foster graduated in 1993 with a degree in accounting, but came to realize that the field was painfully boring and decided not to make it a career. He spent a couple of years travelling in Europe, Australia and New Zealand while supporting himself with part time jobs. After returning to Canada, he progressed through a couple of telemarketing jobs and a temporary position with Revenue Canada processing tax returns before heading off to Korea to teach English. He retired at age 34 with his wife Hyeeun and two children even though he never earned more than $25,000 per year while he was working -- a notable achievement.

A Disciplined Saver, Savvy Investor

Mr. Foster began saving a minimum of $200 per month starting in 1992 when he was still in college. His investment philosophy was shaped by reading books like David Chilton's The Wealthy Barber, Peter Lynch's One Up On Wall Street and Ben Graham's The Intelligent Investor. He's also read all of Warren Buffett's Berkshire Hathaway Chairman's Letters.

Foster limits his stock portfolio to the shares of companies with a long-term record of increasing dividends. He uses the Mergent Handbook of High Dividend Achievers as a screening tool to find candidates for further review. He usually holds less than 20 stocks in his portfolio. His largest single holding is Canadian Oil Sands Trust, which now makes up about 13% of his portfolio after the recent run up in oil prices

He also took some big risks along the way when he detected an unusual opportunity in the market. For example, he bought cigarette maker Altria Group on margin in early 2000 when legal worries had beaten the stock down to the point where it had a 10% dividend yield. He put his entire portfolio into the stock and sold after it rebounded 33%. That's the kind of risk a 30-year-old is better able to weather than someone older.

Stop Working:
Here's How You Can

by Derek Foster

Retire Early rating:

One surprising fact about Foster's retirement portfolio is that he holds no bonds, Certificates of Deposit, or other fixed-income securities. The yield on his retirement portfolio is currently around 4.7%. He would be comfortable spending the full amount of his annual dividend yield if necessary, since he's confident that the stocks he holds will continue to report dividend increases in excess of the inflation rate.

The Foster family owns a four-bedroom home in a small resort community about two hours North of Toronto. They also own a rental condo in Ottawa that provides about 30% of their current income. With little patience for the hassles and burden of rental real estate investments, Mr. Foster plans to eventually sell the condo and use the proceeds to buy more dividend paying stocks.

The author provides a detailed and convincing example of how a $60,000 year wage earner could easily survive on less than $19,000/year in dividend income once he pays off his mortgage and retires. You'd need about a $400,000 retirement nest egg to get $19,000/year in dividends at Foster's 4.7% portfolio yield. Of course, Canadians get free national health care and some hefty tax subsidies for low income earners (which Foster includes in his sample budget.) American retirees might still need $1 million to retire once you add in the $10,000 to $15,000 annually a family of four would require to purchase a comprehensive health insurance policy equivalent to the coverage offered by Canadian health care system.

Stop Working is an excellent book. It's more tuned to Canadian readers because of the detailed tax planning strategies that the author provides, but the investment approach should work equally well in the US. Derek Foster belies the conventional wisdom that you can't save and invest aggressively on a modest income and retire very early.

For more information, you can visit Foster's web site at: http://www.stopworking.ca.

There's also a recent Toronto Sun article on Derek Foster and Stop Working as well as one in the Globe and Mail.