FIRE Canada Interview #5 – Create a long term plan

I’m flying to Asia today for a 10-day business trip. On my last Asia trip, I managed to sit in Air Canada’s premium economy both ways. It sure was nice considering we had to do an unexpected pit stop in Tokyo. Hopefully, I won’t have the similar experience this time, espeically considering I will be sitting in ecomy this time. A 13.5-hour flight is already long enough, no need to tag on an extra 2 hours. *Knock on wood*

As you may know, I have started a Financial Independence Retire Early Canada interview series where I interview fellow Canadians that have reached financial independence and some of them have also retired early. Today we feature D, a long time reader of this blog. D has some very interesting stories about his FIRE journey. Take it away D!

Q1. It is amazing to hear that you have reached financial independence retire early (FIRE) at age 55 a few years ago. Could you speak about your path on how you got to this point?  When did you become interested in personal finance and realized that FIRE is possible? 

I started very similar to Warren Buffet, I learned as a paperboy that I could buy a few things that others couldn’t at that age. I proudly bought a really nice “Duomatic Mustang bike” with the savings.

My mother raised 6 children and my dad was an alcoholic, which created financial struggles. When I was quite young, getting groceries with my mother, she was declined more credit at the supermarket until our balance was cleared up. We walked home together with my mom crying her heart out. This single event convinced me that I will do all I can to prevent that from happening to my family. I was taught by my grandfather, never buy what you can’t pay for. I felt I was financially independent around age 42.

Q2. When did you become interested in personal finance and realized that retirement before the age of 65 is possible? Was there a single event that got you started on the “early retirement” path?

The single event I answered above plus knowing that my mom worked extremely hard to get food on the table for her 6 kids. It was amazing that she raised 6 children while working night shifts for her entire working career.

When I had my first decent job, I looked at what I could save up for university and started saving aggressively. I first started investing in mutual funds when I was 18, at a small mom/pop mutual fund operation. Fortunately, my work ethic was noticed and job opportunities opened up to allow me to make more money and no longer have a need to go to university. I took a trip to Europe during a lay off period and learned that travelling was my education in life. I realized as a 23-year-old Canadian the opportunities are endless if you put your mind to it.

I believe it is even more apparent now. So many immigrants realize the great opportunities in Canada, and they build their new lives in this new country that they call home. Unfortunately, many young Canadians who come from privileged homes aren’t motivated to work hard because they have not faced adversities in life.

Shortly after coming home from Europe, I bought my first home for $6000 cash in 1977. It was 550 sq. ft, and when I drove friends to my home, they thought I was joking. It was a roof over my head, it had a dirt basement and a few mice, but I managed just fine. The learning here is that my travelling experience convinced me to get very focused on opportunities that were presented to me – buying a dump that I could afford was better than renting. I really established myself into a solid saving habit. I was also lucky enough to be able to work lots of overtime and that kept me away from the pubs and prevented me from spending money in my spare time.

Tawcan: Funny what travelling will do to you as a young adult. I lived in Germany for 8 months as a university student and managed to live and travel for less than 800 euro each month. It was one of the best times of my life.

Q3. How did you get your wife on the same page as you financially? Do you both get involved in making financial decisions?

Getting married forced me into a house that my wife would live in. We bought a $69,000 home in cash (in 1983) with no mortgage. My wife was renting and had around $10,000 saved with plans of moving out to western Canada. I borrowed $11,000 from my brother and that put us into the house that we purchased. We both didn’t spend foolishly and that was very crucial at a young age for a couple in marriage. A year later we had the house completely paid for.

Back then, I had a friend use one of the early computers to do some projections for me. I wanted to see the projected results based on monthly investments at different rates.

The projection showed that we would have a million at age 40 (I actually took until age 42, but we had kids and started spending more, plus I didn’t get the projected returns).

The financial plan set the tone. Although my wife was never really involved in investing, she was and still is a conservative spender. Having no debt put us on a positive path and she was convinced we were doing the right thing. We had many discussions about money in our marriage. We had a joint account and I truly believe that our success was built by working together with one another.

In marriage, having trust in each other is extremely important.

Tawcan: Completely agree. It is so important to trust each other in a marriage and have open discussions on anything and everything.

Q4. You mentioned that you love the investment world and started investing around 18. Can you let me know how you got started? What inspired you to start investing?

I knew I wanted to save and get ahead to reverse what I saw so wrong as a child. I read books and started buying mutual funds. At that time I had a friend who bought some stocks in oil companies and his uncle had a great tip about a small company…. to make it a short story, the “hot stocks” that friends tell you are going to the moon and small investment firms that are focused on selling will rob you blind.

The good thing that came out of all this was that in order to purchase stocks, I needed to go to a financial firm and invest through a broker. Through the brokerage firm, I went to several investment seminars and learned many things about stock investing.

Q5. Can you tell me some of your financial and investment mistakes and what you have learned from them?

I worked hard saving but wasted a lot of money on poor investment schemes.

In free investment courses, I learned to buy the company, not the product. So don’t buy a mutual fund, look at what they own and buy the top ten companies. Look at several big Canadian equity funds, you will see the overlap of the same names. The mutual fund industry is brutal, for many reasons. They get your invested amount, with a no load or front-end load it doesn’t matter, they run around the country with teams of highly paid people selling, eating, flying, investigating companies, and buying whatever. Ultimately, the gains and losses of doing all of these activities will cost the fund (you) money. In other words, your money isn’t netting you the returns.

Read about investing and feed the brain. The quick reads like The Wealthy Barber will show it is about saving more than investing. Anyone can do this, and the earlier you start the better because compounding interest is the secret. The turtle wins. You don’t need high-risk investments, but you need to have an aggressive style. This is a tricky word when the brokers give you an investment risk profile.

Don’t waste money on GIC’s, bonds or money market funds because of inflation. Start with the Canadian banks. Each year buy some Canadian banks and Canadian utility stocks. Spread your risk with 2 banks and 1 utility this year. Large blue chip boring successful companies pay dividends. If they have a bad year, the president or managers get replaced, and you will continue to get paid with dividends.

Buy big companies on bad news; I have really done well with this. The market is fickle and currently moves just like the gas prices at the pump. Why pay full price when you see it on sale? Be patient. And when everyone is telling you to buy stocks, I would save and stockpile cash. When the world sounds like it is going to the dump, buy. Warren Buffet calls this “buying opportunities”.

Mutual funds earn income from stocks. Rather than investing in mutual funds and pay an obscure high amount of MER, just buy stocks that the mutual funds invest in.  Better yet, buy the stocks that pay dividends and set up to reinvest the dividends.

My biggest retirement learning is that you pay tax on income. So, structure it to be the lowest taxed possible. One of the ways is through dividends.

I worked with engineers who made double and three times my income. Unfortunately for many of them, they had education loans and big egos. Since they made so much money they could travel lots, live in bigger homes, and drive fancy vehicles. To sustain this “spend freely” lifestyle, they have to continue working longer. Read the book Millionaire Next Door. Don’t wait to pay off car loans and other consumer debts until you are 65. Pay off debt early so you have time as an ally working for you. This is a mistake that many people make. You can’t buy time.

Q6. What is your investing style? Do you invest in dividend growth stocks? Or do you rely on mutual funds and index ETFs? What is your investment philosophy?

Buy for the long term and hold, I am very old school. I learned when you buy and sell, you have a higher risk making irrational decisions. Instead, buy and hold blue chip dividend paying companies. Reinvest the dividends when you are working. When you are retired, use dividend income as your main source of income. Keep it simple and know that quality doesn’t go out of style. ETF’s are better than mutual funds, but I have little experience with them. Similar to mutual funds, if the ETF earns money from specific stocks, own the darn stocks.

I believe with some guidance, it is possible for many people to be financially independent. A couple of very important steps are required though. First, create a long-term plan so you have a goal in mind at an early age. Such as, if you invest ‘X’ amount per month you will have ‘X’ amount at age 50. By following this plan, you will soon prioritize and focus on what grows in value versus items that depreciate like the fancy SUV. Like I have mentioned, I have learned the hard way, but by talking openly with friends, I have learned from them. Second, find a mentor and don’t be afraid to ask for advice. I talk regularly with three retired professionals who I respected to gain valuable knowledge.

It’s all about creating a goal, making a plan, and buying quality investments. Don’t let people make it sound complicated. In fact, when a broker is giving you all the lingo, get it explained so you can understand or walk away. They talk big, but often it is more of a show.

Q6. Are you taking advantage of tax-sheltered accounts like RRSP and TFSA? Do you plan to withdraw early from RRSP before age 71? If so, do you have any early withdrawal strategies to avoid tax penalties?

Yes, I wasn’t in private business so RRSP was our only tax-advantaged option. With the introduction of TFSA, Canadians have even more options. I think TFSA is really good, so make sure you fill them up, ALWAYS.

Getting the money in RRSP/RRIF out completely before age 90 is my goal. I am using an accountant to assist and come up with a plan. I know I am going to die, so I am planning according to the odds of the last survivor.

• The Millennial’s Ultimate TFSA Guide
• The Millennial’s Ultimate RRSP guide

Q7. You are in the process of consolidating all assets to one firm. What is the reason behind this decision?

Consolidation reduces total fees and it makes the analysis of all the investment assets easier. We also wanted to simplify our retirement. It is important to plan around the possibility of poor health.

Over many years of trial and error, I have learned that nobody will manage my money better than me (especially with some guidance). I happen to care more about my money than anyone else. I don’t like sharing it with mutual funds.

I am currently consolidating all my investment assets with BMO. BMO has 3 tiers of investment:

• Investorline is strictly a discount broker without advice.
• BMO Advice Direct offers advice and the fee caps out at $3750/yr. (ideally for someone with more than 500K).
• Advice Direct offers personalized investment advice and the fee is tax deductible outside of the RRSP. This is where I have moved to and I don’t know of other banks that have a similar service.

If I was to pass away, my wife can simply transfer our investment assets into BMO Private Wealth Management. The fees are very competitive for high net worth portfolios, but they do everything including taxes, wills and managed banking.

Q8. Do you keep it a secret to friends that you are retired? Do they feel uncomfortable whenever you share with them about your financial success? If so, why do you think money is such a taboo subject in society?

I have never kept it a secret from anyone that I am retired. Some people might think we’re lucky, but we followed our goals and have worked hard to get to where we are. It had nothing to do with luck. I like to share my financial learnings, but we don’t share our net worth, and I try not to ever make anyone feel uncomfortable. We do buy good quality when we need something. It is very unfortunate that money seems to be a taboo topic. People don’t want to sound like they are bragging about their wealth, and on the other hand, people are embarrassed to admit if they don’t have any financial success. If financial planning was taught in schools, maybe people would be more open about discussing money.

Q9. Many people do not get pensions nowadays. Do you believe it is more challenge to achieve financial independence retire early without a pension?

Just the opposite, I believe it is advantageous without a pension because it forces you to plan, seek out guidance, and make retirement goals.

While many of my coworkers think pensions are a low-risk product, I think the opposite. Many pensions are investing in low-risk products like GIC’s and bonds, so they can hardly keep up with inflation.

Now if you don’t have a pension and save up to buy large blue-chip companies that pay dividends, you will easily have quadruple returns compared to conservative investors over a long period of time.

Make sure you have a growth portfolio with some risk, rather than a low-risk portfolio with little growth. One of my later findings is that the investment engine that we built isn’t going to stop when we retire. We can live off dividends and the portfolio and dividend amount will continue to grow for many more years thanks to long-term stock market return and organic dividend growth.

I am spending more time on estate planning nowadays. The investment engine that we built can go to the estate and be passed on to the next generation. The investments don’t even need to change. My family can benefit from the machine that continues to compound.

In contrast, with pension, you have little control how the money is invested. So many pension plans have been mismanaged over the years. It is very unfortunate, and they are never set up for early retirement.

Q10. What kind of financial advice are you giving to your children?

Develop a plan and pay down debt. Many things have changed since I first started working. Interest rates are very low and TFSA is available as a great new investment plan for Canadians.

I have tried to instill in my children the many benefits of financial independence. I have encouraged my children to buy RRSP’s and TFSA’s. They have learned to spend responsibly and keep debt to a minimum.

I have realized that my children are different than my wife and I. They have developed their own sense of what’s important to spend money on. For example, they travel more than we did when we were young. I think this is great as travelling is educational and has made them appreciate the opportunities they have in Canada.

Tawcan: That’s great that you’re teaching your children the many benefits of financial independence. They will thank you later. I really wish that personal finance is a part of the Canadian educational system, so kids can learn how to be a financially responsible person.

Q11. Did you provide financial help to your children? What are your thoughts on advantages and disadvantages of providing financial help to your children? Do you believe this makes them less financially sound? 

I happened to be reading a book about Warren Buffet when my kids were early teens. In the book it talked about the best thing you can give your children is nothing financially.

However, I have offered to pay for all their education as long as they pass the courses. Earning self-respect and confidence is important and I have watched them feel proud of what they have achieved on their own. To buy them a new car or buy the first home just creates other issues. We have helped our children financially from time to time, but very little compared to most people we know.

Q12. Was money topics openly discussed in your household? Did you get your children involved with household financial decisions from a young age?

Yes! They knew money was the reason to be efficient in household spending. But it’s a difficult thing to teach, as they don’t pay the power bill so they don’t understand why you should turn off the lights in rooms that they aren’t in! I probably discussed it so much that I bored them to death at times. They knew that we were careful with everything we spent. Our children have strong financial confidence and I am very proud of that. When they were young, they got allowances for doing chores. I even remember arguing with my son about the cost of cutting our grass. Unfortunately, his grandpa paid too much for his work and he wanted the same rates at home.  Value for work needs to be taught early.

I matched their contributions to encourage buying stocks or mutual funds. I showed my son how his paper route income alone could turn into a million dollars. Investment time is so important, and we talked a lot about that.

Q13. What would you tell someone like me who is trying to achieve financial independence retire early in Canada?

Start early, stay married, get an investment retirement projection to create a plan, analyze, and buy what you can afford within reason, save 20% of income and buy 3 blue-chip stocks per year at the minimum, read your blog, and learn from others. Ask lots of questions and don’t trust that someone will manage your money better than you can. You need to learn and understand the basics.

I learned how to save and invest, but I should have examined the tax system better. You need the foreign investments in RRSP’s otherwise it has a withholding tax. I didn’t realize getting the money out tax efficiently could be so complicated. I wish I had gotten involved with accounting tax knowledge earlier.

Tawcan: There’s no one-size-fits-all plan when it comes to financial independence but the general formula can be pretty simple. 

Q14. Do you have anything else you would like to share with me and my readers?

Real estate is fickle, some regions pay for their surroundings. You can live cheap and make better incomes in small communities. Also, small communities are great to raise a family in. In the end, it is about being efficient. Be like big businesses and focus on being low cost and efficiency. Talk openly about investing and learn the basics. Many of your young readers will be more than multimillionaires. To them, my advice is, to begin with the end in mind, so you know how to manage money.

Thank you D for sharing your story. Dear readers, are you enjoying the Canadian FI Interview Series? Are you a Canadian that is financially independent or retired early from your career? If so, I would love to have a chat with you.

And in case you want to read the other interview series.

• FIRE Canada Interview #1 – Vancouver reader J
• FIRE Canada Interview #2 – How I became financially independent at age 32
• FIRE Canada Interview #3 – Why I decided to keep working despite reaching FI at 38
• FIRE Canada Interview #4 – Cash flow is the oxygen of financial independence