The financial independence retire early movement is getting a lot of attention lately. While it’s nice to see the movement gaining traction, I feel most of the major media coverage has been very early retirement focus. I think this is paints a very bad picture of what financial independence retire early (FIRE) is about. Furthermore, most of these FIRE stories are US related. As a Canadian, I want to hear more Canadian financial independence retire early stories. Therefore, I started an interview series with a focus on financial independence retire early in Canada.
If you are reading this and are Canadian, financially independent, retired early, or getting close to these major financial milestones, I would love to hear from you.
Today I am fortunate to be able to interview Eddie who has retired a few years ago from full time work at the age of 45 after 20+ years of working in IT with two high school kids.
Q1. That is amazing that you retired at age 45 a few years ago and your wife is planning to retire later this year. What originally sparked your interest in personal finance?
They say, “Choose a job you love and you will never work a day in your life”. Unfortunately for me, I never found passion in my job. It’s not that my job was horrible. It paid well, was challenging and had good benefits and flexibility. However, it was also very stressful and high pressure. Towards the end I found myself living for the weekends and dreading Mondays. A few years into it, I knew that it was not sustainable for 40 years and I set a goal in my 20’s to retire by 45. Luckily, my wife and I have very similar financial habits and attitudes, and thus it became a common financial goal. We have always been savers, while not being excessive. We prefer to splurge on experiences such as family vacations.
Coming out of high school, I still had no clue what I wanted to do in life. I think that is a challenge for many people. However, I knew that I didn’t want to struggle financially and that a job in Science or Engineering could address that (the term STEM hadn’t been coined yet). I think having a career in a STEM related field definitely helps, as they tend to have an above average pay grade. Having said that, there are many other professions that also pay well and are in high demand such as construction skilled trades.
I also think that individuals with a STEM degree tend to be more methodical, logical and good with numbers, which makes financial planning a natural fit. As far back as I can remember, I have closely tracked my spending and tried to adhere to a budget. Whether you use spreadsheets, Quicken or online sites like mint.com, knowing where you money goes can really help you achieve your financial goals.
Q3. You and your wife raised two kids. What approaches did you use to make sure they are financially responsible? Did you give them any allowance? Was the allowance tied to household chores? Do you have any advice to me and my wife and how we should teach our 6 year and 3 year old kids about money?
I have tried to pass my financial knowledge on to my kids. Since they were little, any money they have received through gift has been split between a “savings jar” and a “spending jar” which I track. If they want a new electronic device or want to buy gifts for others, they need to use their own spending money. We provide everything they “need”, but they provide what they “want”. We will give them clothes and shoes at a reasonable cost, but if they want a specific pair of designer sneakers, they pay the difference.
They have never been given an allowance, but we also don’t expect too much from them at home. As a family we typically all pitch in in terms of household tasks. I view that as just being part of the family.
When my oldest turned 16, I opened a Tangerine chequing and savings account in their name and transferred all of their saved money for them to start managing themselves. They can see interest accrue monthly and also received a $50 referral bonus.
I can see our influence working as they tend to take more care of their phones since they paid for them with their own money. I also see them considering the cost of items when making a purchase.
Each family and their attitudes towards money will be different, but what worked for us was at an early age to start teaching our kids the value of money, and slowly allow them to make financial decisions on their own that involve responsibility.
Tawcan: The savings jar and spending jar idea is something we plan to use with our kids too.
Q4. You purchased your first house in the late 90’s when housing prices in Toronto were still very very affordable. You then put down a sizable down payment (40%) and paid off your mortgage within 5 years by doubling up your bi-weekly payments starting in the 3rd year and putting 10% annually toward the principal. Looking back, do you think this was one of the best financial decisions you’ve made? If you were to do it all over again, would you do the same thing?
We were very lucky with our home ownership experience. I think that is a major challenge for people entering the housing market today. When we bought our house, we over bought with the thoughts of accommodating our future family. At the time, it seemed like such a huge commitment, but getting something similar in today’s market would be 4x the cost. This was probably one of the best financial decisions we made that has helped us become financially independent.
We have always tried to avoid debt. Paying down the mortgage was a top priority not only from a financial perspective, but also from an emotional perspective. There is such weight lifted when you are debt free and own your home. That freedom means that any extra money going forward could be used to fund retirement. If we were to do it over, we probably would do the exact same thing. We might have even invested in more properties if we had the funds, knowing how much housing has appreciated.
Q5. What is your investment strategy? Do you invest in mutual funds, index ETFs, dividend growth stocks, individual stocks, or rental properties? How are you diversifying your investments?
We started with mutual funds, T-Bills and GIC’s, as recommended by the banks and our group RRSP advisors. When I started thinking about early retirement, I started reading up on the subject. It was at this time that I came across a book by Derek Foster entitled “Stop Working“, where he outlined a strategy of dividend investing with the goal of dividends generating enough income to cover your expenses. This really struck a chord with me and we used this as criteria in selecting our Financial Advisor. We found a great financial advisor whose goals were aligned with ours. He was not interested in mutual funds as he mentioned the fees were too high and preferred to select high value stocks. We provided our preference of dividend investing and put together a plan.
Over the next few years we saw our savings and portfolio grow, but we also started seeing our investment fee grow, since it was a flat percentage of our total portfolio. It was at this time that I discovered the Canadian Couch Potato Strategy through Moneysense Magazine. I opened my own self-directed investment account and started investing in low cost index iShare ETF’s. Over the next few years, I started educating myself more on investing and any savings beyond registered accounts were funnelled into my self-directed account.
When I retired, we had about 40% dividend growth stocks, 25% individual stocks, 25% index ETFs and 10% Preferred Shares. Today it’s 85% index ETF’s, 15% dividend growth stocks, and 5% cash. I have been moving away from individual stocks and dividend stock and towards ETF’s over the years and will complete the process next year. I am spreading it out to minimize capital gains taxes.
I diversify within my ETF portfolio through Vanguard and BMO ETF’s with a target of 25% Canadian Equity, 25% US Equity, 20% International Equity, 5% Emerging Markets, 7.5% Government Bonds, 7.5% Corporate Bonds, 5% Real Estate Investment Trusts and 5% Cash / GIC’s.
Q6. Your employers match your RRSP contributions. I know so many people not taking advantage of this great employee’s benefit. Can you think of reasons why people say no to free money? What’s your rationale behind contributing your work’s RRSP even though everything is held in mutual funds?
Free money is free money. When I started working and found out about employer matching RRSPs that was one of the first things I signed up for. The only reason I could think of not doing this is if expenses are so high that it is not feasible. The era of defined benefit pensions are going away unless you work in the government. Having a matching RRSP plan is a good alternative for individuals such as myself who are working towards an early retirement.
The drawback of many of these plans is the limitation on investment vehicles available with most only providing access to a limited list of mutual funds with high fees. However, as I mentioned before, free money is free money. Even with the fees and average performance, the immediate return of 100% more than makes up for it. Also, once I left my job, I was able to cash out and transfer the cash (in-kind) to my own self-directed RRSP account and buy whatever I chose without tax implications.
My advice – If your employer offers you free money in the form of RRSP matching, you need to jump on that now.
Tawcan: No kidding! Never say no to free money!
Q7. You utilized a financial advisor for your investments for many years. Do you think it was money well spent? Why and why not?
Yes, I do. We were lucky to find a financial advisor we were compatible with. At the time I was just learning about investing. With work and raising a family, it was nice to not have to watch our investments regularly and let our FA do the work. I knew enough to know which investment and tax shelter vehicles were right for us when our FA proposed them. Some I agreed with, others I stayed clear of.
Once I became more financially literate, I was able to start going out on my own. Now, I’m a strong advocate for passive investing through index ETF’s, not only to reduce fees, but also to reduce volatility through diversification and reduce stress by not having to watch my investment too closely. With individual stocks, a specific event could decimate its stock value. A good investment advisor can be there to either anticipate issues or mitigate the long term damage based on the decision to sell, hold or double down. Once I retired, we made the decision to leave our financial advisor. It wasn’t an easy decision but it was the right decision.
For us a financial advisor served their purpose at the time. Ironically, now that I’m retired, I have more time to focus on investing. Yet, I have decided to invest in index ETF’s because I don’t want to spend the time watching the markets daily.
Q8. Tell me some of your financial mistakes. What have you learned from these mistakes?
You can always say “I should have invested everything in Apple Stocks 15 years ago” or “I should have cashed out in the summer of 2008 before the housing crash, then reinvested on the uptick”, but these are more market timing events.
We never made any really risky financial decisions. We had a few stock loses over the years such as Nortel, but never lost more than $10-15K on an individual investment. I guess I have learned to diversify more to avoid these situations.
Our investment strategy has been a more of a slow, steady and boring approach, but it has worked well for us. Time in the market is better than timing the market.
Q9. Do you take advantage of TFSA and RRSP? Do you plan to withdraw early from RRSP before age 71? If so, what are you early withdrawal strategies to minimize RRSP tax penalties?
Yes, we have always tried to maximize both TSFA and RRSP accounts. Last year I converted my RRSP into a RRIF and started withdrawing from it to spread the taxation over the next 30-40 years. This year I also reworked our investments to optimize them for asset location for tax efficiency.
Q10. What is your withdrawing strategy once you are living off your investment? Do you plan to tap into your principal in the first five years? Or do you plan to utilize distributions/dividends?
There are many articles online that discuss in detail wealth accumulation but not as many on decumulation strategies. All the online articles that I have found also mainly focus on traditional retirement ages of 65-70.
My basic drawdown strategy involves moving a small portion of my RRSP (RRIF) into my non-registered account annually to minimize taxes. Expenses will be funded from here. TFSA’s will continue to grow through annual contributions indefinitely. If all goes well, I will never have to touch my TFSA and can leave that to my estate.
Prior to retirement, I had structured our investments such that our yields (Distributions and Dividends) more than covered our expenses. Even after moving away from dividend investing towards Index ETF’s, I was surprised to find that we still have enough yields to cover our current expenses. That metric was used as one of many to gauge our financial independence. Now, it’s not as important.
Currently most investments are set up as DRIPs. I will shortly cancel those in our non-registered account and use that to fund our expenses. Any short fall will come from our cash holdings or selling of securities from our non-reg account depending on rebalancing needs or profit taking if the markets are up.
There is an industry standard to have a 4% SWR (Safe Withdrawal Rate) in order to retire. To be safe, I targeted a SWR of 3.25% before retiring, as an adjustment for retiring early. Due to the favourable bull market since retirement, our SWR has improved from 3.25% to 2.45%. We don’t include our primary residence or physical assets in this calculation. Additionally our overall spending budget has not changed since retiring. We may spend less on work related expense, but that is offsetted by spending more on leisure and travel.
Q11. What do you see yourself in 5 years and 10 years from now? What are the top three things you are looking forward to?
The timing of my retirement worked out well. My kids are in high school so I can spend more time with them before they head off to post-secondary education. They keep me on a schedule so it’s not a full retirement. At the moment I want to enjoy these years while I can and focus my time around family.
In 5 years they will be off to university or college so my wife and I will be fully retired at that point. We plan to spend more time on hobbies and do more travel. I will probably end up doing more volunteer work as well. I cannot see myself re-entering the workforce, especially in my previous field.
10 years seems too way off to even consider. We will take it one day at a time.
Q12. How are you planning to fund your kids’ post-secondary education? Are you planning to pay for their educations fully? Or the kids need to cover a portion on their own?
We do not want finances to impede our children’s education or choice of program. In fact, even though it would be cheaper for them to live at home while attending school, we are encouraging them to move out into residence, to fully experience University life. We have taken full advantage of RESP grants from the government which should cover most of our kids post-secondary education. We will encourage them to get part-time jobs, co-op placement or internships to give them experience and help teach them about becoming independent, but will not require them to take on huge debt to get their education.
At the same time, we still want them to appreciate the value and costs associated with a proper education so we will expect them to be accountable for all their spending and won’t just write them a blank cheque. We will also encourage them to apply for scholarships that they may qualify for.
Tawcan: Sounds like a similar approach as what my parents did with my brother and I. I really appreciate them telling us to move out of home and into residence even though we could have commuted from home every day. Having an independent live as a university student was a big learning experience for me.
Early retirement always feels a bit taboo, so our financial plan was pretty much kept to ourselves. I revealed my plans to retire early to our immediate family and some close friends about a month before pulling the plug. When I made my announcement at work to leave, I did not mention retirement, just that it was time to move on. No one really questioned me as turnaround is common in our industry.
Once I left I never really hid the fact that I retired. For extended family, I was up front about it when it came up, but I never brought up the topic myself. I’m pretty open about our finances with our children and include them in discussions in hopes that they will learn from it. I would like to teach them that through hard work and proper planning, they can achieve financial independence as well.
I’m more than happy to discuss my financial situation with others that take an interest, but again I wouldn’t bring it up unless asked about it. I think it’s such a taboo topic because everyone attitudes towards finances are different. Some folks live for the moment and others plan for the future. One is not necessarily better than the other. It just depends on what their individual financial goals are. Because of the differing opinions people may feel uncomfortable imposing their views on others or having others views imposed upon them.
Q14. What would you tell someone like me who is trying to achieve financial independence? Do you have any advice for financial independence retire early?
First of all I would say “Good for you!”. It’s great to see individuals take ownership of their financial freedom.
Below is a summary of some keys to our successful journey to financial independence.
1) Education – Having a post-secondary education has helped enabled our financial freedom. Having 2 of these incomes has made it that much easier. I’m not saying this is the only route, but it has worked for us. Consider your schooling and career choices that will provide you with the right balance between happiness and financial freedom.
2) Timing – More specifically real estate timing. We were so fortunate to be able to purchase a house when the markets were reasonably priced. That’s not to say someone entering the work force today will not have the same success, but they may have to sacrifice a bit more, such as working/living outside Toronto or Vancouver, or living in a smaller, more affordable house. I still believe in home equity an important component to financial independence.
3) Discipline – Budgeting and Balance: We have tracked every dollar spent over the last 20+ years. Knowing where your money goes, setting a budget and sticking with it will help tremendously in achieving financial independence. We aren’t misers by any means. We eat out at least once a week; we take annual family vacations on cruises, to Asia and Europe. However, we don’t spend unnecessarily. Each individual needs to find their own balance.
4) Spending – Live within your means: This is a no brainer but needs repeating – Don’t spend more than you earn. We have never had debt other than a mortgage and one car loan. We always pay off our credit cards without fail. We use credit cards for convenience and to get cashback, not as a loan.
5) Savings – Almost anyone can retire within 20 years. I know that is a bold statement, but hear me out. If for every dollar you spend, you save a dollar, you are almost guaranteed to retire in 20 years. In other words, save 50% of your net income and spend the other 50%. After 1 year you have 1 year’s worth of savings. After 20 years you have 20 years of savings. You just need a 5% return on the nest egg to fund your lifestyle without touching the principal. 5% is certainly achievable. It’s a simplified model and doesn’t take into account large purchases such as kids education costs, new cars, a broken furnace, etc. However, it also doesn’t take into account the magic of compound interest. As an example – let’s say your net household income is 100K (round numbers for simplicity), you can spend 50K and save 50K annually. By setting up an automatic withdrawal each paycheck into an investment or saving account that pays 4%, instead of having $1M after 20 years (20 years x 50K) you would have $1.5M due to compound interest. This 50% increase in your nest egg should compensate for unexpected expenses over the years. This is simple in concept but not so easy in execution.
I know that we have been very fortunate in our circumstances and will never take that for granted. Some of it was luck, but with it also came lots of hard work and some sacrifices.
Thanks Bob for allowing me to share my journey with your readers. I hope it provides some useful information or at the very least, a few minutes of entertainment.
I also think it’s important to think about the non-financial aspect of early retirement. You are not only retiring from the work force. Consider what you are retiring into. How will you fill your days? While you are working, think about the activities that you enjoy outside of work. How would you introduce yourself to someone new without mentioning your occupation? Ernie Zelinski’s book “The Joy of Not Working” is a great place to start.
Early retirement isn’t for everyone. There are those who would hate it and get bored pretty quickly. Some folks absolutely love their job and would never think of leaving it unless they were fired or dropped dead.
Then there are others, like me, whose job was a facilitator to give me the financial freedom to figure out what I want to do when I grow up. I’m still working on that.
Thank you Eddie for your excellent insight on the financial independence retire early movement in Canada. Education, timing, discipline, living within your means, and savings are definitely the key drivers for achieving financial independence and early retirement. I enjoyed your take on being tax efficient with your investment portfolio by shifting from dividend-paying stocks to passive ETFs.
Dear readers, are you enjoying the Canadian Financial Independence Interview Series? Are you a Canadian that is financially independent or retired early from your career? Or close to reaching this key financial milestone? If so, I would love to have a chat with you. Give me a shout!
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
- FIRE Canada Interview #5 – Creating a long term plan
- FIRE Canada Interview #6 – Create a net worth statement
- FIRE Canada Interview #7 – Do Absolutely everything and never sacrifice or struggle at all
- FIRE Canada Interview #8 – Building a rental property empire
- FIRE Canada Interview #9 – Relocating to Spain
- FIRE Canada Interview #10 – Kids are as expensive as you let them be
- FIRE Canada Interview #11 – Vancouverites retired in their 30’s
- FIRE Canada Interview #12 – Being a valuist
- FIRE Canada Interview #13 – Always live a rich full life for today
- FIRE Canada Interview #14 – Lifeunscripted
- FIRE Canada Interview #15 – The first million is the hardest
- FIRE Canada Interview #16 – Lean FIRE