FIRE Canada Interview #15 – The first million is the hardest
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.
For the Financial Independence Retire Early Canada Interview #14, Ales who was featured in Moneysense Magazine over 5 years ago contacted me and decided to be interviewed. I am overjoyed to see readers to start reaching out to me regarding being interviewed!
Q1. That is absolutely amazing to hear that you are financially independent at age 46 with a net worth of almost 3.5M. What originally sparked your interest in personal finance?
I started investing with a financial advisor, but after a few minor mishaps (such as not being aware for the Deferred Sales Charges or Front End loads for mutual funds), I started educating myself, and reading articles and books about investing. For personal finance, I started with The Millionaire Next Door (recommended by a co-worker) and The Wealthy Barber, and expanded my knowledge from there. I was always frugal, this probably coming from my mother.
Q2. How did you discover the idea of financial independence retire early (FIRE)? What do you think about the fast-growing FIRE community? Unlike the US, the financial independence retire early movement seems to be kindling here in Canada. Why do you think we are lagging behind compared to the US?
I realized I was on my way to FIRE only a year or so ago when I started watching YouTube videos about the subject, and found out about Mr. Money Moustache and others. I was doing it all along, just by being frugal. Having a bad job some years ago finally cemented the goal of the FI part of FIRE. I don’t want to sit in a rocking chair for the next 40 years, being retired. Even the YouTubers that talk about FIRE aren’t retired… they’re YouTubers. It’s more about doing what you want or love, whether it’s a second career, volunteering etc.
I applaud anyone who is saving and investing with a specific goal in mind, in US or in Canada.
Perhaps I shouldn’t comment on FIRE in the US compared to Canada, since there aren’t official statistics about FIRE in either country. I know they have personal finance conventions (e.g. FinCon) with FIRE content, but the higher population may account for this. And, Mr. Money Moustache is Canadian born, so we are ahead just based on that. But seriously, one would think the free healthcare in Canada would give us a leg up compared to the US, and more people would aim for FI.
Tawcan: FinCon is not just for Americans, there’s definitely a group of Canadian bloggers and non-bloggers that attend each year, yours truly included.
Q3. You mentioned that you started investing in real estate in 2010. Now you own four real estate investment properties in the US. Why real estate? Why did you invest real estate in the US rather than Canada? How did you secure a mortgage in the US?
I had built up a bit of a portfolio of mutual funds by 2010 and wanted to balance my investment classes with something different. Real Estate is a traditional investment of the wealthy, so I started building my “empire”.
I bought in the US because that’s where the crash was. You have to buy where there are opportunities, and the price drop was significant. I was becoming risk friendly, and so took the plunge. I sometimes think I should have bought more, but then administering even the four of them is a part-time job.
All four houses I purchased for cash – as a foreigner, no US bank would give me a mortgage back then, since it was the free use of sub-prime mortgages that caused the crash. I got a HELOC against the house I was living in at the time, and was able to buy all of them mortgage-free.
Tawcan: It was an excellent move that you purchased US real estate in 2010. I wish I had the foresight back then too.
Q4. Given none of the four properties are local, do you manage all these properties by yourself? Or do you utilize a property management company?
I have property managers for all the US properties. As a foreigner, you are not allowed to work in the US, and have to pay someone to do everything. Not that I would fly to the US whenever something needed to be done. I let the property managers take care of the properties, but it certainly isn’t passive income. I have to manage the managers, check the statements, and send emails. Every so often, I get photos of weeds in the front yard from the Home Owners Association, which drives me crazy.
Q5. Since we are talking about real estate, what do you think about the Canadian housing market? Do you foresee the Canadian housing market go down significantly when there’s a recession?
Not that I am an expert on Canadian real estate, but the only places that could drop would be Toronto and Vancouver. The rest of the country didn’t have the huge run-ups that those two cities did. And a recession would cause lower interest rates, making mortgages and houses cheaper.
I wouldn’t mind buying a tri- or quad-plex in Surrey, but nothing cashflows today, so it’s not a place for investment. Prices would have to drop significantly for me to be interested.
Q6. When we were exchanging emails, you indicated that statistics indicate stock market returns beat real estate, but you are investing mostly in real estate. Can you explain your logic behind this investment decision?
My investments are actually 60% in liquid assets like mutual funds, ETFs, stocks and some (less liquid) private equity sprinkled in. Only 40% of my net worth is in real estate, including my residence. I was trying to keep them 50/50, roughly.
Frankly, because of the lack of leverage, the US real estate is returning only 2.5-3% of its current worth in cash flow every year. Most of the capital appreciation has already occurred. I will thus begin to sell the houses, one per tax year, and start buying more private equity, and rock-solid Canadian dividend payers e.g. banks, that will pay me 4-5% yield every year. The 50/50 balance of real estate to stocks will definitely end once I start selling the real estate.
Tawcan: Your statement makes sense then, especially considering the lack of leverage in the US real estate
Q7. Outside of real estate, do you have any other investments like mutual funds, index ETFs, individual stocks, or other investments?
Yes, as mentioned above, I have about 2.1M is in mutual funds (index and actively managed), ETFs, individual stocks and private equity (for diversification).
Q8. Tell me some of your financial mistakes. What have you learned from these mistakes?
Many, many moons ago, just prior to the Dot-com crash, I worked for a software company that gave us employee stock options, and had an employee stock purchase plan. The company actually made money, and the shares went up and up. However, I was working too hard, and didn’t look at the situation, thinking the current trend would continue (a classic investing bias). Also, I didn’t need the money at the time, so why sell when the price is high? I think we all know, in hindsight, why we should sell at the top.
Not really a financial mistake, but ending a common-law relationship also turned out to be expensive, despite a prenuptial agreement. So, getting into a relationship that’s not “forever” would be another mistake. Divorce costs you half of your stuff. I’m glad mine happened early, and I had the prenup, because if it were to happen now, I would have to say good-bye to FI. I learned that it is financially dangerous to live with someone, if I may joke somewhat.
I participated in a couple of real-estate “flips” with properties on Vancouver Island, acting as the financier in a joint venture. While both made money, with the amount of risk, time, effort and stress, I wouldn’t do another one. They were learning experiences, and mistakes, albeit not financial, but definitely unpleasant.
Tawcan: That is indeed a classic investing bias. Investing money in the same company that you work for, however stable, can create a double whammy when the company is doing poorly, and you end up getting laid off. You not only lose your job, you also lose your investments.
Q9. Do you take advantage of TFSA and RRSP? Do you plan to withdraw early from RRSP before age 71? If so, what are your early withdrawal strategies to minimize RRSP tax penalties?
I have both a TFSA and RRSP. I am actively (monthly, via three index funds) buying into my TFSA. I am staying away from RRSP purchases because I have a corporation for work, and to buy RRSPs, I’d have to bring the money into my personal account, and then get a tax discount from the RRSPs equal exactly to the amount of extra tax I had to pay to get the money for the RRSP in the first place.
The general strategy with registered accounts is to let them increase tax-deferred (or free, for the TFSA) for as long as possible. A recent call with my account confirmed the strategy:
- Live off the dividends from the assets in the corporation and the rents for now
- As I sell the houses, invest the proceeds in personally owned dividend-bearing stocks, with extra dividends to help me enjoy the retirement a bit more
- Wait until I am 70 to take OAS, and then start pulling the RRSPs and TFSA, as needed, or as forced to
Q10. Do you plan to retire early in a few years? What do you see yourself in 5 years and 10 years from now? What are the top three things you are looking forward to?
At most, I can work in my current IT job one more year, and will call it a career after that. I am financially independent now and have been for a while. It’s just a fear of “Is it enough?” or “The market just tanked, let’s keep working to keep buying” (October – December of 2018). I’m now trying to get together a $100K emergency fund (I’ve been using a HELOC as an emergency fund until now). I know this $100K would get invested if the market crashed, but I’m telling myself it’s an emergency fund.
In 5 years, I may be doing a 3-month contract job here and there. I will be day trading (something I have avoided until now, being a long-term investor), and doing lots of volunteer work, perhaps helping (financially, with business experience or just time) a start-up business or two. I’d like to mentor some young investors as well – I’m doing a bit of that already.
In 10 years, more of the same, but I would like to also teach high school and college students about investing, because I think it is, sadly, an ignored skill. I may have to get CFP by then. I may do some travelling while I can.
I look most forward to having (1) more time for everything, (2) for not having to go somewhere first thing in the morning where I perhaps wouldn’t go normally and (3) doing lots of reading. If I may throw in a fourth item, it’s going to the gym during the day when no one is there. It’s strange what a difference that makes for me.
Tawcan: It makes sense to have some cash cushion to give you some flexibility.
Q11. Do you keep it a secret to co-workers, friends, and family that you are close to being financially independent? Do they feel uncomfortable whenever you share your financial success with them? Why do you think money is such a taboo subject in society?
Because investing and personal finance are my hobbies, I talk to everyone who will listen about them. I have thus done lunch-and-learns for my co-workers wherever I have worked. A lot of people suspect, just from my knowledge, that I have done well. I have shown my trading account to a few people when teaching them how to buy stocks or mutual funds. If someone were to ask me outright, I would tell them. So, no, it’s not a secret, but I don’t blurt it out in casual conversation.
My family knows about my being close to FI, but if anything seems concerned that I will stop working, since that is all they have done all their lives.
Money is a taboo subject because it is seen as personal, whether it’s revealing of salary or net worth. By not talking about it, you are presumably trying to spare someone else’s feelings from being hurt, since they are poorer than you. And yet one of the main reasons people buy the new car, boat or house, is to show others how well off they are. Much worse is that parents don’t teach their kids about money – it is a taboo subject even then, not allowing parents to teach their children about one of the most important things for their future.
Q12. What would you tell someone like me who is trying to achieve financial independence? Do you have any advice for financial independence retire early?
For FIRE, I would recommend living below one’s means, delaying gratification, saving as much as possible (rather than 15% of income, which will give you a decent retirement at 65, and most people don’t do even that), and investing.
Take some educated risks with your investing. If you don’t trust yourself to invest, automate it with dollar-cost averaging (and “pay yourself first”).
How much you get to invest depends on a combination of income less expenses. Increase the former and decrease the latter. Avoid lifestyle creep as you make more money.
Educate yourself about investing and personal finance; they are very important topics. Read a few basic books, and become interested. I have friends who research their next TV or truck purchase to death, and then buy mutual funds blindly.
And finally, have multiple streams of income e.g. dividends, rents, active work income, some capital gains from active trading if you want to do that, some royalties from a training video or eBook etc. You obviously can’t stop working if your salary/wages are your only source of income.
Q13. Do you have anything else you would like to share with me and my readers?
A lot of what I have done is due to being single-minded about my goals. I easily live (I did the expense tracking) on 12% of my income. I have no car, I don’t enjoy travel for various reasons (fear of flying and fear of spending) and eat out minimally (I’m on Keto, which makes it difficult). I am single, with no dependents, so I am making these decisions only for myself. Someone with kids, but two incomes, could easily have the same FI, with some self-restraint in spending, but both spouses need to be on board.
I like to say “Decisions have been made.” It’s your choice of what decisions you make, what your goals are, and how you live your life. As the saying goes, you can either look rich or be rich, but few of us live long enough to do both. Stop trying to impress other people and be comfortable with whom you are: an FI person. When I am waiting for the bus, I always smile when someone squeals past the bus stop in a brand new Mercedes. I know how much money I have, and I know he/she is bad with theirs.
Other bits and pieces:
- I’m a big believer in tracking my revenues, expenses (to know my burn rate in retirement) and knowing my net worth at any time. It’s very motivating to see it go up. I’ve taken a screenshot – see below.
- My accountant and I had a chat about the Canada Pension Plan and decided to stop paying it. Since I am incorporated, my corporation (as the employer) would pay half, and then I would pay the other half, so it would be twice as expensive compared to a permanent employee. Plus, my corporation would have to pay me a salary instead of dividends, so I would have to pay higher taxes. Since the CPP is a forced-savings vehicle, and I am a good saver on my own, I haven’t been paying it for several years. I’m not expecting to get any CPP in my 60s, or a few pennies.
- I found the saying “The first million is hardest” to be true. Once you reach a critical mass, the compounding is the same percentage, but the dollar amounts really take off. Plus, you have new investing vehicles available, like Private Equity (which has been only lukewarm success for me, sadly), real estate and low-cost mutual funds with certain minimums.
- My not having a car (I try not to buy depreciating assets) is a personal decision, and saves a lot of money and the environment, but costs a lot of time. I sometimes wonder if I had a car, and maybe took more vacations, whether that would extend my “shelf life” at work, and I could put in a few more years.
- Some people believe all debt is bad. I am comfortable going into debt for things that will appreciate, and borrowing to invest, including for real estate and stocks. I bought private equity that paid out 6%, knowing I was borrowing the money at 3%, and being comfortable with the spread as profit. But I also have friends who refuse to get a HELOC (but not use it until needed) on their residence because their family lives there – everyone is different.
- I have a couple of credit cards – unlike what Dave Ramsey says, credit cards are ok, as long as you act as an adult and control yourself. And pay them off every month.
- The experts advocate having a 3-6 months’ of spending emergency fund. I try to build one up, but there’s always a stock that catches my eye, and the emergency fund is gone. As long as my stocks keep paying their dividends, I don’t need an emergency fund, since I can live off the dividends. I also have my HELOC available, and if I were to have to draw on it, the income from my other sources would cover the interest, so it as sort of an emergency fund. It is important, however, to be able to access money to live on without having to sell off a beaten-down portfolio.
Thank you, Ales, for participating in the interview. You have shared some great insight, especially your answer in
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
PS. Ales took a screenshot of his net worth from Quicken. You can see where he started buying the houses in the US in 2010, and started pulling money out the HELOC. The debt spike in 2014 is when he financed a house flip on Vancouver Island as a joint venture; He didn’t bother tracking the second flip in Quicken.