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Should financial planners worry about FIRE?

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By Mark Seed, myownadvisor
Special to the Financial Independence Hub

A recent post in the Financial Post caught my eye, why some financial planners seem worried about the FIRE movement.

My reaction is, they need not worry too much about any FIRE movement. I believe some financial planners might have bigger issues to contend with. More on that in a bit.

Why is FIRE so hot?

As a refresher, FIRE stands for “Financial Independence Retire Early.”

Some FIRE investors strive to save as much of their income as possible during their working years, hoping to attain financial independence at a young age and maintain it through the rest of their life: aka retirement.

A common goal of many FIRE-seekers is to build enough capital and wealth whereby they can largely live off their portfolio value in perputuity or thereabouts. Some of them even leverage an outdated financial study to help them realize their goal: the 4% rule.

The 4% rule (a general guide for a sustained safe withdrawal rate (SWR)) used by many early retirees, was the result of using historical market performance data from 1926 to 1992 by U.S. financial planner Bill Bengen. In general terms, the “4% rule” says that you can withdraw “safely” 4% of your savings each year (and increase it every year by the rate of inflation) from the time you retire and have a very high probability you’ll never run out of money.

You can find the details of that study here.

4% rule

However, the first challenge of many related to this rule is that this study was published almost 30 years ago. A lot has changed since then, including real returns from bonds. There are also products on the market now that allow investors to diversify far beyond the mix of large-cap U.S. stocks and treasuries that the Bengen study was based on. In fact, the abundance of low-cost investing products should be what many financial planners should fear the most, a point I’ll come back to soon.

Certainly, in my personal finance and investing circles, I don’t know of many FIRE-seekers that live by any strict 4% rule. Thank goodness they don’t.

Even though the 4% rule remains a decent rule of thumb to start any early retirement discussion with, it’s a flawed concept for many of today’s early retirees aged 40 or less.

  1. The 4% rule was based on a 30-year retirement horizon. However, a FIRE investor’s retirement could last 50 years or even more. So, while spending in line with the 4% rule could give an early retiree a very good chance at not outliving their money, a 50-year “retirement” timeline could be disasterous if said early retiree was striving to live through a prolonged period of low stock market returns.
  2. This rule was used to demonstrate a safe withdrawal rate associated with only U.S. assets: a mix of U.S. stocks and treasuries to be more exact. There is little doubt that if an investor uses a broader, more globally diversified portfolio with U.S. and international assets leading the way, I suspect their chances of financial success would increase. In fact, Vanguard said they would.
  3. Finally, the 4% rule assumes a constant dollar-plus-inflation spending strategy: straight-line thinking that assumes your spending will follow a very linear path over many retirement decades. My hunch is: of course that won’t happen. Sure, maybe in the first retirement year you spend your desired 4% and at best, maybe next year you spend a bit more accounting for inflation. However, just like asset accumulation is dynamic so will your spending patterns be in retirement. This means you should strongly consider a Variable Percentage Withdrawal (VPW) approach that largely takes into account the flexibility to raise your spending “in good years” and decrease your spending in “bad years.”

Further Reading: Why you should follow a VPW drawdown strategy.

With any retirement drawdown plan, the ability to operate in a spending range will be very key to the longevity of your portfolio. I hope to follow some form of this approach myself in semi-retirement.

Which brings me back to our case study in the Financial Post.

Why financial planners shouldn’t be worried about FIRE

For Kristy Shen and Bryce Leung, a couple from Toronto who retired at 31, they gave up the dream of owning a million-dollar home in Toronto and decided to travel the world instead.

For Kristy and Bryce, their goal was always financial independence and not so much the retire early part. As Kristy explained on my site:

“The idea of retiring from our job and living off passive income seemed so weird and foreign to us, so at first we dismissed it as an idea that only tech entrepreneurs or trust fund babies could pull off.  Then we woke up and realized our savings had hit half a million bucks, and we were like “Hey, why not us?””

Why not indeed.

And so, by living off about $40,000 per year (you can see one of their income reports here), travelling and writing (likely earning some money from their blog and book), they’ve realized their goal of financial independence and then some. Six years past their “retirement date” their portfolio is now worth a cool $1.8 million thanks to a major market bull run in recent years.

However, there are some financial planners in that post that argue there is no magic in personal finance.

“People make money off putting out something that seems magical … like the latte factor. I’ll just skip a cup of coffee every day, and you get rich. But the math doesn’t work — unless you’re having 17 lattes a day.”

While true, citing longevity risk from these planners as yet another major risk for Kristy and Bryce to contend with is definitely reaching here. To argue that our millennial millionaire couple has to worry about spending $40,000 or so per year from a $1.8 million portfolio is a “problem” many Canadians would love to have.

The FIRE movement has been great for many reasons, and people have been doing it for decades before it became an internet thing. FIRE-seekers have: Continue Reading…

What’s the real deal with Mutual Funds?

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By Anita Bruinsma, CFA

Special to the Findependence Hub

Mutual funds stir up heated debates all across the internet. Fund companies sing their praises while others say they are taking you to the cleaners. It can be confusing – are they good or bad? What’s the real deal with mutual funds?

A game-changer for investors

Mutual funds democratized the stock market, making investing accessible to more people, and this was a very good thing. Before the popularization of mutual funds in the 1950s, it was more difficult to get your money invested in the stock market: you needed a stock broker to buy stocks for you and you needed a fair amount of money. 

The idea behind a mutual fund is simple: collect money from a group of people and hire professional money managers to invest this pool of money into dozens of stocks, generating a return for the investors. It’s the pooling of money that is so powerful: it allows a fund to be diversified, giving investors exposure to a myriad of stocks instead of just a few.

As an individual investor, you’d need a lot of money to get that kind of diversification. And whereas a broker would charge a large commission for every trade, a mutual fund has economies of scale, making the costs lower overall. Plus, as a mutual fund investor you don’t need to know one single thing about the stock market. What a win for the masses!

The downside

So why do mutual funds get a bad rap sometimes? It’s mainly because sales practices around mutual funds have a muddied history. Investment advisors who are making recommendations to their clients about what to invest in might be influenced by sales commissions, possibly encouraging them to put their clients’ money into funds that pay them the most commission. Worse, these commissions (and other perks that used to be permitted) were not always properly disclosed to clients. Regulations have improved in this area, but sales commissions can still influence an advisor’s choice of funds. Continue Reading…

The Rule of 30

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By Michael J. Wiener

Special to the Findependence Hub

Frederick Vettese has written good books for Canadians who are retired or near retirement.  His latest, The Rule of 30, is for Canadians still more than a decade from retirement.

He observes that your ability to save for retirement varies over time, so it doesn’t make sense to try to save some fixed percentage of your income throughout your working life.  He lays out a set of rules for how much you should save using what he calls “The Rule of 30.”

Vettese’s Rule of 30 is that Canadians should save 30% of their income toward retirement minus mortgage payments or rent and “extraordinary, short-term, necessary expenses, like daycare.”  The idea is for young people to save less when they’re under the pressure of child care costs and housing payments.  The author goes through a number of simulations to test how his rule would perform in different circumstances.  He is careful to base these simulations on reasonable assumptions.

My approach is to count anything as savings if it increases net worth.  So, student loan and mortgage payments would count to the extent that they reduce the inflation-adjusted loan balances.  I count contributions into employer pensions and savings plans.  I like to count CPP contributions and an estimate of OAS contributions made on my behalf as well.  The main purpose of counting CPP and OAS is to take into account the fact that lower income people don’t need to save as high a percentage of their income as those with higher incomes because CPP and OAS will cover a higher percentage of their retirement needs. Continue Reading…

A Canadian perspective on Health Care Overseas

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By Akaisha Kaderli

Special to the Financial Independence Hub

Q and A with Jim McLeod and Retire Early Lifestyle

Billy and I are Americans. For most of our adult lives we have been self-employed, paying for our own health insurance out-of-pocket. We retired at age 38, and while initially we paid for a US-based Health Insurance policy, we eventually went naked of any health insurance coverage. Wandering the globe, we took advantage of Medical Tourism in foreign countries and again, paid out-of-pocket for services. This approach served us very well. However, we understand that choosing the manner in which one wants to pay for and receive health services is a personal matter.

In our experience, it seemed that Canadians generally were reluctant to stay away from Canada longer than six months because they would lose their access to their home country’s health care system. We did not know the full story of why many Canadians preferred not to become permanent residents of another country due to this healthcare issue. So, we asked Canadian Jim McLeod if he would answer a few questions for us to clarify! Below is our interview with Jim McLeod. He and his wife are permanent residents of Mexico, and now receive all their healthcare from there. It is our hope with this interview, to shed light on some options for Canadians who might not want to maintain two homes, be snowbirds in Mexico, or who could envision living in Mexico with its better weather and pricing.

Jim and Kathy in Mexico

Retire Early Lifestyle (REL): In the beginning, did you choose to do a part-time stint in Mexico before fully jumping in? You know, like to test the waters?

Jim McLeod (JM): Yes. Because of the following stipulations for our Ontario Health Insurance Plan (OHIP) and the possibility of getting a maximum of 180 days on a Mexican Tourist Card, we decided to do the “snowbird” thing initially: 6 months in Ontario during the warmer months, and 6 months in Mexico during the colder months. You cannot be out of Ontario for more than 212 days (a little over 6 months) in *any* 12 month period (ex. Jan – Dec, Feb – Jan, Mar – Feb, etc.) During this time, we used World Nomads for trip insurance to cover us while in Mexico. For us, this wasn’t too bad. However, according to other couples we’ve spoken with, after a certain age, depending on your health, this can become quite expensive.

Leaving the safety net behind

REL: When you retired early and left your home country of Canada, was leaving the guaranteed health care system that your country provides a large hurdle to your plans? How did you factor that cost in?

JM: After doing the snowbird thing twice, we had enough data from tracking all our spending, as per Billy and Akaisha’s The Adventurer’s Guide to Early Retirement, that we knew we would save approximately $10,000 CAD a year by moving full time to Mexico.  And we knew we would lose our OHIP coverage. As such, we budget $2000 CAD a year for out-of-pocket medical expenses. But we also knew that, at that time, we qualified for the Mexican Seguro Popular insurance coverage. Note: Seguro Popular has since been replaced with a new health Care system, el Instituto Nacional de Salud para el Bienestar (INSABI), which has the following requirements: Be a person located inside Mexico, Not be part of the social security system (IMSS or ISSSTE), Present one of the following: Mexican Voter ID card, CURP or birth certificate. As an expat, in order to obtain a CURP, you must be a Temporal or Permanent resident of Mexico.

REL: Initially, did you go home to Canada to get certain health care items taken care of and then go back to Mexico to live?

JM: No, we have not gone back to Ontario for any health care. Having said that, there is one medication that Kathy needs, that she is allergic to here in Mexico, so she gets a prescription filled in Ontario whenever we return and we pay for it out-of-pocket.

REL: What sort of medical treatments have you received here in Mexico? Continue Reading…

How to enjoy your retirement while getting paid

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By Carlos Blanco

Special to the Findependence Hub

Spending a week in Napa’s wine country, enjoying the good life during retirement, and meeting new friends. Sounds like a dream, right? Having the chance to do all this and be paid might sound too good to be true, but I assure you: it’s possible!

For more than a year, I’ve been using an app called Instawork to pick up shifts whenever and wherever I want. I found the platform through a friend and began using it to pick up shifts in order to build a work schedule that best suits my personal schedule. It’s been a wonderful experience where I’ve been able to meet new people and experience different facets of the world. As a friendly guy who likes socializing, it’s been a perfect fit for me.

Prior to using Instawork, I worked as a journalist. That ranks up there as one of the most stressful careers you can have. That kind of stress can take a toll on you after a while and with me it did. The hospitality shifts I’m working now are much more relaxed and I’m truly enjoying myself. From coordinating and assisting at events throughout the year to interacting with clients and guests at a variety of different locations, no two shifts are the same. As an added bonus, I can expand my budding coaching career and attract new clients from different walks of life.

Despite Great Resignation, many still want to work

There’s a lot of talk right now in the news about the Great Resignation and the Great Reshuffle and how people don’t want to work or how the economy is dying. The pandemic shook everything up and made a lot of people reevaluate how they were living their lives and what they wanted out of work. In my view, the economy is not dying and people absolutely do want to work. They just want to do things their way, on their terms, be treated fairly, and to get paid well while doing it. The country and its hourly workers are in a period post-pandemic, where people are just transitioning from one place to another and deciding what type of jobs works best for them. Continue Reading…