Tag Archives: Financial Independence

The hard truth about the FIRE movement [Financial Independence, Retire Early]

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By Maria Weyman, creditcardGenius

Special to the Financial Independence Hub

Retirement, whether near or far, is a pretty big milestone in a person’s life.

We start saving for it as early as possible and put as much towards it as we can in order to be better prepared.

Whether we want to spend it travelling, immersing ourselves in our favourite hobbies, or spending some quality time with loved ones, most of us look forward to our retirement but don’t see it happening in the near future.

The average age of retirement in Canada is 64 years old, but the popularized FIRE movement – which stands for “Financial Independence, Retire Early” – is the lifestyle concept that proposes an alternative scenario.

By living as frugally as possible and saving every bit possible while maximizing income and revenue, FIRE-devotees plan on retiring much earlier than the Canadian average.

Although we all want to retire early, and being financially independent enough to retire at a young age is possible, it might not be attainable for everyone.

We can all dream, but it’s important to look at the concept without those rose-colored, heart-shaped glasses we all get when thinking about early retirement. Realistically, the FIRE movement can be quite extreme.

Reasonable income

Living from paycheque to paycheque is still the sad reality for many Canadians, some not even being able to set aside money for normal retirement. Living as frugally as possible is just a means of survival rather than a means to a bigger end.

Stagnant wages and the ever-increasing cost of living has made it harder than ever to be financially stable, let alone financially independent, especially for lower or middle-income brackets.

Not to mention getting higher-income jobs in the first place requires many years of education and consequently entails large amounts of student loans, which in itself can take decades to pay off.

Investment risks

Even if you have an income that allows some wiggle room, saving alone probably isn’t enough. To be successful in the FIRE movement requires some savvy investing.

And since we’re taking away the option of long-term, stable, compounded interest savings, the timeframe is much shorter.

But with higher rewards usually come higher risks.

It’s up to you to decide if the risk is worth the potential payout.

Retirement timeframe

Another glitch in the FIRE movement lifestyle is retirement timeframe: how long you’ll actually be retired for.

Savings breakdown

Let’s crunch some numbers just to get a general idea. The most complicated part of this calculation is compounding interest. Thankfully, we can summarize the effects of compound interest using a multiplier.

Let’s say you’re 23 years old and you plan on retiring early at 40 years old. The average life expectancy in Canada is 82 years old, meaning your retirement fund will have to be sufficient enough to carry on for over 42 years.

Compound interest allows our savings to “go further” than they otherwise would. If we are looking at a compound interest of 3.5% (moderate yield rate) we can calculate how much further savings would go for a period of 42 years:

Savings Multiplier = (1 + Annual Interest Rate)^42 = 1.035^42
Savings Multiplier = 4.241

Where the “^” indicates an exponential power (that is 2^3 =  2x2x2). This means that over a period of 42 years, your savings will essentially be multiplied by a factor of 4.2, which shows you how powerful a force compounding interest really is.

While it’s nice that our savings can grow exponentially with compound interest, taking money out of our savings results in losses that grow with compound interest. As such, if we take money out of our savings at the beginning of that 42 year period, that money is also multiplied by a factor of 4.241. Taking the money out one month after would have a slightly lower multiplier and so on. By summing the total effect of each monthly withdrawal we can also obtain a monthly expense multiplier. The first step is to find the monthly interest rate. This can be obtained as follows:

Monthly Interest Rate = (1+Annual Interest Rate)^(1/12) – 1 = (1+0.035)^(1/12) – 1
Monthly Interest Rate = 0.28708987%

Note that calculating a power x^(1/12) is a 12th root and will require a scientific calculator. After obtaining the monthly interest rate, you need to do a recursive sum representing the multipliers for all monthly withdrawals: Continue Reading…

”Lucky 5” ways to prepare for a post-Divorce financial future

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By Meggie Nahatakyan

Special to the Financial Independence Hub

Divorce is not the end of the world. Well, not for you. Being newly divorced signals the beginning of a brand new life and the opportunity for you to redesign and fine tune your life, now as a single person, living under your own terms: the way you want it.

Studies show that many newly divorced women are often left off facing worse financial issues right after divorce. Many are struggling to cope with the demands of being able to provide for themselves and their families, single parenthood, and suffering low self-esteem as well as feeling emotionally battered.

Take stock of your life

Instead of focusing on all the negativity a divorce brings, it is crucial that you take stock of your entire life and place yourself in a positive frame of mind by being grateful for all the great things in your life: like your career, health, family, children, friends, and other support systems you have. After that, make a firm decision to make today the very ‘first’ day of a brand new and better life, looking forward to the future and achieve your fullest potentials in a way that fortifies your core values and beliefs.

Take your time

Take the time out of your usual routine and set your mind free. Relax. Think about how you want your life to look 3 to 5 years from now and what you really need in your life. What if you no longer have to work? What will financial freedom, abundance, wealth, and stability really mean to you?

To bounce back from your past broken relationship and face the future with confidence, you need to be financially stable. You can do this by starting a business that you can juggle while working at home and tending to the kids.

Here are 5 business ideas you can start post-divorce to start empowering yourself:

1.) Start Freelancing

There are websites like People Per Hour or Fiverr that allow you to sell your services for a price. If you are a good writer, bookkeeper, transcriber, or you have specific skill sets that can be outsourced, you can always telecommute and work online. The positive side of freelancing is the work time flexibility; you can work in the given timeframe but the exact hours of work will be up to you.

2.) Start a YouTube Channel

With videos booming these days, people are glued to YouTube and social media. There’s no denying that the future is video. Why not start your own YouTube video channel? Are you a good cook? Start a cooking channel. Are you an expert home DIY hobbyist? Then, let the world know through your very own video channel. There are no limits to what you can do so as long as your channel offers interesting and useful content, you are sure to get viewers and subscribers. Join the bandwagon! Continue Reading…

Investing 101: The Road to Financial Independence and Early Retirement

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By Darren Wilson

(Sponsored Content)

Financial independence and early retirement: almost everyone dreams of achieving this. Most won’t succeed. And most of those will think it’s because they can’t

The truth is financial independence and early retirement are not concepts similar to a utopia and a belief in Avalon. Being knowledgable about your finances, where your money is coming and going, and financial planning is half the battle. The rest is discipline.

If you’re armed with the discipline, motivation, and desire to become financially independent, then check out these tips for early retirement today!

 Income vs Wealth

One of the first things to understand right out the gate is the difference between income and wealth. Many people believe how much money they make is how much they are worth.

However, think of celebrities and athletes who run into financial problems because they spend more money than they make. And there are opposite stories about lower class shift workers retiring as millionaires.

This is because of spending. Wealth is usually viewed as a person’s total net worth. In this way, wealth is made up of your assets minus your liabilities. What’s left is your equity or, wealth.

Plan for the Long Term

It’s important to plan for as long term as possible. This means thinking beyond conventional means of income. While working several jobs or longer hours to increase your income may seem like the best idea for saving, it’s not.

Instead of focusing on longer hours and multiple jobs, begin looking into investing: long-term investments such as a traditional IRA or a Roth IRA for your retirement (in the United States; the Canadian equivalents would be RRSPs and TFSAs.)

Investments don’t have to be retirement accounts only: it would also be wise to start a different portfolio for personal investments. This portfolio could consist of private businesses, car washes, mutual funds, and real estate. These are great cash generators for after you retire and some of the best stocks to buy today.

While wealth may not be made up of just income, some income will be necessary for retirement. Investments are a great way to achieve that. Continue Reading…

Work Optional: Retire sooner to live your best life

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By Vicki Peuckert Cook

Special to the Financial Independence Hub

If you’ve spent any time reading about personal finance lately, you’ve likely heard about the “FIRE” movement. FIRE means Financial Independence – Retire Early.

Suze Orman got headlines by announcing she hated the FIRE movement (but she changed her position a few weeks later.) While Clark Howard “FIRE’d” before it ever became a popular thing to do. (If you think “retire early” doesn’t pertain to you, I strongly urge you to keep reading!)

Whether you agree with people who want to retire early in their 30s or 40s or not, it’s not hard to support the idea of becoming financially independent. Making work optional at some point so you can choose how to live your best life makes good sense.

Tanja Hester and her husband, Mark Bunje, left their careers behind to retire early (at ages 38 and 41) after reaching financial independence. Tanja’s new book, Work Optional – Retire Early the Non-Penny-Pinching Way teaches you how to get there too: no matter when you start or what age you’ll be when you leave work for the last time.

Retiring Is about your life, not just your money

It’s hard to think about retirement without focusing on money. After all, retiring without a solid financial plan – especially retiring early – is a recipe for disaster.

Tanja clearly explains what a bad idea it is to think you can just get back into the workforce if you run out of money in retirement. Her conservative advice is to Make Your Plan Bulletproof by diversifying your “magic money” sources.

Tanja doesn’t just tell you what to consider. She provides action steps and detailed information on ways to shore up your finances before quitting your day job for good.

What I really love about Work Optional is how Tanja embeds the importance of financial planning within retirement life planning. She redefines money as a tool to “help you live your best life as soon as possible.”

This helped me think about early retirement less as a race to get done with work but as a path to defining “living” according to your own terms.

Work Optional is organized in 3 main sections:

  • Determining what kind of life will thrill you
  • Creating a conservative financial plan to be able to live that life
  • Adapting to live your best “post-work” life

You can see that crafting and living your retirement dreams bookend the part of retirement planning most people really focus on: money. But Tanja doesn’t let you skip the tough questions you need to answer in order to transition to living the retirement you want.

She knows there is more to it than money, and she asks you to dig deep and engage with the most critical person in your retirement planning: YOU.

You have to do more than read

If you’re on this site, you probably listen to podcasts and read plenty of articles, blog posts, and books focused on personal finance. When I started on my own FIRE journey, I read everything I could find. Even with all of the information I had, I was still hesitant to act.

Did I really understand what I was reading? What if I missed something and made a mistake? Did new information come out that would help with my retirement planning? Continue Reading…

Women, Wealth and Retirement

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One of my very first financial planning clients was a single woman in her late 40s named Rachel who lived in Toronto and worked as a self-employed consultant to the not-for-profit sector. She made good money but lacked the confidence to manage her day-to-day finances and save for the long term.

Moreover, Rachel provided care for her aging parents and was under a tremendous amount of stress: enough for her to worry about her own health and whether she could maintain her current workload.

We worked together to establish a budget and cash flow projections for the next 12 months. During that time, we checked in monthly to ensure her income and expenses were on track and updated her plan accordingly.

Having always come from a place of fear about her financial future, Rachel quickly realized the path was not as bad as she once made it out to be. Most importantly, I never made her feel bad for things she didn’t understand: I just offered support and encouragement, along with tools that were easy to understand and implement.

After just one year she felt empowered about her finances and confident about her financial future. This new-found confidence also shone through her consulting business as she managed three straight years of record revenue growth to help further strengthen her financial position.

Meanwhile, her parents’ health continued to decline, so Rachel decided to scale back her workload and spend more time with her mom and dad. Now she only works on enough projects throughout the year to reach a specific annual income target that meets her monthly spending and savings goals. She has enough confidence in her financial plan to turn away other business opportunities to focus on her well-being and spend more time with her parents.

Rachel now joins a growing list of financially well-prepared Canadian women. Earlier this year, RBC Insurance conducted a survey of Canadian women over the age of 45 with household income of $60K+. The survey found that women are relatively well-prepared financially, but still express varying degrees of confidence when it comes to their financial future.

Highlights include:

  • The majority of women over 45 have a very clear idea of what they would do with a sudden lump sum of money, with only a quarter worry about being able to manage the money properly.
  • Canadian women have also mastered the household money matters. More than nine in 10 (92 per cent) agree they have a strong understanding of their finances.
  • Yet despite this, 24 per cent say they won’t be able to maintain their household’s financial situation if their spouse or partner were to pass away and one-third are not confident that they will be able to afford the lifestyle they want to live through retirement.
  • Interestingly, single women were only slightly more likely than married women (36 vs. 34 per cent) to cite a lack of confidence in their ability to afford their lifestyle in retirement.

Retirement planning is a challenge in any household, let alone one in which a spouse dies early. If that spouse happens to be the household’s chief financial officer, what’s the surviving partner to do?

Even though I manage our day-to-day finances and retirement savings I do want my wife to have an understanding of our financial position:  both current and future. I want to set up our finances in a way that’s easy for her to manage in the event of my untimely demise. I also want to ensure that she can maintain a comfortable lifestyle in retirement.

I’ve made sure to include my wife as the beneficiary on my RRSP. That way, if I died, she could have my RRSP assets transferred to her RRSP through a tax-deferred rollover.

I have a term life insurance policy in place that will be enough to pay off our existing mortgage and provide another $300,000 or so to live on.

I also have a defined benefit pension through my current employer. If I died, she would receive 2/3 of the pension I was receiving for the rest of her life.

Annuities: A Missing Piece of the Retirement Puzzle?

The idea of guaranteed income for life is appealing to me as a way to simplify our finances in retirement. Continue Reading…