Snappy title, huh?
FIRE is made up of several subcategories of people who are trying to optimize their money in order to lead a better life. Doctors, travel hackers, Mustachians, that sort of thing. That's all cool and whatnot but it kinda leads to tribalism within the community, which is marketed by content creators as a good thing - but I disagree. The reason I disagree is jaw-droppingly simple: FIRE is identical no matter the profession or "tribe" because the goal and its systems (below) remain the same for each individual.
You could be a doctor in your 40's with 4 kids and a divorce. You could be a truck driver with a high school education. You could be a brand new teacher struggling to get full-time employment in a highly competitive market. These are completely different people, different circumstances, different life choices and likely different FIRE numbers but the goal (FIRE) and systems (the steps below) remain the same. You're not a unique snowflake (sorry) and your tribe is simply people who have stuff in common with you. Great for the community but susceptible to marketing.
Don't let FIRE become an identity, just a background system you've frontloaded time and effort into that will eventually recede to the background while spitting out dividends both literally and figuratively.
Below you're going to read my broad overview of how to FIRE with a Canadian focus.
Step 1: Dream a Little
Without going off the rails, allow yourself to reflect on what really makes you happy and what you've always wanted to do. Before you accuse me of importing bunnies and rainbows to this blog, this is actually very important because you're going to assign a dollar value to everything you think of. Note: not everything on your list should cost a lot of money.
Always wanted to travel - how much per year? Like eating expensive food - how much per month? Create a top 10 list of your favourite people, things or pleasures and figure out how much they cost on an annual basis.
This step is prone to change over time. Totally normal, people change their priorities - that's life. Don't fight it, just roll with the punches and keep updating your top 10 happy factors.
Here's some inspiration to get you started.
Step 2: Stress Budget or Anti-Budget
As I see it, you have two options. #1 You tally up everything you earn and spend to create an annual budget. Savings rate, dinners, car insurance, that time at your friend Mo’s, etc. I call this stress budgeting.
OR #2 you tally up all your income, move 50% to savings, pay your fixed expenses and spend the leftover cash on whatever the fuck you want. I call this anti-budgeting.
Either way, the goal is figure out where all your money is going, especially your fixed expenses. This is the name of the game people. Reduce the amount of time and money spent on housing, commuting, cars, insurance, utilities (including cell phones and internet), childcare, and of course food. This opens up more money for discretionary purchases that are spontaneous and fun to FIREwalkers and toxic to guilty debt junkies.
Be sure to compare your numbers to your dream chart. You'll find a lot of expensive things on your anti-budget that aren't compatible with your happiness. Cut them. Start easy or go after the big four I named above. Unless an overpriced pickup truck makes you happy?
Take your annual spending and multiply by 25, as per the 4% Assumption.
One last note: if you can't get through these first two steps, you're fucked. Skipping the dream step will mean you're saving money for some vague or vain reason and that will poison your relationships and your thought process behind FIRE. Skipping the budget will mean nothing ever gets measured and you might as well be walking through life in clothing that never fits. It's uncomfortable for you and everybody around you. So take your time - in fact I'll give you two years because I think that's how long it takes most people to optimize enough to reach 50% savings. Nobody figures this shit out in days, weeks or months. Ditch the instant-gratification mindset and just think this through over the next couple of years. Incremental improvements please.
Step 3A: Increase your Income
Believe it or not, the most overlooked step to FIRE is making more money. People may think this means driving for Skip the Dishes on the side (and I guess it can) but I would encourage a general audience to make more money at your current job or educate yourself for your future job within your industry. Add skill to your work instead of adding hours to your day. Communicate advancement desires to your boss or to somebody useful in a position of power. Continue to become more useful to your employer via continuing education/training.
If you're self-employed, the same is basically true. Continue to become more useful to your customers. Add value to their purchases of your wares or services.
You should also never, ever, assume your employers/customers are your family. You have a business relationship, full stop. In practical terms, this means keeping your resumé updated and your eyes out for new opportunities. In a recent survey at my own employer, they asked if I would stay even if a similar job at another employer was offered to me. I think you know what answer I gave them.
Step 3B: Reduce your Spending
As mentioned in anti-budgeting, your fixed expenses are everything because:
- They cost the most
- Almost all advertising is aimed at you increasing these expenses
- Good chance they are not on your Dream list
- Less is more
Like every other step here today, this shit takes a lot of time and patience. I’m being repetitive here but give it two years to get all these systems into place. One of the nasty side effects of Consumerism is Instant Gratification Syndrome. This simply cannot coexist on your path to FIRE.
When your fixed living expenses are low and your income is increasing, you'll be able to save more and more. If 50% sounds like a pipe dream, eventually it will come into focus and be an attainable goal. Steps 3A and 3B will slowly but surely increase your savings rate. I'm not going to spend any more time pandering to bandwagoners of this movement who believe 50% is far too high. Achieve it or don't.
Step 3C: Invest the Difference
You have to be willing to take risks and invest your money. Gone are the days of superb and safe interest rates. Start to purchase publicly traded global companies in the form of broad-based low-cost index ETFs. Real Estate in Canada is another very viable option but with much more initial work and higher start up cost. Both are tried and true investment options and you've gotta pick one or both and start investing.
If you're lost between choosing an RRSP or TFSA, please leave this website and never return. The choice simply doesn't exist - it is imperative you use all tax shelters and deductions at your disposal. All those articles that detail choices between the two are for people with piss-poor saving rates and years of neglecting their tax shelters. You're on the path to FIRE, and as such, your savings rate will be 50% or higher and you will have no problem filling out both accounts.
Again, this takes time and limits grow each year but you have to max both. If you're late to the game and can admit you were one of those people I mentioned above, then a short-term choice could exist. A high income earner with $150k in RRSP contribution room and $65.5k in TFSA contribution room will likely not be filled up in a year or so even with a 50% savings rate (not to mention I've made it clear it takes two years to truly set up the path to FIRE). If this sounds familiar, lean towards the RRSP I guess. I'm assuming you're making over $75k/year. Earning high income will give you a massive tax return to be reinvested (double if your spouse is on board) and will also likely spike your CCB payments the following year to if you have kids.
Which ETFs? I choose VEQT. I write about all that here.
Step 4: Taking the Money Out
There's something immediately stressful about the idea of never saving again. You've committed years of your life to building and honing a beautiful 50% (or higher) savings rate - reversing course simply feels wrong. Are you sure you have enough?
This is described as "one more year syndrome" where the saver will never believe they have enough to quit the wealth building systems above. Or take a pay cut. Or vacation the entire summer. The excuses pile up. It's eerily similar to Imposter Syndrome.
Withdrawing from your accounts is the entire point of FIRE so get ready to get over yourself. As per the 4% Assumption, there is no chance you'll be withdrawing 4% annually. Instead, you'll likely be winding down from your job, staying part time or perhaps severance. Your spouse may not be able or willing to earn $0 either.
So how to do it? Start with your most difficult accounts first. Goes like this:
- Unregistered (aka taxable accounts)
*Note* I do not touch on corporate accounts because I have never had one. Sorry!
- Pensions and other locked-in accounts are notoriously difficult to work around because of a thousand rules, different regional laws and the impossibility of reducing your taxes to sub 3% - hopefully you don’t have them. If you do, you'll simply have to blend your withdrawals with the strategies below. Certified Financial Planners are worth their weight in gold here.
- There are different rules for federal and provincial LIRAs (also called Locked-in RRSPs). Use taxtips.ca or google the rules to get your specifics. If that all seems overwhelming, keep in mind by this step you’d have likely already seen a financial planner familiar with FIRE. Chances are you’ll have the opportunity to unlock a percentage of your LIRA into an RRSP.
- For example, at age 55 I’ll be able to unlock 55% of my LIRA and contribute to my RRSP, regardless of whether or not I have the RRSP contribution room. Nifty, huh?
- The unlockable portion will suffer the same fate as any pension and will have to be blended with the withdrawal strategies below.
- The goal to effectively withdrawing from RRSPs is to remain within the annual tax exemption on earned income (which RRSP withdrawals are considered to be). For 2021, the exemption is $13,808. So you can withdraw that without being taxed.** You can either spend that money or move some over to your TFSA since those contribution limits are increased annually. The bigger your RRSP, the harder this is to accomplish.
- I’ve declared in the 4% Assumption that you’re very likely going to earn income after hitting FIRE anyways. So withdrawing from RRSPs might be put on the backburner and that’s okay. It’s also okay to have to pay some taxes when you do pull money. 0% is optimal but not necessary. Choose your happy lifestyle before considering your tax bracket. You’ve earned that after all the years of saving.
- Most people will end up with this account being the biggest and since it's fully taxable, it's important to get it right. As detailed in the FIRE Power of VEQT,, I will be shoving all of my canadian equities into taxable accounts because of the tax advantages of being Canadian. Canadian companies paying eligible dividends of $40k will be taxed so efficiently (varies by province) that pulling money from the RRSP under the exemption ($13.8k) will net you a tax of 0.5-3%. That’s $53.8k of income. Insane!
- Have a quick glance at the taxtips.ca simple calculator and calculate different scenarios and see for yourself.
- This one is a little more trickier than it looks. Your contribution room will continue to increase so adding money is optimal. Since you may not be making much money, withdrawing from the RRSP and depositing into the TFSA is sensible. That way, you’re effectively moving hard to access cash into an account with no tax consequences.
- You might be thinking, isn’t the TFSA a perfect place to hold my emergency funds? If I can’t withdraw from my RRSP and/or my unregistered accounts aren’t paying their usual dividends due to volatile market conditions, shouldn’t I keep this account liquid? This makes sense on paper until you realize you can simply keep a year or two of cash in EQ Bank and let your TFSA become the equities monster it was born to be. If you’re worried about running out of cash, your TFSA is the knight in shining armour. Keep piling money into it and let the magic see you through. If you’re interested in gifting large sums of money or planning a generous inheritance, the TFSA is likely your go-to.
- So the bottom line is to add to and then ignore your TFSA for FIRE purposes. Another option is to simply withdraw the earnings from the account (something like VRIF). So you’d keep adding annual contribution limit (and the previous year's earnings) from your RRSP but also keep withdrawing the current year's earnings to live off if you want. It doesn’t really make sense from a logical point of view (you can just use the RRSP money without putting it in and then out of the TFSA) but behaviourally I could see people using this option.
* Utilities to me means water, electricity, heating, internet, and mobile phone plans.
** Most banks will apply an automatic withholding tax of 20% or greater when you withdraw, even if you're inside your exemption. This is a blanket policy designed to stop the majority of Canadians who wihdraw from their RRSPs from owing an insane amount of tax without realizing it. You might be able to have this waived by calling and whatnot but if you're not impatient you could pull your money in late-December, file your taxes in early-March and have your money back soon after that. Two months of waiting time. Not the end of the world.