This post is also available in: FR
FIRE stands for “Financial Independence, Retire Early”.
The basic definition is very simple: save a large amount of money to retire as quickly as possible, but this formula does not apply to everyone.
Indeed, some people would rather tighten their belts to leave their jobs as quickly as possible. On the other hand, there are also people who love their jobs, but are still interested in the financial independence part of it, because they no longer want financial stress to affect their life.
The most frequent variations of the FIRE movement
Of course, the definition of FIRE differs from person to person. For some, this movement means financial security while for others it means “Bye Bye Boss!”. Then between the two, there are a multitude of meanings.
So there are several variations to the movement.
The first step is to decide what type of FIRE would be most appropriate for you and then set a clear and concise goal.
The traditional FIRE
In the original version of the FIRE movement, people prefer to maximize their savings for retirement. They will sometimes adjust their lifestyle or find ways to increase their income in order to increase their investments.
They are looking to achieve a portfolio approaching 25X their expenses in order to withdraw a retirement income similar to their current expenses.
Theoretically, the assets amassed should be sufficient for the rest of their lives.
The goal is traditional retirement, but as soon as possible.
The person seeking to achieve Lean FIRE aims to earn enough assets to cover basic expenses. In fact, these individuals generally live very frugal lifestyles and want to maintain these habits in retirement.
By being very minimalist, there is no need to set aside a large amount. In addition, since this individual has a lower than average cost of living, it is often easier to invest the money saved.
Do they deprive themselves to lower their expenses so much? Sometimes yes, but sometimes no. Some people just don’t have a very high standard of living without having to restrict themselves.
In contrast to Lean FIRE, the individual who aims for Fat FIRE usually plans for an above average cost of living in retirement.
For example, most people are limited in the number of vacations they can take; globetrotters at heart will most likely travel much more in retirement! Therefore, expenses will increase compared to working life.
Therefore, in order to have this lifestyle at retirement, the amount accumulated must be fatter.
These people may also simply want the Fat FIRE to feel comfortable with the stock market fluctuations.
This type of financial independence is based on a portfolio to partially support yourself and then work part-time to make up the missing income.
The origin of the term “Barista” comes from the fact that a job at Starbucks would be enough extra income. Plus, they offer medical insurance even if you work there part-time!
So, the portfolio itself is not high enough to reach FIRE.
On the other hand, it allows you to:
- work less, part-time;
- change to a less stressful field;
- have some freedom to choose your own schedule;
- work, simply because you love it;
And most importantly, to enjoy life a little more since the wallet doesn’t need to be as big as for other types.
For example, a person with a cost of living of $40,000 would need to earn $1,000,000 to reach the traditional FIRE (25X expenses).
By aiming for the Barista FIRE genre, that same person might decide to cut their goal in half. Each year of “retirement” they can then withdraw $20,000 from their $500,000 portfolio and work part-time to cover the shortfall.
This variation is based on the snowball effect; you work hard to shape a solid snowball and you put all your energy into getting it to the top of the mountain. Then you watch it roll and grow exponentially with no further effort.
The idea behind Coast FIRE is to earn a large sum of money as quickly as possible and then let the compounding interest do its magic.
At a certain point, it will no longer be necessary to continue saving since the portfolio will grow and reach the FIRE number by itself.
While waiting for retirement, we must not disburse in order to reach our projected amount and be confident in our returns.
Let’s look again at the example of a person with a $40,000 cost of living who needs to earn $1,000,000 (25X $40,000) to reach the traditional FIRE.
If they manage to earn $315,000 by age 35, they will have over $1,000,000 by age 65. Their money will have grown with an ultra conservative 4% return for 30 years.
During those 30 years when savings are no longer necessary, they simply have to work to support our current cost of living. Saving for retirement is on auto-pilot and you don’t have to think about it anymore.
Like the Barista FIRE, the Coast FIRE can make choices with some freedom and less stress.
Here is an online calculator that allows you to calculate the amount of savings needed to reach the Coast FIRE . This tool takes into account your income, savings and portfolio performance.
The savings and disbursement strategy
The different savings vehicles in Canada
In Canada, we have three main ways to save:
The money grows tax-free and withdrawals will be taxed at the marginal rate.
The money also grows tax-free, but withdrawals will not be taxed. Unlike an RRSP, the TFSA does not imply tax deductions.
Capital gains will only be taxed when the investment is sold (i.e., realized), while interest and dividend income will be taxed year after year.
When we talk about RRSPs and TFSAs, we must understand that they are investment vehicles, not investments.
A vehicle is not better at one bank or on one platform more than another, it all depends on what you choose to put in it (mutual funds, stocks, exchange traded funds, guaranteed investment certificates, etc.).
RRSPs and TFSAs should always be maximized before turning to non-registered accounts.
Minimize the tax impact of withdrawals
The importance of using all three types of savings is in the disbursement strategy. Indeed, when we talk about earning our FIRE number, it will be a combination of RRSPs, TFSAs and non-registered investment accounts.
For example, when disbursing our one-time income of $40,000, this amount will be virtually tax-free if:
- $10,000 come from RRSPs
- $20,000 come from TFSA
- $10,000 come from non-registered accounts
When it comes to the FIRE movement, there is no single solution. There is something for everyone and it is often a combination of elements that may suit you.
To each their own strategy, to each their own life projects!
Interesting reads (in French):
This post is also available in: FRCome to discuss that topic in our Facebook Group!