Financial Freedom 45 Update: Have I Already Achieved F.I.R.E.?

By Robb Engen | September 5, 2020 |
Posted in
For years I’ve been tracking my net worth with the dual goal of becoming a millionaire by the end of 2020 (Ha!), and achieving financial freedom by age 45 (in 2024). The financial freedom target did not necessarily mean a full-stop early retirement, but a point when I could realistically leave my day job to pursue other interests – namely blogging, financial planning, and freelance writing.

In my last financial freedom update I mentioned I was still on track to reach my goal, although what life would look like afterwards wasn’t exactly clear. Now I have a much better idea. What a difference two years can make! 

Since then, I quit my day job and turned my side hustle into a “full-time” pursuit. I’m working for myself and doing what I love – helping people with their finances by writing educational content and providing one-on-one coaching.

They say if you do what you love, you’ll never work a day in your life. According to many in the personal finance community, by that definition I’ve already achieved F.I.R.E., or financial independence, retire early.

I’ve left the commute, the cubicle, and the drudgery of the 9-to-5 to pursue my dream. I work when I want, and for as long as I want. That, to me, is freedom.

Now, before the retirement police come out with a cold dose of reality, I am fully aware that I’m not retired. I need to earn an income to meet our current and future spending needs. In fact, my best estimate is that we could survive for about 10 years on our existing resources – not an ideal F.I.R.E. scenario.

On the other hand, I’m not looking to retire on a meagre budget of $30,000 per year. We still have big dreams to travel the world (eventually). We like good quality food and wine. We still have growing children to feed and clothe. And we’re not the kind of people who want to sell it all and roam the continent in an RV.

after tax spending to age 95

After tax spending to age 95

Have I already achieved F.I.R.E.? I’ve never branded myself as a F.I.R.E. blogger because I don’t believe you can call yourself retired if you’re still earning an income. But I’ll admit I’ve had a loose definition of financial freedom because what I really meant was the freedom to stop working for someone else and start working on my own terms.

The truth is, I’m still striving for that freedom – just now I aim to be a financially independent entrepreneur (FIE?). Here’s what that might look like:

Financially Independent Entrepreneur

I’ve been working on my own business full-time since December 2019. Revenue has exceeded my wildest expectations. But when I say ‘full-time’, just know that means working an average of 20-25 hours a week. I’m not busting my butt 24-7.

In a typical work day this summer, I’d get up at 6am and go for a run, come home and make breakfast for the kids, then sit on the deck with a coffee and eat breakfast with my wife, clean up and have a shower, and start working on projects by 10am. I’d pause for lunch and a 30-minute walk around the neighbourhood, and then finish up any writing or financial planning by 3:30pm. I like to be finished by noon on Friday.

Now, just because I love what I do doesn’t mean I want to do it forever. I’ve mapped out a plan that has me ‘working’ until age 55. I doubt I’ll stop at that age, but it’s a reasonable guess at this point.

I’d also like a large enough annual spending target that gives us the flexibility to travel and maintain our current standard of living. We’ve built $15,000 per year in travel expenses into our budget (spending is that much lower in the chart this year because 2020).

We’ve talked about spending our summers abroad when we’re able to travel again – renting a house somewhere in Europe or the U.K. for two months and using it as a jumping off point for other destinations. Working online means I can check-in from anywhere in the world if needed.

I’ve given us a spending boost once both of our kids are in post-secondary (my age 50 year). The thinking is that we’ll have a lot more flexibility to travel during the school year.

New worth projections to age 95

New worth projections to age 95

Our net worth will reach around $2.9M by my final working year (age 55) and stay relatively constant for 20 years before we spend down our investments and savings by my wife’s age 95 year. That’s the “die-broke” scenario that has us spending all of our savings and investments, but still leaving the house in our estate.

I’ve mentioned before why I’m not aggressively paying off the mortgage – not while the interest rate is at 1.45%. This projection has us paying off our mortgage in 7.5 years – well before I stop ‘working’ so we avoid the risk of carrying a mortgage into retirement.

One important note is that we don’t have big annual savings targets. Both of our RRSPs are already maxed-out, as is my TFSA. The next three years will see some pretty big catch-up contributions to get my wife’s TFSA fully funded. Outside of that, we’re only projecting to max out our TFSA contributions each year. We’ll also continue to max-out the kids’ RESPs.

That means I can work just enough to meet our spending needs and hit those modest savings targets while our investments grow. 

Final Thoughts on Financial Freedom 45

I’m going to ‘retire’ this financial freedom 45 series now that I’ve officially quit my day job and started working on my own terms. While I haven’t achieved F.I.R.E., I do think I’ve unlocked what most F.I.R.E. enthusiasts are searching for – the freedom to stop working for someone else and start pursuing your passion.

Truth be told, it does sort of feel like I’m retired. I mean, I am working a bit more than I need to right now. But that’s because we’re in the middle of a pandemic and I’ve spent more time at home than I had planned. Stuck at home, I might as well write an article or work on a financial plan. That’s actually how I started my blog in the first place – when our first born daughter started sleeping through the night from 7pm – 7am and we were stuck in the house with free time every night.

I’ll keep tracking and updating my net worth, but that $1M goal has never mattered to me as much as achieving financial freedom. Now that I’m doing what I love, I have a better idea of what financial freedom actually means.

Weekend Reading: Let’s Talk Inflation Edition

By Robb Engen | August 29, 2020 |
Posted in
Weekend Reading: Let's Talk Inflation Edition
Since 1991, the Bank of Canada has used an inflation-control target framework to guide Canada’s monetary policy. The goal is to keep inflation at 2%, the mid-point between its target range of 1-3%. The inflation target framework is reviewed every five years, with the most recent agreement in place until the end of 2021.

The current inflation targeting framework aims to keep inflation low and predictable. This allows individuals and businesses to make long-range financial plans that will contribute to the well-being of our economy. This approach has largely been successful, with price increases averaging around 2% for three decades. That’s a far cry from the inflation-ravaged late 1970s and early 1980s, when inflation peaked at more than 12% in 1981.

It’s fair to say that the extraordinary stimulus measures resulting from the Covid-19 pandemic has forced central banks and governments around the world to review their monetary policy framework as it relates to deficits and inflation. 

Earlier this week, U.S. Federal Reserve chair Jerome Powell announced a major shift in how the central bank will help guide the economy with a focus on low interest rates and job growth. It will tolerate slightly higher inflation in an effort to achieve maximum employment.

North of the border, the Bank of Canada is also reviewing its approach to monetary policy and exploring potential alternatives. It released a “Let’s Talk Inflation” survey – open until October 1 – to get feedback from Canadians on how the current inflation targeting framework affects them and how it compares to other potential alternatives. 

Reading between the lines, it’s clear that the Bank of Canada is seriously considering a shift in approach – one that will likely mirror the Federal Reserve’s new “tolerance” for higher inflation in the pursuit of job growth.

Take the Bank of Canada survey here and let me know your thoughts on inflation in the comments below.

In the meantime, if you’d like to better understand how monetary policy actually works, I highly recommend Stephanie Kelton’s aptly-time book, The Deficit Myth. You’ll see why central banks are on the right track with their thinking around inflation and job growth, and why governments on both the left and right screw it up by equating government spending with household spending.

This Week(s) Recap:

Our kids are heading back to school next week and so our stay-at-home summer is officially coming to a close. We are anxious about sending the kids back but we’re looking forward to the new routine. Obviously my wife and I are incredibly fortunate that we both stay home full-time and don’t have to balance childcare and working arrangements. I know many other parents aren’t so lucky.

Last week I shared how to give financial advice to your Millennial and GenZ kids

I also looked at preparing for retirement and understanding your new spending patterns.

This week I shared the risk of carrying a mortgage into retirement

Promo of the Week:

Like many of you, we’ve been doing a great deal of shopping online during the pandemic. Whenever I do, I try to remember to visit an online cash back rebate site first to earn an extra percent or more on the purchase. It’s like doubling up on your credit card rewards. There’s two sites that I visit regularly to take advantage of cash back rebates: Great Canadian Rebates and Rakuten (formerly Ebates.ca):

Become a member of Great Canadian Rebates and take advantage of online coupons and earn cash back rewards. GCR features over 400 merchants to satisfy all your shopping needs.

Rakuten pays you cash back every time you shop online, and it’s FREE to join. Sign up now and when you spend $25 you’ll earn a $5 cash back bonus.

You can also read my Great Canadian Rebates vs. Ebates Canada comparison guide here.

Weekend Reading:

The Credit Card Genius team put together a study on what your credit card benefits are really worth. It looked at nine major credit card perks and put a dollar value to each of them. Great stuff!

Read why Irrelevant Investor Michael Batnick will never go to a car dealership again. I have to agree.

The editorial board at the Globe and Mail says that a fight in Canadian real estate reveals the true problem: We need a lot more housing.

An incredible look at the decline of upward mobility in one chart by Visual Capitalist.

The five largest stocks in the S&P 500 have a market capitalization that equals the smallest 389 stocks in the index. Simply incredible.

This T.E. Wealth blog dives deeper into both the Canadian and U.S. markets to show how a select few companies are truly driving stock returns.

PWL Capital’s Justin Bender gives us an excellent explanation of the expected future returns for Vanguard’s asset allocation ETFs. Hint, investors should lower their expectations:

On the other hand, Andrew Hallam explains how all-in-one portfolios proved their worth during Covid-19.

Morningstar’s Susan Dziubinski and Christine Benz discuss why young investors shouldn’t dabble in stocks. I get the idea of making mistakes early and chalking it up to a learning experience. But I’d rather young investors not lose money gambling on individual stocks and just get it right from the start with a broadly diversified indexing strategy.

Coronavirus is creating retirement insecurity. These 10 steps can defuse the time bomb of an ageing population.

The sandwich generation. Why adult children looking at supporting their parents need to consider the impact on their own financial goals.

One of the original personal finance bloggers, JD Roth gives us the true history of financial independence.

The Family Money Saver blog looks at why people don’t do F.I.R.E.

Steven Arnott, author of The Snowman’s Guide to Personal Finance, wrote an excellent case study on preparing for retirement.

A guest post on the My Own Advisor blog looks at whether you should only put 5% down on your mortgage and invest the difference.

Here’s why we won’t remember much of what we did in the pandemic:

“But I doubt I am alone in finding that my memory of the lockdown months is rather thin. No matter how many new people or old friends you talk to on Zoom or Skype, they all start to smear together because the physical context is monotonous: the conversations take place while one sits in the same chair, in the same room, staring at the same computer screen.”

Finally, a neat futuristic look at what the coronavirus will do to our offices and homes.

Have a great weekend, everyone!

The Risk Of Carrying A Mortgage Into Retirement

By Robb Engen | August 25, 2020 |
Posted in
A mortgage-free home is the cornerstone of any solid retirement plan. Indeed, decades ago it would have been considered a major financial sin to carry a mortgage into retirement. But times are changing. The proportion of seniors with mortgage debt has almost doubled from 8% to 14% (from 1999 – 2016). Seniors also have the highest rate of mortgage delinquency. 

What’s going on here?

Carrying a Mortgage Into Retirement

As you prepare for retirement, one useful financial planning hack is to match your mortgage amortization with your retirement date so that you can retire with a clean balance sheet, so to speak. This is especially helpful for those who bought a home (or upgraded their home) later in their career, when a typical 25-year amortization wouldn’t see the mortgage paid off until well beyond retirement age.

But I’ve had several clients in my fee-only financial planning practice ask me about carrying a mortgage balance into retirement. They wonder if it makes sense to pay off the mortgage faster when interest rates are at record lows (some had mortgage rates below 2%). Wouldn’t that money be put to better use investing in a diversified portfolio of ETFs – particularly if there’s still unused RRSP contribution room?

Related: Boosting Retirement Savings During Your Final Working Years

To be fair, carrying a mortgage balance into retirement isn’t necessarily a bad thing, if done with well thought out reasons (like prioritizing investments in a low interest rate environment). But this assumes you have the available cash flow to top-up your mortgage or your investments. It also assumes your retirement outcome doesn’t hinge on having a paid-off home and that you’ll have sufficient sources of income to pay your bills.

There’s plenty of evidence to suggest that’s not the case for many seniors today. A Statistics Canada study showed that working seniors were more likely to have debt than non-working seniors, which suggests they might be staying in the workforce longer in order to pay off debt. 

Senior immigrant families had twice as much debt as Canadian-born families (but 1.5x more assets). Single seniors had lower debt and asset levels than couples and other family types.

Alarmingly, those aged 55-74+ were the only age group that posted an increase in the number of mortgages held versus last year:

Growth of Mortgage Debt in Retirement

I reached out to mortgage expert Rob McLister of Rates.ca for his thoughts on the growing trend of mortgage debt in retirement. He said that carrying a mortgage or HELOC balance into retirement is obviously not something most seniors aspire to do.

“With shelter prices consistently exceeding income gains, poor retirement planning and incessant cost of living increases, it’s a growing reality, said Mr. McLister.”

There’s also a greater propensity for parents to help their kids get into the housing market, with nearly half of millennial homebuyers getting financial help from the bank of mom & dad.

Mr. McLister says that parents who don’t have 20+ years of retirement savings banked should think very carefully about how much they gift their kids.

“It worries me that people are relying so much on home equity to survive their golden years.”

There’s also the notion that surging home values (especially in Toronto and Vancouver) give people the illusion that they don’t need to save as much, which Mr. McLister says is almost guaranteed to be a problem for people who exceed the standard life expectancy.

Home prices may not beat inflation for long periods of time in the future, and depending on where you live in Canada may not have kept up with inflation over the past 10 years.

The run-up in house prices has fuelled the growth of another trend – reverse mortgages. These products, once considered a last resort for retirees, are now growing at 3-4 times the year-over-year growth of regular mortgages. It’s driven partly from the fact that many seniors have very little in terms of savings and investments, instead relying on rising home equity prices to increase their net worth.

The trouble is you need to live somewhere, and so unlocking your home equity becomes a major challenge if you don’t want to downsize or sell your home and rent in retirement.

Mr. McLister says the reverse mortgage market growth has been driven mainly by plunging interest rates, growing senior debt loads, more aggressive marketing, and increasing acceptance of “equity release” (that’s what they call it now) as a retirement planning strategy.

Note that if you have to borrow and can qualify, the lowest-cost option for extra cashflow in retirement is a HELOC at prime to prime + 0.60%. With this option you can pay up to 40% less interest over 10 years, but you’re making monthly interest payments the whole time.

Pitfalls to Avoid in Retirement

Given this growing reality of seniors carrying debt into retirement, I asked Mr. McLister to share some tips around using a HELOC. 

Tips if you get a HELOC as a retirement safety net:

  • Keep the limit at 75-80% of what you’d qualify for with a reverse mortgage. That way, worst case, you can pay off the HELOC with a reverse mortgage to eliminate the monthly interest payments.
  • Apply for a HELOC before you retire when your income is higher
  • Monthly interest payments can ding your cashflow so many seniors with HELOCs borrow off the HELOC to pay the interest (i.e. capitalize the interest).
    • If you’re going to do this, deposit your paycheque into the HELOC and use it as your chequing account. That way the lender see you’re still making regular principal payments and not just racking up debt. The Manulife One is easily the best of breed for this purpose but I’d suggest trying to negotiate the prime + 0.60% HELOC rate.

Final Thoughts

It’s tough to pinpoint exactly why so many seniors are carrying mortgage debt into retirement. One reason is that interest rates have been extremely low for a long time and so perhaps many seniors have prioritized investing over paying off their mortgage. As long as they have enough income to cover their monthly payments then everything should be fine and the mortgage will be paid off, eventually.

More troubling, though, is the increasing level of indebtedness – either from excessive borrowing or from a home purchase later in life where the amortization schedule doesn’t line up with a typical retirement age. This forces more seniors to work past age 65 in order to make their monthly payments. Not ideal.

I’ve made a conscious choice to prioritize my RRSP, TFSA, and even non-registered investments before I start aggressively paying off my mortgage. But I’m 41 and still in the accumulation phase. I prefer to invest now rather than pay off my 1.45% mortgage debt.

That’s me, though. Many of my clients focused on paying off their mortgage and tell me they’re glad they did. More than just numbers on a spreadsheet, it’s the psychological effect of being debt-free that increases happiness. It’s something I’ll keep in mind as I inch closer to early retirement.

What are your thoughts on carrying a mortgage into retirement: Cardinal sin, or new reality?