Financial advice for people looking to retire early

Financial Independence and Early Retirement (FIRE) is a growing movement for people looking to retire earlier than the traditional age (Getty Images)

Are you dreaming of an early retirement that would allow you to travel and enjoy free time with your friends and family?

Financial Independence and Early Retirement (FIRE for short) is a growing movement for hard-working, goal-oriented workers looking to retire earlier than the traditional age and achieve financial independence.

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Today, I’ll explore the origins of the FIRE formula and outline the steps to implement it in your life, so you have a better understanding of what early retirement entails.

Canadians are retiring later

The current median retirement age in Canada is 64.9, according to Statistics Canada. In 1998, the median retirement age was 60.8. This means that, two decades later, the average working Canadian has to work 4.1 more years before they can retire compared to the turn of the century.

Thanks to advances in medical technology, people are living longer than ever, and centenarians (people over age 100) are the fastest-growing age group. That said, if you're 60 years old, you’re probably a bit envious of the people who got to retire at your age in the late 1990s, while you still have another 5 years of work ahead of you.

The origins of the FIRE formula

Given the increasing average retirement age, it only makes sense that some would want to rebel and create a plan to retire well before 65.

The core principles of FIRE involve living frugally, maximizing savings, and making strategic investments to generate sufficient passive income that covers living expenses without the need for active employment. This way you can actually enjoy your retirement.

The FIRE movement originated in the United States and gained popularity in the early 1990s. It was largely influenced by the book "Your Money or Your Life" by Joe Dominguez and Vicki Robin, which offered a roadmap for readers to follow to achieve financial independence through mindful spending and saving.

How to implement FIRE to retire early

The beauty of the FIRE formula is that it really isn’t complicated. However, it will require short-term sacrifices on your end, and you may find yourself living a very different lifestyle from your peers in their 20s and 30s.

Here are the steps you’ll need to follow to begin implementing FIRE into your life to help you retire early.

Step 1: Assess your financial situation

Begin by evaluating your current financial health. Calculate your total income, expenses, and existing savings. Determine your savings rate and identify areas where you can cut costs.

All of this will help you set your financial baseline, so you can begin to bridge the gap between where you are and where you want to be.

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Without a clear goal in mind, you’re guaranteed to fall short of your expectations. Plus, having a big goal that you’re working toward will make it easier to stay motivated to the FIRE lifestyle, even when you might want to throw in the towel.

Step 2: Create a saving and investment plan

Next, you’ll want to develop a comprehensive plan that includes aggressive saving strategies and smart investment choices.

Aim to save a significant portion of your income, ideally 50% or more. Instead of letting your cash sit in a traditional savings account, though, you’ll want to allocate it into assets and investments that increase cash flow, such as:

• ETFs
• Real estate
• GICs
• High-interest savings accounts

Additionally, I recommend maximizing your contributions to tax-advantaged accounts, such as a TFSA or First Home Savings Account, before using a traditional investment account (where you’ll be required to pay capital gains tax).

Step 3: Implement frugal living into your lifestyle

One of the most effective ways to reach your savings and investment goals is to reevaluate your lifestyle and how you spend your money. The more frugally you can live, the less money you’ll spend on daily expenses, and the quicker you’ll be able to set money aside to invest in income-producing assets.

After completing the first step and assessing your current financial situation, you’ll be able to see the full picture of just how much you’re spending on a daily, weekly, and monthly basis.

Most importantly, you’ll be able to differentiate between necessary expenses and those which are more discretionary, such as:

• Eating out
• Upgrading to the latest technology every year
• Purchasing costly designer clothes and shoes
• Entertainment
• Insurance/finance payments on an over-budget or secondary vehicle

I’ve found that one of the most effective ways to quickly save more money is to cut back on eating out and spending nights out buying drinks and paying cover fees.

Just by meal prepping your lunch instead of paying $20 to eat out, you can save over $100 per week, $400 per month, and over $5,000 per year. If you assume an average annual return of 7 per cent, this $400 saved/invested every month can grow to $67,105 in a decade.

Step 4: Build multiple income streams

If you want true financial freedom, you never want to rely on one sole income source. If something were to happen to the market, your job, or one particular business, it could ruin all of your plans.

This is why it’s important to try to build multiple income streams.

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While you may only start with one income stream (i.e., your current job or business), it’s important that you use your newfound savings to invest in multiple income streams.

The easiest way to do this is simply to invest your savings into a time-tested ETF that offers a reliable return over time. You could also pick up a side hustle that utilizes your skills to help you earn more. For example, one of my primary school teachers was an amazing guitarist and singer, and would perform at local pubs and restaurants on the weekends for extra cash.

You could also consider purchasing a home or multi-family unit to rent out or start/invest in a small business or service that doesn’t require your full-time attention (although this can be riskier).

How early retirement can affect taxes

One important thing you’ll need to account for if you retire early is how it will affect your taxes. Even if you “retire” early from your career, you’ll still technically be earning income from your investments and any businesses that you’ve started.

This means that you’ll still be paying taxes well into your retirement, with the exception of withdrawals from certain tax-advantaged accounts.

If you need more guidance to see if you’re on the right retirement path, consider consulting with a professional financial advisor or planner. They’ll be able to work with you to help you create a financial roadmap, so you can reach your goals.

Lastly, remember that being retired doesn’t always mean that you have to stop all of your work. For many, retirement is simply a time to start working on hobbies and passion projects.

Christopher Liew is a CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers at Blueprint Financial.

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